Prospect's editor Bronwen Maddox and deputy editor James Elwes interviewed Financial Services Authority chairman Adair Turner in November. They discussed the financial crisis, regulation and the break-up of the FSA.
PROSPECT: Is it the right time to be breaking up the FSA, now that everyone has got used to it?
ADAIR TURNER: My belief is that the endpoint of the reform will be better than the existing FSA. I always had an inkling even before I took the job that the spread of the FSA’s responsibility from the prudential regulation of large banks through to the conduct regulation of 20,000 Independent Financial Advisers and general insurance brokers was a very wide span which went across activities which had a different nature, a different skill-set and different logical links.
So I am actually a believer that the prudential regulation of banks in particular but also shadow banks has a natural overlap with central banking activity and should be combined with the central bank. Insofar as I had an inkling, I always believed that, years ago, and I increasingly became convinced of that over the first few years that I was here, which was very clearly against FSA institutional belief at the time. So I am a supporter, and I think it was pretty clear even before the election that I was a supporter of that general direction.
In an ideal world, we wouldn’t be doing this change in the middle of the biggest financial crisis in the world. So it’s not so much that you asked the question, “should we be doing it given that people have got used to the FSA?” I don’t think that would be a good argument against not doing it, but in an ideal world I would not choose to be doing this amid the biggest financial crisis, because an organisational divide takes up a lot of top management time thinking about people, premises, systems, lots of nitty-gritty things. We had a board away day of the FSA board two weeks ago of the FSA board, which was entirely devoted to all that sort of stuff. There are only so many hours in a day, and every hour that Hector [Sants, chief executive officer of the FSA] or I or other senior people spend thinking about that, we are not thinking by definition about the very, very large problems which are in the global financial system.
But the decision has been made to go ahead and do it—these are manageable challenges. We simply have to manage that balance between business as usual and progressing, and of course the government when it pressed the button and said “let’s do it,” many of us thought that we’d gone through a terrible financial crisis and that we were now in the position of building the better system for the future. I think that’s what we felt at the financial stability board internationally: that there was huge amounts of work required to build a better system for the future, but most of us in Spring 2010 did not anticipate that we’d be back by Autumn 2011 worrying about the present stage of the crisis rather than putting it right to the future. So, we are going through a major organisational change, and the thing is manageable, but in an absolutely ideal world I would not choose to be doing these two things simultaneously.
PROSPECT: Are they manageable at the same time though?
ADAIR TURNER: Yes, they are manageable, I mean you use all the techniques of trying to set up dedicated groups within the organisation who are able to devote their time to the systems—the HR, the property, etc, who are, as it were people totally dedicated to that—and you have other people not involved in that who are totally dedicated to the capital and liquidity of our major banks, what’s going on in the Eurozone, etc. The pinch point in this process simply arises at the top level where you cannot avoid the fact that the board, chairman, CEO, and a small number of other people will have to look one way and another. But beneath that level the organisational device for dealing with such a situation is to try and ring-fence different groups of people and say “yes I know there’s a major financial crisis going on but I want you to think about how we manage this organisational transition,” so it’s manageable.
PROSPECT: Did the FSA fail by not anticipating or tackling problems in banking regulation?
ADAIR TURNER: I think the global regulatory system in total failed, but I think the FSA has been more willing than any other institution in the world to put up its hand and admit that it got things wrong. If you look at the internal audit report on Northern Rock, that is a very, very self-critical document, produced six months before I became chairman. Back in April 2008, the Turner review, which I produced at the Chancellor’s request six months after I became chairman, was also very critical of a lot of things we did, so we did do a lot of things wrong—there was a wrong supervisory approach.
But I think it’s very important to realise that the really big thing that was wrong was the overall regulatory approach, agreed at global level, and which a group of very clever people at global level thought was very sophisticated and totally appropriate. In retrospect, Basel 2—the revision of the capital standards of Basel 1 to Basel 2—was an enormous amount of intellectual effort over 10 years, which completely failed to address the fundamental issues. There was far too little capital and liquidity buffers across the global banking systems.
This situation had arisen over a 30 or 40 year period, in which banks had steadily been allowed to run with lighter capital and liquidity requirements; dramatically so, the figures are quite startling, on how much lower the capital ratios came. We used to run banks with 25 per cent or 20 per cent equity to assets and we had a working financial system. But we used to run with far, far higher capital requirements, far, far higher liquidity requirements. Over a 30, 40, 50 year period we moved away from them, and we constructed an economic theory that this was all fine because financial markets had got so much more sophisticated—that liquidity problems wouldn’t emerge because markets across the world had become more liquid and sophisticated, the banks could run with lower capital because the techniques of risk management had become more sophisticated. And all this was just hugely wrong.
So I think the FSA as an institution was largely an inheritor of a sort of 50 year-long giant intellectual mistake. So it made mistakes as well, but you do have to place them within that wider context – the whole system, which we agreed at global level was deeply, deeply wrong.
PROSPECT: But putting it that way, I mean the question is obviously “are we going to get it right?”
ADAIR TURNER: We are trying to get it right. Basel 3 is a very, very major change to capital and liquidity requirements. I am on record of saying that in an ideal world, if one were a benevolent dictator designing a system for a green field economy which didn’t previously exist, one would go to still higher capital requirements. So I’m in the same camp as say David Miles [member of the Monetary Policy Committee] and the stuff he’s written at the Bank of England: that if you step back and approached it on an entirely theoretical basis we would be still more radical than we have been.
But we have been very radical. Basel 3, compared with Basel 2—if you take what we have done to the definition of the numerator of the capital ratio, the denominator and the ratio itself, it is an increase of capital requirements, not just of some percentage points but of several times. We have very significantly increased capital requirements. And one has to be pragmatic about two things: first of all, you have to get a global agreement and there are different points of view around the world about how radical to be. I think it is well known that the UK, both myself and Mervyn King [Governor of the Bank of England], the FSA and the Bank, were pretty much in the radical camp in terms of how much we wanted to go on capital, but we have to have a global agreement. And that global agreement also has to reflect the balance between getting to much higher levels of capital liquidity and the difficulty of getting there without slowing down the real economy by driving deleveraging. What the world ended up in, in 2008, was levels of leverage both in the real economy in many countries and in the financial system in itself, which were far too high—hugely above optimal levels—and the process of getting out of excessive leverage is a very, very difficult transition task. That is what we are struggling with at the moment, and frankly I think that we have all learnt over the last two years just how difficult it is. I knew it was difficult but I now know that it’s much more difficult than I anticipated.
PROSPECT: It’s particularly difficult with, as you said the implications for economic growth.
ADAIR TURNER: Yes, huge implications, and for financial stability over-all; and what has happened in the Eurozone is a knock-on consequence of these two things, which are very linked. There were two very big intellectual mistakes. One of which is an Anglo-Saxon mistake of falling in love with liberalisation. The other was going ahead with the eurozone without thinking enough about the status of the government debt of countries which can no longer issue currency. And out of these two very large intellectual and architectural mistakes, we have ended up in a very dangerous position. There [has been] a failure to take account of just how dangerous too many debt contracts in the world are.
PROSPECT: Do you think regulation is possible in the first place? The economist John Kay has said that the crisis has shown that those in charge were incapable of running the financial sector, but the suggestion that we regulate that sector implies that we must find two groups of individuals who understand it.
ADAIR TURNER: I think it’s important within John’s point of view to distinguish between regulation and supervision. Regulation is a set of rules that you apply, supervision is the detailed process of ensuring that people are sticking to those rules, and also a process of reviewing what they are doing and responding to it in a somewhat judgemental way which goes beyond the rules. When I heard John making this argument, his primary argument was about supervision rather than regulation. Now John does believe that there should be a structure of regulation.
I believe that one of the reasons that we ended up with large numbers of supervisors is that we have designed the rules with insufficient margin for error. If we had always had much higher capital and liquidity requirements, you don’t then need to supervise tightly to work out whether they are meeting those rules precisely. When you set your capital and liquidity requirements with very few buffers—close to the point of danger—you then have to supervise very intensely to make sure that banks haven’t just gone beyond the point of going beyond those rules.
We also created Basel 2 rules—the risk-weighted rules—which required intense supervision. Making sure that a bank is sticking to the capital rules now needs very large numbers of supervisors to do it, because it doesn’t take the form of “show me your total assets.” You’ve got to have 20 per cent equity against those total assets. It takes the form of these modelled risk weights, and so a large bank like the Royal Bank of Scotland, the Lloyds Banking Group, or HSBC, probably has a hundred different models or more on which it is working out the capital requirement against different categories of mortgages and different countries. Because they are working out their own riskiness and their own capital requirements, we then have to check all of these, and I don’t think John would deny that we need capital and liquidity rules, we undoubtedly do, and if they are going to be these what are called risk-sensitive rules, then we need supervisors to check them.
Now I do believe that our general tendency in future should be to have more aggressive rules, and if we have more aggressive rules, we don’t need to be quite so intensive on the supervisory approach, because you’ve put margin for error in the rules themselves. The other thing I would say, and it is an area where I disagree with John, and we’ve had this debate intensely, John believes that you could solve this problem of the financial sector by a particular form of regulation, let’s be clear it’s not non-regulation, it’s a particular form of regulation, by the ring-fencing of simple banks from complicated banks.
PROSPECT: Where does this fit with Sir John Vickers’ suggestions?
