LONDON (Reuters) - Incoming Royal Bank of Scotland (RBS.L) Chairman Howard Davies has defended his role in setting up the financial regulator that presided over the near meltdown of Britain’s banking system.
Davies was a surprise appointment to succeed Philip Hampton as chairman of state-controlled RBS after the Financial Services Authority (FSA) he set up in the 1990s was widely criticised for inadequate supervision of banks in the run-up to the 2007-9 financial crisis. The FSA was subsequently disbanded.
Davies told Reuters the FSA was not a “light-touch” regulator and was not to blame for the failure of banks such as RBS, which cost taxpayers 45 billion pounds ($67 billion) to rescue.
“The big problem during the crisis was that banks didn’t have enough capital. It had nothing to do with light-touch regulation,” he said in an interview on Monday.
“There’s no sense in which the FSA was ever a light-touch regulator in capital terms. It implemented internationally-agreed capital standards,” he added. “No one has ever demonstrated that there was any kind of blind eye turned to capital requirements”.
Davies, a former deputy governor of the Bank of England, set up the FSA in 1997 and ran it until 2003. He will take over as RBS chairman in September.
In a recently published book ‘Can Financial Markets Be Controlled?’, Davies said banks around the world would continue to cut back on investment banking and operate in fewer countries.
RBS said in February it would shrink its investment banking drastically, pulling out of 25 countries across Europe, Asia and the Middle East. Barclays (BARC.L) and UBS UBSG.VX have also reduced their investment banking activities.
“I expect simplification of banks generally because I think there is mounting evidence that highly diversified banks on a highly international basis are very difficult to manage,” said Davies.
Fears of a repeat of the crisis meant banks were adopting an approach of “prudence and caution”, awarding risk managers higher status, he said.
“The balance of power between the front line of the business and risk management has changed. Chief executives of boards are much more inclined to take notice of what risk managers say than they used to before,” he said.
Davies said there was also a greater fear of regulatory intervention, particularly at the top of institutions where new rules have been introduced to make top bankers accountable for breaches in rules or procedures that happen on their watch.
Those rules include a new criminal charge of reckless misconduct, or causing a UK lender to fail, which carries a prison sentence of up to seven years.
“People running institutions are much more conscious of their personal responsibilities and the risks to them,” Davies said.
Editing by Mark Potter