Adair Turner, chair of the UK’s former regulator the Financial Services Authority, has encouraged banks to hold higher capital ratios and warned about the risks of peer to peer lending.
In an interview with the BBC, Turner said: "Having been significantly involved in the redesign of …the financial regulator after 2009, which was the role that I played, and being quite proud of what we achieved in terms of the capital ratios and liquidity requirements for banks, if I was able to make my decisions myself without having to negotiate it internationally… I would go to much higher capital ratios, and much higher liquidity ratios and reserve ratios," he told the Radio 4 Wake up to Money programme.
"Let’s be clear how extreme this problem is: we now require banks to hold 10% capital against risk weighted assets, but a prime mortgage can be risk weighted as low as 10% by a bank’s internal model. What that means at the limit is that you only have to put 1% of bank equity against a mortgage portfolio, and the rest can be borrowed money or bank money."
Turner said the general public would be ‘amazed’ at the ratios, which he said were around 99 to 1 in the example given for mortgages, and that banks should hold more of a 5 to 1 ratio of debt to equity for lending.
Turner worked for Chase Manhattan Bank in the late ’70s, and then was a director for McKinsey & Co, becoming director general of the Confederation of British Industry in 1995, before becoming chairman of the Financial Services Authority in 2008.
Turner also warned about the dangers of peer-to-peer lending, which has become the fastest growing area of financial services.
Peer- to- peer lending has been part of the SME financing story in the UK and across Europe, across commercial finance and within asset finance, as it forms a part of the raft of alternative financing from high street banks, with greater risks involved to make bigger returns.
"The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses," Adair predicted.