ADAIR TURNER: Well, actually, John Kay’s proposal was rejected by Vickers. John’s idea was that we should have only deposit banks, which only invested in government debt: completely narrow banks. Vickers actually explicitly rejected that and so would I, because I think John has wrongly defined the problem there, he’s defined the problem as being “how do you prevent depositors losing money and the state ever having to put in money for depositors to be protected?” Although that is important, that is not at all the biggest problem we have in the banking sector.
The fundamental problem we have in the banking sector is that the amount of credit it extends to the real economy will, left to itself, be deeply volatile. It will be far too excessive in the upswing, and then it will go in the downswing. John, in his earliest forms of narrow banking, essentially said, if I could regulate just banks that take deposits and only hold government debt (i.e. all banks are essentially just marketing arms for national savings and investment), we can deregulate the rest and we can just ignore it. I think that is completely wrong, John knows I think it’s completely wrong, we’ve had this debate, because I think you would then be leaving a deeply unstable process of credit creation.
I also believe that even with the Vickers proposals, which I am more sympathetic to, which would have a ring-fence bank, which would have SME lending within it, I think although that is a good idea and I am a clear supporter of that, I think we should never fool ourselves that we could then forget about regulating what is outside the ring-fence bank. Lehman Brothers was an outside-the-ring-fence bank, but its failure was still a major problem. Even if we ring-fence banks in the way that John Vickers suggests—and I think it’s a very good report which I support the broad thrust of—we will still have to regulate what goes on outside. And, by the way, and it goes back to my point about rules and supervision, the Vickers proposals will require some supervision to enforce. For example, in the Vickers proposal it says that ring-fence banks will need a treasury department that must be able to place excess funds if your ring-fence bank has more deposits than loans, or take money from the money market if it has more loans than deposits. That treasury department will also have to manage the balance sheet, for instance by using perhaps interest rate derivates to deal with the fact that if it has fixed-rate mortgages but floating-rate deposits it will have a risk that it might want to try, quite responsibly, to offset. It then says, however what Treasury should do is manage the balance sheet as an end purpose in itself, not as a way of making profit.
Actually working out whether a treasury department is just managing the balance sheet or is taking the opportunity of that to try and make profit is something that requires supervision and detailed engagement. It’s not something that you can regulate by writing into legislation how you do that, because the actual contracts that you’re doing, the derivative contracts that you make with another bank, the placings and takings that you have, those can simultaneously be for profit making or for management of the balance sheet.
So, to go back to John’s point, one: I disagree with him on narrow banking, I am in favour of the Vickers suggestion, which is different from narrow banking. Two: you will never get rid of the need for supervision as well as rules, however the weight and intensity of supervision could be somewhat less and somewhat less detailed if we had more robust rules which in themselves had margins for error and buffers within them.
PROSPECT: There is also the problem of being able to keep up with very aggressive, very innovative people, who are paid vast amounts of money and who do things like set up AIG Financial Products in Curzon Street, for example, which emitted $2 trillion dollars worth of derivatives. The FSA didn’t notice that.
ADAIR TURNER: Well, AIG Financial Products in Curzon Street was actually regulated by the French. It was the Banque de France. There is a problem: there is a major issue here about clarity of who is responsible. If you set up, as a branch of a European legal entity in London, then the single market rules are very clear that the local regulator has only limited control over what you do.
PROSPECT: How limited, and to what extent is there some control before the limit kicks in?
ADAIR TURNER: It’s very limited—in relation to prudential risk it is close to nil. The prudential risk responsibility for a bank, for instance operating as a branch in the UK, like Landsbanki back in 2008, clearly resides with the home regulator. There are aspects of what is called conduct regulation—mis-selling someone a mortgage—which reside with, to a degree, the local regulator. The approach with the AIGs in the past was that there was not a strong focus on their conduct because they were not selling to retail consumers. In conduct terms they were selling to people who they thought were sophisticated consumers. So we had relatively little role in relation to them and we had no role in relation to the prudential side.
What this illustrates is the huge difficulties of the European single market. One of the things we thought—and remember the UK before the crisis had complete cross-party, press and popular consensus on this—was that whatever else we wanted in Europe, even though we disagreed with some things like the social market or over-regulation, we ought to be pressing for completion of the single market. Completion of the single market requires that Tesco can go and set up anywhere in the European Union without being subject to regulations and can just get on with it. We picked up that proposal, which is pretty sensible in relation to manufacturers, or retailers, or coffee shops, or skiing instructors, and we applied it without enough thinking to financial services.
PROSPECT: Doesn’t Landsbanki, as part of the European Economic Area, make the point even more that the local regulator may have very few rights and responsibilities, and yet the host country may provide deposit insurance. Isn’t this a question that remains unsettled?
ADAIR TURNER: First of all, banks which operate as branches are not covered by the Financial Services Compensation Scheme, and if you look at their websites they say that now it is their home country, however tiny, which is the insurance policy that covers them. The other thing we did, and this was a shift in previous FSA policy, we accepted that we had to have the European Banking Authority [EBA], and that the EBA had to have an ability to set some more common rules and to ask questions about the supervisory capability of all these different countries, big and small, round Europe. And the phrase I used in the Turner review is, given where we were, we had to have either more Europe or less Europe. We either had to say “these single market disciplines really shouldn’t apply to retail banking at all and all banks that operate in a country should be subsidiaries and subject to the local regulator control,” which would be less Europe. Or we had to go more Europe and have an EBA. Now on the whole it has gone more Europe. I think probably people do much better understand now that if something comes with a name like Icesave they might imagine that that has something to do with Iceland, not the local regulator.
PROSPECT: Do you have a proper sense of what British banks’ exposure to the Eurozone is?
Oh yes, we have very precise understanding of what that exposure is, that is published and available for people to look at. That was covered by the latest EBA recapitalisation, I think it is familiar to people that the UK banks’ exposure directly to the more troubled peripheral countries in terms of their sovereign debt and their banking debt is relatively small, which is why when the EBA recapitalisation programme came out a few weeks ago with the application of mark-to-market values to sovereign debt, there were no UK banks which on that basis needed more capital to meet the 9 per cent requirement.
Even now, the UK banks have, to varying extents, exposure to the real economy of some of the peripherals—there are some which have non-trivial exposure to corporates and householders in Spain or Italy. You have RBS which owns Ulster Bank, again that should have been obvious to people all along. Ulster is one of the major three banks in Ireland, therefore by definition Ulster Bank has exposure to Irish commercial real-estate, to Irish householders, etc. Now that has been heavily provisioned against, but the exposure is there to see. In addition, UK banks have exposures to other banks, French or German banks in Europe, which may have more exposures to the Italian or Spanish banks.
So, to answer the question, yes we do understand what these exposures are, when we look at the things that we need to make sure are well covered-off, it is not so much their sovereign and bank exposure to peripherals, as their numbers there are relatively small. The question is how well we feel about the real-economy exposures of some banks. The figures are available publicly.
The other one is a knock-on consequence if other banks in Northern Europe got into trouble our banks are exposed to them, that is inevitable. The global banking system is a deeply interconnected thing, we have almost encouraged it over the last 20 years to be deeply interconnected. We have told lots of developed intellectual stories about what a great thing it is that we have this incredibly interconnected global financial system in which risk and liquidity are laid off in a complicated system. So we cannot unravel that. There would be disadvantages in unravelling that and we need to watch very carefully those knock-on consequences.
There are some of those where we are reliant on a macro-resolution to the eurozone problems. There is a level of interconnectivity in the global financial system such that you cannot solve all problems by looking only at your own institutions. Or, if you do, i.e. by telling them to cut their lines to some other banking system, you will precipitate the very problems that you are trying to avoid, so that is why we have an enormous not only real economic interest in comprehensive solutions to the eurozone, but financial stability interests.
PROSPECT: Are you worried about potential counterparty risk to large Northern European banks, French, German banks?
ADAIR TURNER: Not specifically. Am I worried about the overall Eurozone situation, yes I am very worried? PROSPECT: No, specifically the counterparty risk of our banks.
ADAIR TURNER: We are well aware of what that is, and it is clearly the case that for the sake of the world there needs to be coherent answers to the eurozone situation. There is a level of problem in other bits of the world economy from which you cannot fully insulate your own banking system, other than by categories of government guarantee, and if we didn’t want that we should have designed a global banking system which was completely separate legal entities.
I believe that we have to shift somewhat, and we have already shifted, to more subsidiarisation, and to more strong local banks. My own philosophy, which has been against that of several people in the world, has been more willing to accept that national banking systems ought to be, to a degree, ring-fenced, at least in relation to their core retail and commercial bank operations. And that, after all, is the Vickers proposal. I have supported the idea that large global banks in their retail and commercial operations, fundamentally, ideally, should be constellations of national subsidiary banks. But you can’t leap to these things immediately, we have an interconnected banking system, so of course we are concerned about making sure that there is an integrated, coherent resolution to the Eurozone problems.
PROSPECT: The way you’ve described this interconnected system is that you’ve told stories about why it’s desirable and so on. It sounds almost regretful.
ADAIR TURNER: I think this integrated global system, to be safe, needed much higher levels of capital and liquidity resource in the banking system. It needed much higher capital requirements against intra-financial system complexity and trading activity. It also needed—this goes onto the eurozone—really effective mechanisms for guarding against the excessive creation of public debt held by the banking system, and it didn’t have any of these. We have to understand how deep were the intellectual and architectural failures of the system, which collectively round the world we had managed to create by 2008.
