27 February 2008

BBC: FSA sees credit squeeze on banks

The FSA has warned banks that the crisis in the financial markets will force them to change the way they do business. Chief executive Hector Sants said banks would never again be able to raise as much money as cheaply as they had been doing by selling off their loans.

In an exclusive interview with the BBC, he said they would have to keep more of their loans on their own books. That, in turn, could permanently push up the cost of borrowing for all of us. "Banks themselves need to give consideration to how their business models will need to adapt to the changed market circumstances they have seen," said Mr Sants. "Secondly, we will be looking for firms to treat their customers fairly in these arguably more difficult times in prospect."

BBC business editor Robert Peston said the implication of Mr Sants' position "will be a pretty steep reduction in the amount of credit available and the cost of it". Mr Sants will also deliver this stark message to 300 banks and other financial institutions in a speech later on Wednesday.

There has been concern that the way bankers are rewarded has contributed to the credit crisis by encouraging short-term risk taking. Some shareholders feel bankers' bonuses should take into account the long-term consequences of their investment decisions, not just short-term results. "There is a risk that the remuneration structures are too short-term and they do incentivise behaviour which is not helpful in maintaining long-term financial stability," Mr Sants said.

Angela Knight, chief executive of the British Bankers' Association said shareholders had the opportunity to vote on the remuneration of senior executives in the banking industry. "That key issue of ensuring remuneration is fair, that it is competitive in the international market, that it rewards the right behaviour, is clearly something that has been looked at by shareholders, the management and the FSA over a number of years," she told the BBC.

Hector Sants also gave greater detail in his BBC interview on what he described as the FSA's unacceptable performance as the supervisor of Northern Rock. He said an internal review had shown that the FSA correctly identified the risks being run by Northern Rock - which borrowed the majority of its funds from the wholesale financial markets.

Yet Mr Sants said the FSA failed to communicate properly with the bank's management to force a reduction in those risks. He insists that the review, which will be published in a few weeks, will be no whitewash.

© BBC - British Broadcasting Corporation