Not ‘realistic’ for regulator to pre-emptively spot scandals
Move to so-called ‘twin peaks’ regime will help regulators to gain a measure of control over banks.
It is not realistic for regulators to spot or prevent scandals in the financial services sector before they occur as its size now means it has become too unwieldy to control effectively, according to Jeffrey Grange, chief underwriting officer at Torus Speciality Insurance Company.
In an interview with FTAdviser, Mr Grange said that despite calls for regulators to be “more proactive and interventionist”, the reality is that banks are too large and diversified to effectively control.
Mr Grange said: “These institutions have been so massive, so fundamental to the operation of commerce and we can regulate them but, in the end, they are too big to fail [and] more importantly, they are too big to control.
“What is the next step or level of addressing that? A clear breakdown of the control environment is needed.”
Mr Grange’s comments follow on from the recent scandal surrounding banks’ alleged manipulation of the London interbank offered rate, which has prompted investigations by global regulators and has already seen UK banking group Barclays fined £290m.
In the wake of the scandal, Lord Turner, chairman of the Financial Services Authority, said it was impossible to spots instances of subtle manipulation such as this as it would require “supervision so intensive as to be prohibitively expensive”.
Mr Grange said the move to the so-called ‘twin peaks’ regulatory scheme - which will see the bifurcation of the FSA into the Financial Conduct Authority and the Prudential Regulation Authority in 2013 - will help mitigate this lack of control.
He said the Libor scandal had caused “a lot of institutional embarrassment on the banks themselves who have worked very hard to restore the reputation after 2008”, but said it provided yet more evidence of the sector’s controlled environment having “failed”.
Mr Grange said: “The reality is they are not just banks anymore.
“The traditional pillars of financial services have really broken down and you have banks that have huge insurance operations, banks that have massive investment [and] management arms so they are both banking and deposit making, loan making and also consolidating huge investment pools.
“It is really challenging for the regulators to keep up because the banks get more muscular and do more things but you have silo mentality on the part of the regulators.
“I do think it’s a very important step to have a consolidated regulatory view to essentially match up with the banks themselves and stay current and abreast about how the bank model has really evolved.”