By the way, I didn’t know that at the time—I’m not saying that I was sitting back somewhere in 2005 saying: “Oh, God!” I was not a Nouriel Roubini [a professor at the New York University Stern School of Business, who is credited with having predicted the 2008 crisis.] There are other people who managed that: Bill White at Jackson Hole, back in 2004; Nouriel Roubini, who said this system is heading for disaster. I didn’t know that. But I do think we have to realise that we are struggling with the aftermath of huge, really huge design problems. Those design problems relate to the capital and liquidity rules of the entire global financial system and we are on the path to putting those right; but we are trying to do it simultaneously with also dealing with the problems in the fact that we didn’t have it right in the first place.
PROSPECT: As you’ve described, it is a partial solution. Should people expect, then, that there is a significant, persisting risk of continuing financial crises of this kind?
ADAIR TURNER: Once we get to Basel 3, we will be in a far better position than we were before. In an ideal world would I go further? Yes, I would. We also have unfinished business within the Basel agenda: there’s a project on trading book capital, which we still have to look at. The area of the capital regime, which pre-crisis was not just woefully poor but beyond woefully poor, was the amount of capital that we required against some trading activities. We had collectively bought off on the idea that Value at Risk models provided an incredibly sophisticated way of managing risks. We had bought off on the idea that you could look at the price movement over a ten-day period and that as long as you had capital to cover that, that was fine, on the grounds that we had such liquid and sophisticated markets that you’d always be able to get out a position in a 10 day time period.
And this was a huge failure of the regulators to think about collective systemic risk. The thing that you hope an individual bank might be able to do is think about idiosyncratic risk within a stable system. The thing that we have to think about is unstable systems. The idea that you can get out of a position in 10 days may be a legitimate assumption for one individual bank thinking about idiosyncratic positions in a stable system. Applied to the whole of the system it’s complete nonsense—complete nonsense—because if the system goes wrong, nobody’s going to get out of their position in 10 days time because who are they going to get it out to? Everybody else is going to be getting out, and that’s what’s happened in Autumn 2008.
There was a massive fallacy of aggregation, fallacy of composition-type intellectual mistake. So, let’s be clear, I was very clear even after 6 months, when I wrote the Turner review, that we were the inheritors of some massive design and intellectual mistakes, and I have become increasingly aware of how severe those mistakes were over the last few years.
PROSPECT: These are methodological ideas and explanations—to what extent do you think that the problem is simply one of size? Is the city and is finance too big?
ADAIR TURNER: I think it is highly likely, at the end of this process, once we have applied sensible rules, some areas of financial activity will be smaller than they were before. First of all, I think it is likely that some real economy leverage will, and should be, lower. I think household debt-to-GDP probably went to a level that creates risks. As it happens, in the UK those have not been the core of what has gone wrong this time round. That is essentially because we’ve had such low interest rates that despite their high levels of leverage, most people were still able to pay their mortgage debt. So the UK mortgage market actually has been one of the things that has not produced extreme problems.
The overall level of leverage that we got in the household sector was higher than is optimal, and in bits of the corporate sector, particularly the corporate real-estate sector. So those are bits of real economy, and if they have lower leverage, then by definition we have a smaller set of bank balance sheets. But the far more dramatic stuff is that, I think, there was a set of developments in structured credit and derivates against structured credit, which were, as I said in my Prospect interview two years ago, completely socially useless, many of which have gone and should go.
What was going on in early 2007, brilliantly described in Michael Lewis’s The Big Short, is a group of people wanting to take a set of bets, and when they found that they didn’t have enough CDOs [Collateralised Debt Obligations] naturally arising, constructed out of US sub-prime mortgages for all the people who wanted to take the bets, they started creating synthetic CDOs. So you had CDS [Credit Default Swaps] bets against synthetic CDOs. Now, at one level, if this was just two guys in a pub choosing to bet on who can drink a pint of beer faster, people are allowed to go off into a corner and make private bets. Unfortunately that’s not the case, these were of the category of pure bets with no socially value-added purpose, which, however, because they resided on the balance sheets of major financial institutions, were creating huge systemic risk. And that will get smaller, has got smaller, will stay smaller as a result of our trading book capital regime, and should stay smaller. PROSPECT: The CDS point brings us on to a question mentioned earlier. The CDS and derivates like it were possible because of the failures of the Commodity Futures Modernization Act (2000) to adequately set regulations for derivates. The implication is that there is not the political will in the United States adequately to confront the excesses of the financial services industry; and there is a direct link between that and the political funding rules that exist in the United States, whereby financial institutions can fund their preferred candidates. For this reason there is a resilience—an inability—to confront the excesses of that type of activity in the United States. And so long as that activity prevails in the US, then we will follow, because as you mentioned earlier with Basel 3, unless there is global consensus then there is no consensus, and the United States is of course the bear in the room, is it not?
ADAIR TURNER: Well, as an analysis of what occurred, I think you’re right. I think you are quite right that the CFTC (Commodity Futures Trading Corporation) back, I forget the exact date but late-1990s, was proposing a set of regulations, which were pushed aside. And they were pushed aside because of the lobbying power of major financial interests. If you look at the failure to regulate the major investment banks in the US in an effective fashion, a failure of the SEC to apply appropriate capital liquidity rules, I’m sure that that had a lot to do with the lobbying power of the major banks there.
Now, there are some bits of the US regime, however, which are good and pretty strong. We think of their straight commercial bank regulation as, aggressive and robust, what the Federal Reserve does, what the Federal Deposit Insurance Corporation does, they did have a leverage ratio, which we did not. They are applying tighter capital rules—I am confident they will apply Basel 3 capital. We work very closely with them, and they are part of the international consensus on that. I also think that Dodd-Frank is a major step forward for them.
What worries me, particularly as I look at the US now, is that a political process has gone on to deny to the agencies like the CFTC and the SEC [the Securities and Exchange Commission] the budget resources that are required for them to do effectively what Dodd-Frank has instructed them to do. Dodd-Frank is an extraordinary piece of legislation, which just says you shall do this and the CFTC shall write a rule. This is an enormous amount of work for these two agencies and for the Federal Reserve Bank in some other areas. What is going on, and what is going on in Congress is deliberate action to starve them of funds, which I think has a degree of motivation coming out of some financial interests through campaign money to members of Congress.
If I were American, would I be worried about my campaign rules and the power of big lobbyists in general and the financial system in particular? Yes, I’d be hugely worried. I think one of the most powerful things that we have in our democracy, and we should never move away from it, is the ban on paid advertising [by politicians] on TV. Because we don’t have paid advertising on TV, there’s just a limit to how much our political parties can possibly spend in a general election. Therefore, they are much less influenced by the lobbying power of money, and we should stick to that. The American campaign system has developed in a terrible fashion.
PROSPECT: Do you think British politicians are influenced by the power of money and the City?
ADAIR TURNER: Not in anything like the way that the US works. But let’s be clear: the influence of the City on UK politics before the crisis—and I’ll be very clear about what I mean by this—I think there was a significant influence, but it works in a completely different fashion. We have different campaign rules and we also have a different role of Parliament. So backbenchers in Parliament do not have strong independent legislative power. Governments put bills down, they can be amended—but governments have enormous power of initiation and whipping, in a way that the US Congress doesn’t. That means that there is no equivalent in the UK of the very clear progress in the US of, a law’s proposed, it was voted down by those ten Senators, or those X congressmen, whom you can work out were directly receiving money from these people who had an interest in that law. That is what goes on in the US—we do not have that.
Was there, however, a pervasive influence of assumptions about the City on the UK political dynamic? Yes, there was. There was a belief that light-touch regulation, or limited-touch, would make the City bigger, and that the City was a source of employment and tax revenue in particular. And therefore there was clear pressure on the FSA at times to say, go easy on the city. The FSA never used the phrase “light touch”, but politicians did, and they did it in speeches, which were directed at the FSA.
PROSPECT: Ministers or politicians?
ADAIR TURNER: Oh—ministers right at the top. Prime ministers. Chancellors of the Exchequer made speeches of that sort in the last government. And if the FSA, in 2006, had presciently said: “We are really worried about these capital liquidity ratios, so insofar as we have legal power—and there are some constraints on this—to go beyond global things, we’re going to impose higher capital standards on our banks, or we’re going to impose higher trading book requirements on CDS contracts, or, correlation trades.” We would have been hit by a wall of assertions from the press, I have to tell you, from many of the business columns of our major newspapers, but also at ministerial level and parliamentary level with, “What are you doing? Why are you imposing these?”
So there was not, I think, anything like the campaign contribution direct through to voting. But there was a pervasive tendency to believe that the UK had an interest in a light-touch regulatory regime. And, for instance, in the Financial Services and Markets Act (2000), there is a need for us to have regard to the competitiveness of London as a financial centre. I don’t think there should be. I do not think a prudential regulator should have to have regard to competitiveness. Other people should have regard to competitiveness. I’ve been a business lobbyist before, that’s what the Confederation of British Industries does, that’s what the City of London, corporation, the Lord Mayor, legitimately does. But I think you need absolutely clear—it is not the job of a regulator to be interested in external competitive success. They mustn’t do crazy things that will necessarily harm it. But the moment you introduce an idea that they are part regulator and part sponsor, spokesman, for an industry, that’s dangerous, that’s confusing.
PROSPECT: Nonetheless, do you think George Osborne is right to be concerned that Brussels will damage the competitiveness of the city?
ADAIR TURNER: That is an absolutely legitimate thing for the Treasury to be focused on, but I think you have to keep a regulator very clearly separate from those debates, because otherwise you are in danger of a subtle form of regulatory capture. This works through a set of intellectual assumptions and unwritten assumptions about what you should do and not do rather than any “X told me precisely to do this.” People are influenced by the assumptions as to what people want them to do even if it’s not clearly specified, and it’s very important to create a culture within a regulator that says, “Your job is to make sure this financial system is sound. It’s somebody else’s to work out whether it’s competitive in the world economy.”
