Turner: Not banks' enemy
The chairman of the Financial Services Authority has upset a few bankers by declaring that he won't be a cheerleader for the City and that quite a lot of what they got up to over the past decade was "socially useless".
But a proper reading of Adair Turner's speech at the Mansion House last night should reassure them. Some will argue that the regulator-in-chief is letting them off lightly. So perhaps it is the greater citizenry - most of us - who will now be miffed at him.
Most significantly, he is some considerable distance from arguing for radical reform of the structure of the banking industry.
While opinion at the Bank of England has hardened in favour of breaking up the banks, of separating their retail operations from their so-called casinos (see my note last week, "Banks can learn from retailers"), Adair Turner retains a touching faith that regulators will in future be able to eliminate the risk of taxpayers picking up the tab for investment bankers' recklessness through the judicious application of variable capital requirements.
Some will see this as the triumph of hope over the experience of a financial crisis that on some measures was the worst the world has ever seen.
And, so far Turner has rested his defence of this aspect of the status quo on the practical difficulty of distinguishing between the bits of a bank such as Royal Bank of Scotland or Barclays that are core utility functions, deserving of insurance provided by taxpayers, and which bits fall more squarely in the caveat emptor, wholesale and speculative categories.
He says there are some trading activities, for example, that even a pure retail and commercial bank would need - and that therefore it would be somewhat arbitrary to draw a line that says one group of traders could stay in a taxpayer-backed bank whereas another group would have to be cut loose to take their chances in the free market.
But it's not clear to me that he is being wholly consistent here. Because if he is going to make safe the speculative activities of banks by insisting they hold far greater capital as a buffer against potential losses than hitherto, then plainly he is confident these activities can indeed be clearly identified.
And if the bits of Barclays and Royal Bank that are riskiest can be picked out for the purposes of forcing them to hold more capital, then presumably they could also have a line drawn around them that would allow them to be segregated, separated, demerged.
So if Adair Turner believes there is a powerful case for preserving the universal bank - one that provides essential credit, protects our savings and is part of an indispensable network for moving money around, all joined on to the seductive, glamorous casino - he needs to demonstrate three things.
First that it wasn't these universal banks and associated financial institutions that caused the most havoc in the recent crisis. Which may be hard to do, since the bulk of taxpayer support has indeed been provided to the likes of Royal Bank of Scotland, Citigroup, UBS and AIG (which was a universal bank by another name).
For the avoidance of doubt, they weren't the only culprits. But it was when they were tainted that we were staring into the abyss. We could not afford to lose a single one of them, let alone the lot. The collapse of Northern Rock, Washington Mutual, Lehman Bros and HBOS would have been much less dangerous if there hadn't been contagion to much bigger and more broadly based institutions.
Second, he needs to make the case why - in spite of the mess these universal banks made of things - it is in the interest of the wider economy that such banks should continue to exist. And he would need to take head on the arguments of John Kay and Andy Haldane that universal banks are intrinsically lousy retailers, designing products whose purpose is to befuddle consumers into paying excessive fees and interest.
Third, and most importantly, he would need to demonstrate - beyond a doubt - that the so-called living wills that universal banks are being asked to draw up will end the iniquity of their investment banking activities being implicitly supported by taxpayers.
There is no doubt that any universal bank's casino or investment banking arm has been able to attract cheaper funding over many years because of creditors' confidence that in the event of a crisis the entire bank would be rescued by taxpayers, that the state would not allow the casino to fail.
And creditors have been proved absolutely right over the past year (Lehman was allowed to go down, but it wasn't a universal bank). We did bail out the whole of RBS, Citi, AIG, UBS and so on.
It is counter to common sense and social justice that taxpayers should insure investment banks, which are no more socially or economically useful than any other kind of imaginable business.
So the question for Adair Turner is whether he really thinks it would be easier, more practical and in the interest of the UK (or the world) to endeavour to prevent the subsidisation by taxpayers of universal banks' less socially useful functions through regulation, the imposition of internal firewalls, complicated legal ruses, rather than the cleaner method of breaking the banks up.
Turner himself gave one rather graphic example of how banks are making hay out of the support given to them by the public sector. He pointed to investment banks' recent generation of very large profits and said:
"these profits are, to a significant extent, being earned because of specific post-crash circumstances: increases in the market share of the survivors, government guarantees and central bank liquidity support; very low interest rates; volatility; and large government debt issues."
Which is why, in his view, those substantial profits are "a legitimate matter of social interest, rather than a private matter [for the banks]".
What follows - for him and for his fellow regulators on the Financial Stability Board in their report to the G20 leaders - is that these high profits should primarily be deployed to strengthen banks capital resources (and support lending), rather than being used to pay fat bonuses or dividends.
Or to put it another way, there will be an international agreement to limit bonus payments at banks that are perceived to be too thinly capitalised. And Turner says that "over the long term there will be a legitimate interest of regulators in aggregate bonus payment rates if and when these payments have implications for capital conservation".
Many will see this as a fudge, since Turner is explicit that "for regulators the key long term issue is not the level of pay but the structure of payments and the incentives they produce".
But even this messy business of making sure that bankers' remuneration doesn't undermine their respective institutions would be so much easier if the casinos could be left to their own devices, wholly separate from utility and retail banks in which taxpayers will always have the right to butt in.