The City regulator today defended its decision to take no action against bosses at part-nationalised Royal Bank of Scotland (RBS), but said new rules were needed to punish bankers who take too many risks.
Adair Turner, chairman of the Financial Services Authority (FSA), wrote in the Financial Times that while RBS chief executive Sir Fred Goodwin and his team had made bad decisions they had not broken any rules.
He suggested that new rules could be brought in that would see bank bosses who take unnecessary risks struck off from working at financial institutions.
Currently the FSA has powers to ban bankers who break the rules, but Lord Turner proposed new regulations could be introduced requiring bankers to prove they tried to steer their business away from risk.
Banks need stricter rules than other businesses because of the huge economic costs when they are bailed out by the taxpayer, he added.
“Achieving a general shift in attitudes to risk and return may require that bank directors and executives are made subject to quite different incentives than those that are appropriate in other sectors of the economy,” he wrote.
“It would for instance be possible to set a rule that no board member or senior executive of a failing bank will be allowed to perform a similar function at a bank unless they can positively demonstrate to the regulator that they warned against and sought to reduce the kind of risk-taking that led to failure.”
Lord Turner also told the BBC the FSA could be given the power to fine bad bankers up to two years’ pay, in a system similar to that introduced in America following the financial crisis.
RBS’s acquisition of Dutch bank ABN Amro for €70bn in October 2007 was “highly risky but breached no regulation”, according to Lord Turner’s article in the FT.
The FSA cleared RBS and its senior management, but warned that their competence would be taken into account in any future applications made by them to work at FSA-regulated firms.
The FSA had previously struck an agreement with Johnny Cameron, who headed the RBS investment banking division, that he will not take a full-time job in the financial services industry.
The near-collapse of RBS, which is now 83%-owned by the taxpayer, arose from a series of takeovers and losses in its investment bank.
After acquiring NatWest in 1999, Mr Goodwin led a series of takeovers, including a $10.5bn deal for US bank Charter One in 2004.
Lord Turner also rebuffed criticism that the FSA had not released the report from its investigation into the conduct of bosses at RBS, saying there was no report to release.
The City watchdog’s supervisory investigations into other banks that failed during the crisis are continuing.