PROSPECT: Are proposals about a transaction tax a threat to the City?
ADAIR TURNER: Well, as is known, I can see some theoretical arguments for a transaction tax. I said so in Prospect two years ago, with a considerable effect on public debate at the time. I can see theoretical arguments for it. I think it is important that it is put on the table. It is for others to decide the appropriate approach between “Are you only in favour of it if it’s at a global level?”, “Are you only in favour of it if it’s at a European level?” and I simply keep out of that debate because it’s not my locus to do that, that is Treasury’s locus. The thing that I did a couple of years ago was deliberately say it, and I believe it now, that it is very important when we have been through such an extraordinary crisis to take ideas out of the index of forbidden thought, to not have taboos and assumptions that you can’t talk about things, and I think transaction taxes had fallen into that category and they shouldn’t be in that category, any more than should much higher requirements on bank capital, much higher requirements on bank liquidity, etc.
PROSPECT: Anglo-Saxon capitalism is something of a pejorative on the continent. To what extent is the City going to be subject to the EBA, to what extent is the British regulator going to be subject to it, and to what extent is it going to be effectively a defensive relationship from our point of view?
ADAIR TURNER: No I’m not worried about their role, I think they played a very thoughtful role in relation to the discussions that we had on the European bank recapitalisation programme, which was announced a few weeks ago. We are deeply involved in discussions with them. Our major concern with Europe is not with the EBA, it is with the proposals for the Capital Requirement Directive 4, CRD 4. But let’s be absolutely clear what our major concerns are: it’s not that that will impose too high requirements on the UK, it is the concern that both I and Mervyn King have expressed that it will limit us from imposing adequately high requirements, it is precisely the other way round.
PROSPECT: So our interests are aligned then?
ADAIR TURNER: Well, at the moment there is a danger that CRD4 will proceed in what is called a “maximum harmonising” fashion, and maximum harmonising directives both tell you what is the maximum regulation you can have, as well as the minimum. We believe that CRD4 should set minimum absolute standards for capital requirements across Europe, but that we, the UK authorities, should be able, if we think appropriate, to impose higher capital and liquidity requirements than are defined at that level. And that is the big debate, which is going on at the moment. And Michel Barnier [European Commissioner for Internal Market and Services] would say, no there is flexibility within it and there are some elements of flexibility and I think they have improved somewhat on the course of this debate.
But on the whole our current biggest debate with Europe, in the banking space rather than the securities space, is very definitely focused on ensuring that we have freedom to impose higher standards, not freedom to impose lower standards.
PROSPECT: And to what extent will we have to simply accept a European decision?
ADAIR TURNER: Well, the European rule will be binding, and capital requirements will become a legal force through European law. As I say, even the present form of the proposed directives, CRD4, has significant amounts of flexibility within it, so we’re not totally constrained. We and the UK government are arguing for more flexibility within it. We are arguing for enough flexibility that we can do the Vickers proposals, so the Vickers proposals for the ring-fenced banks, the equity requirement should not be the 7 per cent within Basel 3, it should be 10 per cent. We need to preserve the freedom to do that. Now the commission say, “yes what they are proposing will still allow the freedom to do the Vickers proposals,” but that’s the biggest debate that we have at the moment, and on that, we, and the Bank of England and the Treasury, are all as one trying to persuade Europe to give us the freedom to impose higher standards, not lower standards.
PROSPECT: And what degree of influence do we exert when we do try and persuade Europe of anything?
ADAIR TURNER: We have very significant influence. There’s an irony that, before the crisis—and you do get some slightly ironic reaction in Europe on this—before the crisis the majority of the UK contribution to the European debate was heavily focused on: keep the regulation lighter and don’t impose too many restrictions on these financial systems which are sophisticated and capable enough to manage risk themselves. So there is sometimes a reaction in Europe saying, “hang on there, you’re now coming along and saying that your biggest concern is to make sure that you’re able to impose higher standards than Europe is proposing.” So there is a slightly ironic reaction, given that we have gone from being predominantly people arguing in the direction of light-touch to people who in some particular areas, not all areas but in particular areas, like bank capital and liquidity, have been on the hawkish side of the debate.
The UK has been very influential at global level, we are major players in the development of Basel 3 and in the Basel Committee and in the Financial Stability Board, and we have major influence in Europe through our direct links in the role we play in the EBA and the other authorities through the membership of myself and Mervyn King and Paul Tucker [Deputy Governor, Financial Stability at the Bank of England] of the European Systemic Risk Board, which is also a new and important player on this. So we’re not distant from these debates—and these things are decided by qualified majority voting, and other people may have different points of view. So influence doesn’t always mean you always get your point of view, but we are very involved in those debates and we’re a very significant influence.
PROSPECT: What are you going to do next?
ADAIR TURNER: I don’t know, I’ll just have to wait and see. I agreed that, whatever else we do, I would see the FSA through to the end of its life. When we were in the process of persuading Hector to stay on in June last year, at a certain stage he said, “Well, what are you going to do?” And I said, “We’ll both stay to the end of this process.” So we are both committed to doing that.
The FSA will almost certainly last in its current legal form till maybe March, April 2013: longer than we initially thought. It’s right that the existing leadership drives it through to a successful conclusion of this separation and to the two successive bodies. And beyond that, I think first of all, I’ll just have a very, very long sleep. And then beyond that I’ll do something else.
PROSPECT: Two years ago, in Prospect, you said: “We do now have banks which have adequate capital and I think we’re beyond the point of fragility.”
ADAIR TURNER: Yes, I think we’ve gone back to the point of fragility at the macro level. Not necessarily for our individual banks, but to the whole system. And so to that extent, I thought then, and so did most people, around the table of the FSB, Basel committee, everywhere, that we’d gone through this terrible crisis, we’d taken a set of emergency measures both in the financial system and at the macroeconomic sense, the emergency stimulus, the recapitalisations, the April 2009 London G20. Everybody felt that the recovery will be slow, but we’ll slowly come out of it, and, my god, we’d better make sure it doesn’t happen again in 15 years time.
I think relatively few of us, at that stage, anticipated, I did not, that we would be as worried as we are now, not about the future design of the system. The failure was to be prescient enough to see that the knock-on of this global financial private system crisis then knocked-on and interacted with fault lines within the eurozone construct. Plus, even in the US, you probably wouldn’t have found people in the Fed in mid-2009 who would have had anticipated that they’d have to go to quantitative easing by 2010.
So I think in lots of ways, in lots of different dimensions, we have been surprised on the downside. You even see that just in the most simple fashion: what has happened to the Bank of England’s growth charts—well, they’ve been revised down. And again it is a warning of how incredibly difficult it is to be prescient of these things, and also just what a complex interconnected system we have. One sometimes feels that this financial system is like some incredibly complicated waterbed, where you try and deal with something here and then something happens at the other end. We’re just not clever enough to see it. We still have a very complicated process, which is as much for the balance of government fiscal policy and monetary policy as anything regulators can do. We’ve got a very difficult process of managing out of the present situation, but the levers for managing out of the transition are more to do with bank quantitative easing and things that central banks can ultimately do than anything we can do. But I think the more that we can understand the complex interconnectivity, the more we have to redouble our efforts to be radical about how much we have to change these systems to make them more stable for the future.
PROSPECT: The waterbed metaphor is quite a striking one, but also quite a pessimistic one, in that it implies a never-ending series of problems. Do you think there is much more pain yet to come?
ADAIR TURNER: I have always been an optimist, and was so even in the third week of October, 2008. The world will not go into a 1929-33 unless we fail to do the things we are capable of doing. We have the tools to prevent that—back in October 2008, people thought we could have a 1929-33. Ultimately, at the limit, we know what to do to prevent that, and ultimately it’s central banks who do it, and what they do is they print money and they use it in quantitative easing, which of course is the point of economics where Keynes and Friedman agreed—that is what you do in the extreme environment.
Of course the extreme statement of it is Milton Friedman’s helicopter money, and I think that the world is very well served by the fact that in the US Federal Reserve, which is the most important simply because of the size of the banks, we have as a Federal Reserve chairman someone who has been a deep student and expert of what happened in 1929-33 and I believe the bank is right to be doing quantitative easing and I think those tools of central bank intervention are the right thing to do. They are ultimately limitless. I think it is very important that we never use phrases like “Central banks are out of ammunition.” The one group who never run out of ammo are central banks because they can ultimately create as much money in their own currency as they want.
PROSPECT: So you think the Bank of England can simply go on printing money?
ADAIR TURNER: Of course it can. The bank has to balance continually as to whether it is desirable to do that. If they overdo it, they will create too much inflation rather than simply prevent deflation. But the capacity of a central bank to stimulate aggregate nominal demand—that is one of the very few things that in this area of complex uncertainty we should be certain about. That’s what central banks can do. They get it wrong they can create hyper-inflation so they have to be very wary about getting it right.
I’ve always been clear that it’s important to have confidence. What I think we are much less clear about is how far we’re clever enough to achieve a reasonable recovery at a reasonable pace in time. Am I totally confident that we will not do a 1929-33—yes. Am I totally confident that we can avoid a Japan over the last 20 years. No. That is uncertain and we need to think carefully about the appropriate policies. Having said that, let us remember that while the last 20 years of Japan are unfortunate, they are still an environment of a rich country growing at something like three-quarters or a half per cent a year. It’s not a disaster. Not remotely like 1929-33.
