Lord Adair Turner, the current chairman of the UK Financial Services Authority and drafter of the 2009 Turner Review (we shared some perspectives on the review here), held an entertaining and provoking speech last week at London's City Banquet on 'maintaining momentum for reform' in the financial sector. Here's a teaser. He stated, among many other things, that
[t]o regain trust, banks need to refocus their energies not on those over-complex products of no real use to humanity (...), but on their core functions of providing savings and credit and payment products to customers, whether individuals, companies or institutions.
But focusing on the socially valuable is not straightforward. Because (...) it is in the nature of markets that there are some things which are indirectly socially useful, but which in the short-term will look to the external world like pure speculation. Market making does have an important social function – but that benefit is achieved indirectly and market making requires some position taking. And a vibrant global economy probably does require an important role for securitised credit a recovery indeed of securitised credit markets, but securitised credit extension needs to be underpinned by at least some trading activity.
So rebuilding trust in the necessary and socially useful functions of banks cannot mean an end to all trading activities nor, much as some might like it, an end to well-remunerated traders.
But it does mean that the top management of banks, and in particular of any banks which are involved both in complex trading activities and in retail banking activities – need to operate within limits. They need to be willing, like the regulator, to recognise that there are some profitable activities so unlikely to have a social benefit, direct or indirect, that they should voluntarily walk away from them. They need to ask searching questions about whether the complex structured products they sold to corporate and institutional customers, truly did deliver real hedging value or simply encouraged those institutions into speculative and risky exposures which they did not understand: and, if the latter, they should not sell them even if they are profitable. They need to be willing to accept the capital and other requirements which will be imposed on activities of little value and considerable risk, rather than deploy lobbying power to argue against such constraints on the basis of a simplistic assertion that all innovation is always valuable.
Interested in the whole story? The transcript is handily available here.