PROSPECT: Is it the right time to be breaking up the FSA, now that everyone has got used to it?
ADAIR TURNER: My belief is that the endpoint of the reform will be better than the existing FSA. I always had an inkling even before I took the job that the spread of the FSA’s responsibility from the prudential regulation of large banks through to the conduct regulation of 20,000 Independent Financial Advisers and general insurance brokers was a very wide span which went across activities which had a different nature, a different skill-set and different logical links.
So I am actually a believer that the prudential regulation of banks in particular but also shadow banks has a natural overlap with central banking activity and should be combined with the central bank. Insofar as I had an inkling, I always believed that, years ago, and I increasingly became convinced of that over the first few years that I was here, which was very clearly against FSA institutional belief at the time. So I am a supporter, and I think it was pretty clear even before the election that I was a supporter of that general direction.
In an ideal world, we wouldn’t be doing this change in the middle of the biggest financial crisis in the world. So it’s not so much that you asked the question, “should we be doing it given that people have got used to the FSA?” I don’t think that would be a good argument against not doing it, but in an ideal world I would not choose to be doing this amid the biggest financial crisis, because an organisational divide takes up a lot of top management time thinking about people, premises, systems, lots of nitty-gritty things. We had a board away day of the FSA board two weeks ago of the FSA board, which was entirely devoted to all that sort of stuff. There are only so many hours in a day, and every hour that Hector [Sants, chief executive officer of the FSA] or I or other senior people spend thinking about that, we are not thinking by definition about the very, very large problems which are in the global financial system.
But the decision has been made to go ahead and do it—these are manageable challenges. We simply have to manage that balance between business as usual and progressing, and of course the government when it pressed the button and said “let’s do it,” many of us thought that we’d gone through a terrible financial crisis and that we were now in the position of building the better system for the future. I think that’s what we felt at the financial stability board internationally: that there was huge amounts of work required to build a better system for the future, but most of us in Spring 2010 did not anticipate that we’d be back by Autumn 2011 worrying about the present stage of the crisis rather than putting it right to the future. So, we are going through a major organisational change, and the thing is manageable, but in an absolutely ideal world I would not choose to be doing these two things simultaneously.
PROSPECT: Are they manageable at the same time though?
ADAIR TURNER: Yes, they are manageable, I mean you use all the techniques of trying to set up dedicated groups within the organisation who are able to devote their time to the systems—the HR, the property, etc, who are, as it were people totally dedicated to that—and you have other people not involved in that who are totally dedicated to the capital and liquidity of our major banks, what’s going on in the Eurozone, etc. The pinch point in this process simply arises at the top level where you cannot avoid the fact that the board, chairman, CEO, and a small number of other people will have to look one way and another. But beneath that level the organisational device for dealing with such a situation is to try and ring-fence different groups of people and say “yes I know there’s a major financial crisis going on but I want you to think about how we manage this organisational transition,” so it’s manageable.
PROSPECT: Did the FSA fail by not anticipating or tackling problems in banking regulation?
ADAIR TURNER: I think the global regulatory system in total failed, but I think the FSA has been more willing than any other institution in the world to put up its hand and admit that it got things wrong. If you look at the internal audit report on Northern Rock, that is a very, very self-critical document, produced six months before I became chairman. Back in April 2008, the Turner review, which I produced at the Chancellor’s request six months after I became chairman, was also very critical of a lot of things we did, so we did do a lot of things wrong—there was a wrong supervisory approach.
But I think it’s very important to realise that the really big thing that was wrong was the overall regulatory approach, agreed at global level, and which a group of very clever people at global level thought was very sophisticated and totally appropriate. In retrospect, Basel 2—the revision of the capital standards of Basel 1 to Basel 2—was an enormous amount of intellectual effort over 10 years, which completely failed to address the fundamental issues. There was far too little capital and liquidity buffers across the global banking systems.
This situation had arisen over a 30 or 40 year period, in which banks had steadily been allowed to run with lighter capital and liquidity requirements; dramatically so, the figures are quite startling, on how much lower the capital ratios came. We used to run banks with 25 per cent or 20 per cent equity to assets and we had a working financial system. But we used to run with far, far higher capital requirements, far, far higher liquidity requirements. Over a 30, 40, 50 year period we moved away from them, and we constructed an economic theory that this was all fine because financial markets had got so much more sophisticated—that liquidity problems wouldn’t emerge because markets across the world had become more liquid and sophisticated, the banks could run with lower capital because the techniques of risk management had become more sophisticated. And all this was just hugely wrong.
So I think the FSA as an institution was largely an inheritor of a sort of 50 year-long giant intellectual mistake. So it made mistakes as well, but you do have to place them within that wider context – the whole system, which we agreed at global level was deeply, deeply wrong.
PROSPECT: But putting it that way, I mean the question is obviously “are we going to get it right?”
ADAIR TURNER: We are trying to get it right. Basel 3 is a very, very major change to capital and liquidity requirements. I am on record of saying that in an ideal world, if one were a benevolent dictator designing a system for a green field economy which didn’t previously exist, one would go to still higher capital requirements. So I’m in the same camp as say David Miles [member of the Monetary Policy Committee] and the stuff he’s written at the Bank of England: that if you step back and approached it on an entirely theoretical basis we would be still more radical than we have been.
But we have been very radical. Basel 3, compared with Basel 2—if you take what we have done to the definition of the numerator of the capital ratio, the denominator and the ratio itself, it is an increase of capital requirements, not just of some percentage points but of several times. We have very significantly increased capital requirements. And one has to be pragmatic about two things: first of all, you have to get a global agreement and there are different points of view around the world about how radical to be. I think it is well known that the UK, both myself and Mervyn King [Governor of the Bank of England], the FSA and the Bank, were pretty much in the radical camp in terms of how much we wanted to go on capital, but we have to have a global agreement. And that global agreement also has to reflect the balance between getting to much higher levels of capital liquidity and the difficulty of getting there without slowing down the real economy by driving deleveraging. What the world ended up in, in 2008, was levels of leverage both in the real economy in many countries and in the financial system in itself, which were far too high—hugely above optimal levels—and the process of getting out of excessive leverage is a very, very difficult transition task. That is what we are struggling with at the moment, and frankly I think that we have all learnt over the last two years just how difficult it is. I knew it was difficult but I now know that it’s much more difficult than I anticipated.
PROSPECT: It’s particularly difficult with, as you said the implications for economic growth.
ADAIR TURNER: Yes, huge implications, and for financial stability over-all; and what has happened in the Eurozone is a knock-on consequence of these two things, which are very linked. There were two very big intellectual mistakes. One of which is an Anglo-Saxon mistake of falling in love with liberalisation. The other was going ahead with the eurozone without thinking enough about the status of the government debt of countries which can no longer issue currency. And out of these two very large intellectual and architectural mistakes, we have ended up in a very dangerous position. There [has been] a failure to take account of just how dangerous too many debt contracts in the world are.
PROSPECT: Do you think regulation is possible in the first place? The economist John Kay has said that the crisis has shown that those in charge were incapable of running the financial sector, but the suggestion that we regulate that sector implies that we must find two groups of individuals who understand it.
ADAIR TURNER: I think it’s important within John’s point of view to distinguish between regulation and supervision. Regulation is a set of rules that you apply, supervision is the detailed process of ensuring that people are sticking to those rules, and also a process of reviewing what they are doing and responding to it in a somewhat judgemental way which goes beyond the rules. When I heard John making this argument, his primary argument was about supervision rather than regulation. Now John does believe that there should be a structure of regulation.
I believe that one of the reasons that we ended up with large numbers of supervisors is that we have designed the rules with insufficient margin for error. If we had always had much higher capital and liquidity requirements, you don’t then need to supervise tightly to work out whether they are meeting those rules precisely. When you set your capital and liquidity requirements with very few buffers—close to the point of danger—you then have to supervise very intensely to make sure that banks haven’t just gone beyond the point of going beyond those rules.
We also created Basel 2 rules—the risk-weighted rules—which required intense supervision. Making sure that a bank is sticking to the capital rules now needs very large numbers of supervisors to do it, because it doesn’t take the form of “show me your total assets.” You’ve got to have 20 per cent equity against those total assets. It takes the form of these modelled risk weights, and so a large bank like the Royal Bank of Scotland, the Lloyds Banking Group, or HSBC, probably has a hundred different models or more on which it is working out the capital requirement against different categories of mortgages and different countries. Because they are working out their own riskiness and their own capital requirements, we then have to check all of these, and I don’t think John would deny that we need capital and liquidity rules, we undoubtedly do, and if they are going to be these what are called risk-sensitive rules, then we need supervisors to check them.
Now I do believe that our general tendency in future should be to have more aggressive rules, and if we have more aggressive rules, we don’t need to be quite so intensive on the supervisory approach, because you’ve put margin for error in the rules themselves. The other thing I would say, and it is an area where I disagree with John, and we’ve had this debate intensely, John believes that you could solve this problem of the financial sector by a particular form of regulation, let’s be clear it’s not non-regulation, it’s a particular form of regulation, by the ring-fencing of simple banks from complicated banks.
PROSPECT: Where does this fit with Sir John Vickers’ suggestions?
ADAIR TURNER: Well, actually, John Kay’s proposal was rejected by Vickers. John’s idea was that we should have only deposit banks, which only invested in government debt: completely narrow banks. Vickers actually explicitly rejected that and so would I, because I think John has wrongly defined the problem there, he’s defined the problem as being “how do you prevent depositors losing money and the state ever having to put in money for depositors to be protected?” Although that is important, that is not at all the biggest problem we have in the banking sector.
The fundamental problem we have in the banking sector is that the amount of credit it extends to the real economy will, left to itself, be deeply volatile. It will be far too excessive in the upswing, and then it will go in the downswing. John, in his earliest forms of narrow banking, essentially said, if I could regulate just banks that take deposits and only hold government debt (i.e. all banks are essentially just marketing arms for national savings and investment), we can deregulate the rest and we can just ignore it. I think that is completely wrong, John knows I think it’s completely wrong, we’ve had this debate, because I think you would then be leaving a deeply unstable process of credit creation.
I also believe that even with the Vickers proposals, which I am more sympathetic to, which would have a ring-fence bank, which would have SME lending within it, I think although that is a good idea and I am a clear supporter of that, I think we should never fool ourselves that we could then forget about regulating what is outside the ring-fence bank. Lehman Brothers was an outside-the-ring-fence bank, but its failure was still a major problem. Even if we ring-fence banks in the way that John Vickers suggests—and I think it’s a very good report which I support the broad thrust of—we will still have to regulate what goes on outside. And, by the way, and it goes back to my point about rules and supervision, the Vickers proposals will require some supervision to enforce. For example, in the Vickers proposal it says that ring-fence banks will need a treasury department that must be able to place excess funds if your ring-fence bank has more deposits than loans, or take money from the money market if it has more loans than deposits. That treasury department will also have to manage the balance sheet, for instance by using perhaps interest rate derivates to deal with the fact that if it has fixed-rate mortgages but floating-rate deposits it will have a risk that it might want to try, quite responsibly, to offset. It then says, however what Treasury should do is manage the balance sheet as an end purpose in itself, not as a way of making profit.
Actually working out whether a treasury department is just managing the balance sheet or is taking the opportunity of that to try and make profit is something that requires supervision and detailed engagement. It’s not something that you can regulate by writing into legislation how you do that, because the actual contracts that you’re doing, the derivative contracts that you make with another bank, the placings and takings that you have, those can simultaneously be for profit making or for management of the balance sheet.
So, to go back to John’s point, one: I disagree with him on narrow banking, I am in favour of the Vickers suggestion, which is different from narrow banking. Two: you will never get rid of the need for supervision as well as rules, however the weight and intensity of supervision could be somewhat less and somewhat less detailed if we had more robust rules which in themselves had margins for error and buffers within them.
PROSPECT: There is also the problem of being able to keep up with very aggressive, very innovative people, who are paid vast amounts of money and who do things like set up AIG Financial Products in Curzon Street, for example, which emitted $2 trillion dollars worth of derivatives. The FSA didn’t notice that.
ADAIR TURNER: Well, AIG Financial Products in Curzon Street was actually regulated by the French. It was the Banque de France. There is a problem: there is a major issue here about clarity of who is responsible. If you set up, as a branch of a European legal entity in London, then the single market rules are very clear that the local regulator has only limited control over what you do.
PROSPECT: How limited, and to what extent is there some control before the limit kicks in?
ADAIR TURNER: It’s very limited—in relation to prudential risk it is close to nil. The prudential risk responsibility for a bank, for instance operating as a branch in the UK, like Landsbanki back in 2008, clearly resides with the home regulator. There are aspects of what is called conduct regulation—mis-selling someone a mortgage—which reside with, to a degree, the local regulator. The approach with the AIGs in the past was that there was not a strong focus on their conduct because they were not selling to retail consumers. In conduct terms they were selling to people who they thought were sophisticated consumers. So we had relatively little role in relation to them and we had no role in relation to the prudential side.
What this illustrates is the huge difficulties of the European single market. One of the things we thought—and remember the UK before the crisis had complete cross-party, press and popular consensus on this—was that whatever else we wanted in Europe, even though we disagreed with some things like the social market or over-regulation, we ought to be pressing for completion of the single market. Completion of the single market requires that Tesco can go and set up anywhere in the European Union without being subject to regulations and can just get on with it. We picked up that proposal, which is pretty sensible in relation to manufacturers, or retailers, or coffee shops, or skiing instructors, and we applied it without enough thinking to financial services.
PROSPECT: Doesn’t Landsbanki, as part of the European Economic Area, make the point even more that the local regulator may have very few rights and responsibilities, and yet the host country may provide deposit insurance. Isn’t this a question that remains unsettled?
ADAIR TURNER: First of all, banks which operate as branches are not covered by the Financial Services Compensation Scheme, and if you look at their websites they say that now it is their home country, however tiny, which is the insurance policy that covers them. The other thing we did, and this was a shift in previous FSA policy, we accepted that we had to have the European Banking Authority [EBA], and that the EBA had to have an ability to set some more common rules and to ask questions about the supervisory capability of all these different countries, big and small, round Europe. And the phrase I used in the Turner review is, given where we were, we had to have either more Europe or less Europe. We either had to say “these single market disciplines really shouldn’t apply to retail banking at all and all banks that operate in a country should be subsidiaries and subject to the local regulator control,” which would be less Europe. Or we had to go more Europe and have an EBA. Now on the whole it has gone more Europe. I think probably people do much better understand now that if something comes with a name like Icesave they might imagine that that has something to do with Iceland, not the local regulator.
PROSPECT: Do you have a proper sense of what British banks’ exposure to the Eurozone is?
Oh yes, we have very precise understanding of what that exposure is, that is published and available for people to look at. That was covered by the latest EBA recapitalisation, I think it is familiar to people that the UK banks’ exposure directly to the more troubled peripheral countries in terms of their sovereign debt and their banking debt is relatively small, which is why when the EBA recapitalisation programme came out a few weeks ago with the application of mark-to-market values to sovereign debt, there were no UK banks which on that basis needed more capital to meet the 9 per cent requirement.
Even now, the UK banks have, to varying extents, exposure to the real economy of some of the peripherals—there are some which have non-trivial exposure to corporates and householders in Spain or Italy. You have RBS which owns Ulster Bank, again that should have been obvious to people all along. Ulster is one of the major three banks in Ireland, therefore by definition Ulster Bank has exposure to Irish commercial real-estate, to Irish householders, etc. Now that has been heavily provisioned against, but the exposure is there to see. In addition, UK banks have exposures to other banks, French or German banks in Europe, which may have more exposures to the Italian or Spanish banks.
So, to answer the question, yes we do understand what these exposures are, when we look at the things that we need to make sure are well covered-off, it is not so much their sovereign and bank exposure to peripherals, as their numbers there are relatively small. The question is how well we feel about the real-economy exposures of some banks. The figures are available publicly.
The other one is a knock-on consequence if other banks in Northern Europe got into trouble our banks are exposed to them, that is inevitable. The global banking system is a deeply interconnected thing, we have almost encouraged it over the last 20 years to be deeply interconnected. We have told lots of developed intellectual stories about what a great thing it is that we have this incredibly interconnected global financial system in which risk and liquidity are laid off in a complicated system. So we cannot unravel that. There would be disadvantages in unravelling that and we need to watch very carefully those knock-on consequences.
There are some of those where we are reliant on a macro-resolution to the eurozone problems. There is a level of interconnectivity in the global financial system such that you cannot solve all problems by looking only at your own institutions. Or, if you do, i.e. by telling them to cut their lines to some other banking system, you will precipitate the very problems that you are trying to avoid, so that is why we have an enormous not only real economic interest in comprehensive solutions to the eurozone, but financial stability interests.
PROSPECT: Are you worried about potential counterparty risk to large Northern European banks, French, German banks?
ADAIR TURNER: Not specifically. Am I worried about the overall Eurozone situation, yes I am very worried? PROSPECT: No, specifically the counterparty risk of our banks.
ADAIR TURNER: We are well aware of what that is, and it is clearly the case that for the sake of the world there needs to be coherent answers to the eurozone situation. There is a level of problem in other bits of the world economy from which you cannot fully insulate your own banking system, other than by categories of government guarantee, and if we didn’t want that we should have designed a global banking system which was completely separate legal entities.
I believe that we have to shift somewhat, and we have already shifted, to more subsidiarisation, and to more strong local banks. My own philosophy, which has been against that of several people in the world, has been more willing to accept that national banking systems ought to be, to a degree, ring-fenced, at least in relation to their core retail and commercial bank operations. And that, after all, is the Vickers proposal. I have supported the idea that large global banks in their retail and commercial operations, fundamentally, ideally, should be constellations of national subsidiary banks. But you can’t leap to these things immediately, we have an interconnected banking system, so of course we are concerned about making sure that there is an integrated, coherent resolution to the Eurozone problems.
PROSPECT: The way you’ve described this interconnected system is that you’ve told stories about why it’s desirable and so on. It sounds almost regretful.
ADAIR TURNER: I think this integrated global system, to be safe, needed much higher levels of capital and liquidity resource in the banking system. It needed much higher capital requirements against intra-financial system complexity and trading activity. It also needed—this goes onto the eurozone—really effective mechanisms for guarding against the excessive creation of public debt held by the banking system, and it didn’t have any of these. We have to understand how deep were the intellectual and architectural failures of the system, which collectively round the world we had managed to create by 2008.
By the way, I didn’t know that at the time—I’m not saying that I was sitting back somewhere in 2005 saying: “Oh, God!” I was not a Nouriel Roubini [a professor at the New York University Stern School of Business, who is credited with having predicted the 2008 crisis.] There are other people who managed that: Bill White at Jackson Hole, back in 2004; Nouriel Roubini, who said this system is heading for disaster. I didn’t know that. But I do think we have to realise that we are struggling with the aftermath of huge, really huge design problems. Those design problems relate to the capital and liquidity rules of the entire global financial system and we are on the path to putting those right; but we are trying to do it simultaneously with also dealing with the problems in the fact that we didn’t have it right in the first place.
PROSPECT: As you’ve described, it is a partial solution. Should people expect, then, that there is a significant, persisting risk of continuing financial crises of this kind?
ADAIR TURNER: Once we get to Basel 3, we will be in a far better position than we were before. In an ideal world would I go further? Yes, I would. We also have unfinished business within the Basel agenda: there’s a project on trading book capital, which we still have to look at. The area of the capital regime, which pre-crisis was not just woefully poor but beyond woefully poor, was the amount of capital that we required against some trading activities. We had collectively bought off on the idea that Value at Risk models provided an incredibly sophisticated way of managing risks. We had bought off on the idea that you could look at the price movement over a ten-day period and that as long as you had capital to cover that, that was fine, on the grounds that we had such liquid and sophisticated markets that you’d always be able to get out a position in a 10 day time period.
And this was a huge failure of the regulators to think about collective systemic risk. The thing that you hope an individual bank might be able to do is think about idiosyncratic risk within a stable system. The thing that we have to think about is unstable systems. The idea that you can get out of a position in 10 days may be a legitimate assumption for one individual bank thinking about idiosyncratic positions in a stable system. Applied to the whole of the system it’s complete nonsense—complete nonsense—because if the system goes wrong, nobody’s going to get out of their position in 10 days time because who are they going to get it out to? Everybody else is going to be getting out, and that’s what’s happened in Autumn 2008.
There was a massive fallacy of aggregation, fallacy of composition-type intellectual mistake. So, let’s be clear, I was very clear even after 6 months, when I wrote the Turner review, that we were the inheritors of some massive design and intellectual mistakes, and I have become increasingly aware of how severe those mistakes were over the last few years.
PROSPECT: These are methodological ideas and explanations—to what extent do you think that the problem is simply one of size? Is the city and is finance too big?
ADAIR TURNER: I think it is highly likely, at the end of this process, once we have applied sensible rules, some areas of financial activity will be smaller than they were before. First of all, I think it is likely that some real economy leverage will, and should be, lower. I think household debt-to-GDP probably went to a level that creates risks. As it happens, in the UK those have not been the core of what has gone wrong this time round. That is essentially because we’ve had such low interest rates that despite their high levels of leverage, most people were still able to pay their mortgage debt. So the UK mortgage market actually has been one of the things that has not produced extreme problems.
The overall level of leverage that we got in the household sector was higher than is optimal, and in bits of the corporate sector, particularly the corporate real-estate sector. So those are bits of real economy, and if they have lower leverage, then by definition we have a smaller set of bank balance sheets. But the far more dramatic stuff is that, I think, there was a set of developments in structured credit and derivates against structured credit, which were, as I said in my Prospect interview two years ago, completely socially useless, many of which have gone and should go.
What was going on in early 2007, brilliantly described in Michael Lewis’s The Big Short, is a group of people wanting to take a set of bets, and when they found that they didn’t have enough CDOs [Collateralised Debt Obligations] naturally arising, constructed out of US sub-prime mortgages for all the people who wanted to take the bets, they started creating synthetic CDOs. So you had CDS [Credit Default Swaps] bets against synthetic CDOs. Now, at one level, if this was just two guys in a pub choosing to bet on who can drink a pint of beer faster, people are allowed to go off into a corner and make private bets. Unfortunately that’s not the case, these were of the category of pure bets with no socially value-added purpose, which, however, because they resided on the balance sheets of major financial institutions, were creating huge systemic risk. And that will get smaller, has got smaller, will stay smaller as a result of our trading book capital regime, and should stay smaller. PROSPECT: The CDS point brings us on to a question mentioned earlier. The CDS and derivates like it were possible because of the failures of the Commodity Futures Modernization Act (2000) to adequately set regulations for derivates. The implication is that there is not the political will in the United States adequately to confront the excesses of the financial services industry; and there is a direct link between that and the political funding rules that exist in the United States, whereby financial institutions can fund their preferred candidates. For this reason there is a resilience—an inability—to confront the excesses of that type of activity in the United States. And so long as that activity prevails in the US, then we will follow, because as you mentioned earlier with Basel 3, unless there is global consensus then there is no consensus, and the United States is of course the bear in the room, is it not?
ADAIR TURNER: Well, as an analysis of what occurred, I think you’re right. I think you are quite right that the CFTC (Commodity Futures Trading Corporation) back, I forget the exact date but late-1990s, was proposing a set of regulations, which were pushed aside. And they were pushed aside because of the lobbying power of major financial interests. If you look at the failure to regulate the major investment banks in the US in an effective fashion, a failure of the SEC to apply appropriate capital liquidity rules, I’m sure that that had a lot to do with the lobbying power of the major banks there.
Now, there are some bits of the US regime, however, which are good and pretty strong. We think of their straight commercial bank regulation as, aggressive and robust, what the Federal Reserve does, what the Federal Deposit Insurance Corporation does, they did have a leverage ratio, which we did not. They are applying tighter capital rules—I am confident they will apply Basel 3 capital. We work very closely with them, and they are part of the international consensus on that. I also think that Dodd-Frank is a major step forward for them.
What worries me, particularly as I look at the US now, is that a political process has gone on to deny to the agencies like the CFTC and the SEC [the Securities and Exchange Commission] the budget resources that are required for them to do effectively what Dodd-Frank has instructed them to do. Dodd-Frank is an extraordinary piece of legislation, which just says you shall do this and the CFTC shall write a rule. This is an enormous amount of work for these two agencies and for the Federal Reserve Bank in some other areas. What is going on, and what is going on in Congress is deliberate action to starve them of funds, which I think has a degree of motivation coming out of some financial interests through campaign money to members of Congress.
If I were American, would I be worried about my campaign rules and the power of big lobbyists in general and the financial system in particular? Yes, I’d be hugely worried. I think one of the most powerful things that we have in our democracy, and we should never move away from it, is the ban on paid advertising [by politicians] on TV. Because we don’t have paid advertising on TV, there’s just a limit to how much our political parties can possibly spend in a general election. Therefore, they are much less influenced by the lobbying power of money, and we should stick to that. The American campaign system has developed in a terrible fashion.
PROSPECT: Do you think British politicians are influenced by the power of money and the City?
ADAIR TURNER: Not in anything like the way that the US works. But let’s be clear: the influence of the City on UK politics before the crisis—and I’ll be very clear about what I mean by this—I think there was a significant influence, but it works in a completely different fashion. We have different campaign rules and we also have a different role of Parliament. So backbenchers in Parliament do not have strong independent legislative power. Governments put bills down, they can be amended—but governments have enormous power of initiation and whipping, in a way that the US Congress doesn’t. That means that there is no equivalent in the UK of the very clear progress in the US of, a law’s proposed, it was voted down by those ten Senators, or those X congressmen, whom you can work out were directly receiving money from these people who had an interest in that law. That is what goes on in the US—we do not have that.
Was there, however, a pervasive influence of assumptions about the City on the UK political dynamic? Yes, there was. There was a belief that light-touch regulation, or limited-touch, would make the City bigger, and that the City was a source of employment and tax revenue in particular. And therefore there was clear pressure on the FSA at times to say, go easy on the city. The FSA never used the phrase “light touch”, but politicians did, and they did it in speeches, which were directed at the FSA.
PROSPECT: Ministers or politicians?
ADAIR TURNER: Oh—ministers right at the top. Prime ministers. Chancellors of the Exchequer made speeches of that sort in the last government. And if the FSA, in 2006, had presciently said: “We are really worried about these capital liquidity ratios, so insofar as we have legal power—and there are some constraints on this—to go beyond global things, we’re going to impose higher capital standards on our banks, or we’re going to impose higher trading book requirements on CDS contracts, or, correlation trades.” We would have been hit by a wall of assertions from the press, I have to tell you, from many of the business columns of our major newspapers, but also at ministerial level and parliamentary level with, “What are you doing? Why are you imposing these?”
So there was not, I think, anything like the campaign contribution direct through to voting. But there was a pervasive tendency to believe that the UK had an interest in a light-touch regulatory regime. And, for instance, in the Financial Services and Markets Act (2000), there is a need for us to have regard to the competitiveness of London as a financial centre. I don’t think there should be. I do not think a prudential regulator should have to have regard to competitiveness. Other people should have regard to competitiveness. I’ve been a business lobbyist before, that’s what the Confederation of British Industries does, that’s what the City of London, corporation, the Lord Mayor, legitimately does. But I think you need absolutely clear—it is not the job of a regulator to be interested in external competitive success. They mustn’t do crazy things that will necessarily harm it. But the moment you introduce an idea that they are part regulator and part sponsor, spokesman, for an industry, that’s dangerous, that’s confusing.
PROSPECT: Nonetheless, do you think George Osborne is right to be concerned that Brussels will damage the competitiveness of the city?
ADAIR TURNER: That is an absolutely legitimate thing for the Treasury to be focused on, but I think you have to keep a regulator very clearly separate from those debates, because otherwise you are in danger of a subtle form of regulatory capture. This works through a set of intellectual assumptions and unwritten assumptions about what you should do and not do rather than any “X told me precisely to do this.” People are influenced by the assumptions as to what people want them to do even if it’s not clearly specified, and it’s very important to create a culture within a regulator that says, “Your job is to make sure this financial system is sound. It’s somebody else’s to work out whether it’s competitive in the world economy.”
PROSPECT: Are proposals about a transaction tax a threat to the City?
ADAIR TURNER: Well, as is known, I can see some theoretical arguments for a transaction tax. I said so in Prospect two years ago, with a considerable effect on public debate at the time. I can see theoretical arguments for it. I think it is important that it is put on the table. It is for others to decide the appropriate approach between “Are you only in favour of it if it’s at a global level?”, “Are you only in favour of it if it’s at a European level?” and I simply keep out of that debate because it’s not my locus to do that, that is Treasury’s locus. The thing that I did a couple of years ago was deliberately say it, and I believe it now, that it is very important when we have been through such an extraordinary crisis to take ideas out of the index of forbidden thought, to not have taboos and assumptions that you can’t talk about things, and I think transaction taxes had fallen into that category and they shouldn’t be in that category, any more than should much higher requirements on bank capital, much higher requirements on bank liquidity, etc.
PROSPECT: Anglo-Saxon capitalism is something of a pejorative on the continent. To what extent is the City going to be subject to the EBA, to what extent is the British regulator going to be subject to it, and to what extent is it going to be effectively a defensive relationship from our point of view?
ADAIR TURNER: No I’m not worried about their role, I think they played a very thoughtful role in relation to the discussions that we had on the European bank recapitalisation programme, which was announced a few weeks ago. We are deeply involved in discussions with them. Our major concern with Europe is not with the EBA, it is with the proposals for the Capital Requirement Directive 4, CRD 4. But let’s be absolutely clear what our major concerns are: it’s not that that will impose too high requirements on the UK, it is the concern that both I and Mervyn King have expressed that it will limit us from imposing adequately high requirements, it is precisely the other way round.
PROSPECT: So our interests are aligned then?
ADAIR TURNER: Well, at the moment there is a danger that CRD4 will proceed in what is called a “maximum harmonising” fashion, and maximum harmonising directives both tell you what is the maximum regulation you can have, as well as the minimum. We believe that CRD4 should set minimum absolute standards for capital requirements across Europe, but that we, the UK authorities, should be able, if we think appropriate, to impose higher capital and liquidity requirements than are defined at that level. And that is the big debate, which is going on at the moment. And Michel Barnier [European Commissioner for Internal Market and Services] would say, no there is flexibility within it and there are some elements of flexibility and I think they have improved somewhat on the course of this debate.
But on the whole our current biggest debate with Europe, in the banking space rather than the securities space, is very definitely focused on ensuring that we have freedom to impose higher standards, not freedom to impose lower standards.
PROSPECT: And to what extent will we have to simply accept a European decision?
ADAIR TURNER: Well, the European rule will be binding, and capital requirements will become a legal force through European law. As I say, even the present form of the proposed directives, CRD4, has significant amounts of flexibility within it, so we’re not totally constrained. We and the UK government are arguing for more flexibility within it. We are arguing for enough flexibility that we can do the Vickers proposals, so the Vickers proposals for the ring-fenced banks, the equity requirement should not be the 7 per cent within Basel 3, it should be 10 per cent. We need to preserve the freedom to do that. Now the commission say, “yes what they are proposing will still allow the freedom to do the Vickers proposals,” but that’s the biggest debate that we have at the moment, and on that, we, and the Bank of England and the Treasury, are all as one trying to persuade Europe to give us the freedom to impose higher standards, not lower standards.
PROSPECT: And what degree of influence do we exert when we do try and persuade Europe of anything?
ADAIR TURNER: We have very significant influence. There’s an irony that, before the crisis—and you do get some slightly ironic reaction in Europe on this—before the crisis the majority of the UK contribution to the European debate was heavily focused on: keep the regulation lighter and don’t impose too many restrictions on these financial systems which are sophisticated and capable enough to manage risk themselves. So there is sometimes a reaction in Europe saying, “hang on there, you’re now coming along and saying that your biggest concern is to make sure that you’re able to impose higher standards than Europe is proposing.” So there is a slightly ironic reaction, given that we have gone from being predominantly people arguing in the direction of light-touch to people who in some particular areas, not all areas but in particular areas, like bank capital and liquidity, have been on the hawkish side of the debate.
The UK has been very influential at global level, we are major players in the development of Basel 3 and in the Basel Committee and in the Financial Stability Board, and we have major influence in Europe through our direct links in the role we play in the EBA and the other authorities through the membership of myself and Mervyn King and Paul Tucker [Deputy Governor, Financial Stability at the Bank of England] of the European Systemic Risk Board, which is also a new and important player on this. So we’re not distant from these debates—and these things are decided by qualified majority voting, and other people may have different points of view. So influence doesn’t always mean you always get your point of view, but we are very involved in those debates and we’re a very significant influence.
PROSPECT: What are you going to do next?
ADAIR TURNER: I don’t know, I’ll just have to wait and see. I agreed that, whatever else we do, I would see the FSA through to the end of its life. When we were in the process of persuading Hector to stay on in June last year, at a certain stage he said, “Well, what are you going to do?” And I said, “We’ll both stay to the end of this process.” So we are both committed to doing that.
The FSA will almost certainly last in its current legal form till maybe March, April 2013: longer than we initially thought. It’s right that the existing leadership drives it through to a successful conclusion of this separation and to the two successive bodies. And beyond that, I think first of all, I’ll just have a very, very long sleep. And then beyond that I’ll do something else.
PROSPECT: Two years ago, in Prospect, you said: “We do now have banks which have adequate capital and I think we’re beyond the point of fragility.”
ADAIR TURNER: Yes, I think we’ve gone back to the point of fragility at the macro level. Not necessarily for our individual banks, but to the whole system. And so to that extent, I thought then, and so did most people, around the table of the FSB, Basel committee, everywhere, that we’d gone through this terrible crisis, we’d taken a set of emergency measures both in the financial system and at the macroeconomic sense, the emergency stimulus, the recapitalisations, the April 2009 London G20. Everybody felt that the recovery will be slow, but we’ll slowly come out of it, and, my god, we’d better make sure it doesn’t happen again in 15 years time.
I think relatively few of us, at that stage, anticipated, I did not, that we would be as worried as we are now, not about the future design of the system. The failure was to be prescient enough to see that the knock-on of this global financial private system crisis then knocked-on and interacted with fault lines within the eurozone construct. Plus, even in the US, you probably wouldn’t have found people in the Fed in mid-2009 who would have had anticipated that they’d have to go to quantitative easing by 2010.
So I think in lots of ways, in lots of different dimensions, we have been surprised on the downside. You even see that just in the most simple fashion: what has happened to the Bank of England’s growth charts—well, they’ve been revised down. And again it is a warning of how incredibly difficult it is to be prescient of these things, and also just what a complex interconnected system we have. One sometimes feels that this financial system is like some incredibly complicated waterbed, where you try and deal with something here and then something happens at the other end. We’re just not clever enough to see it. We still have a very complicated process, which is as much for the balance of government fiscal policy and monetary policy as anything regulators can do. We’ve got a very difficult process of managing out of the present situation, but the levers for managing out of the transition are more to do with bank quantitative easing and things that central banks can ultimately do than anything we can do. But I think the more that we can understand the complex interconnectivity, the more we have to redouble our efforts to be radical about how much we have to change these systems to make them more stable for the future.
PROSPECT: The waterbed metaphor is quite a striking one, but also quite a pessimistic one, in that it implies a never-ending series of problems. Do you think there is much more pain yet to come?
ADAIR TURNER: I have always been an optimist, and was so even in the third week of October, 2008. The world will not go into a 1929-33 unless we fail to do the things we are capable of doing. We have the tools to prevent that—back in October 2008, people thought we could have a 1929-33. Ultimately, at the limit, we know what to do to prevent that, and ultimately it’s central banks who do it, and what they do is they print money and they use it in quantitative easing, which of course is the point of economics where Keynes and Friedman agreed—that is what you do in the extreme environment.
Of course the extreme statement of it is Milton Friedman’s helicopter money, and I think that the world is very well served by the fact that in the US Federal Reserve, which is the most important simply because of the size of the banks, we have as a Federal Reserve chairman someone who has been a deep student and expert of what happened in 1929-33 and I believe the bank is right to be doing quantitative easing and I think those tools of central bank intervention are the right thing to do. They are ultimately limitless. I think it is very important that we never use phrases like “Central banks are out of ammunition.” The one group who never run out of ammo are central banks because they can ultimately create as much money in their own currency as they want.
PROSPECT: So you think the Bank of England can simply go on printing money?
ADAIR TURNER: Of course it can. The bank has to balance continually as to whether it is desirable to do that. If they overdo it, they will create too much inflation rather than simply prevent deflation. But the capacity of a central bank to stimulate aggregate nominal demand—that is one of the very few things that in this area of complex uncertainty we should be certain about. That’s what central banks can do. They get it wrong they can create hyper-inflation so they have to be very wary about getting it right.
I’ve always been clear that it’s important to have confidence. What I think we are much less clear about is how far we’re clever enough to achieve a reasonable recovery at a reasonable pace in time. Am I totally confident that we will not do a 1929-33—yes. Am I totally confident that we can avoid a Japan over the last 20 years. No. That is uncertain and we need to think carefully about the appropriate policies. Having said that, let us remember that while the last 20 years of Japan are unfortunate, they are still an environment of a rich country growing at something like three-quarters or a half per cent a year. It’s not a disaster. Not remotely like 1929-33.
