Financial crisis a collective intellectual failure
The financial system as a whole could have set itself up to deal with the global downturn better, according to a senior official with the UK Financial Services Authority (FSA).
In a pre-recorded interview for the Australian Securities and Investments Commission (ASIC) summer school, held in Sydney this week, the UK FSA’s chief executive, Hector Sants, said too much focus had been placed on the acts of individual institutions and sectors in ascribing blame, rather than considering the financial crisis as a whole, and called it “a collective intellectual failure”.
He said, for example, that the central banks have been focused on a core inflation agenda rather than a subsidiary one.
“The overall system and risk inherent in it weren’t properly considered," he said, arguing that no one organisation or institution could be held responsible for the crisis.
“We could have done a better job,” Sants said, particularly by encouraging institutions to look at their business models. He later added, “We should have asked questions more stridently than we did”.
He noted mispriced risk and the end of a boom period as signals of economic difficulty ahead, including credit loss. However, banks, regulators and commentators did not anticipate “the catastrophic loss of confidence” we are now faced with.
On the subject of reform, Sants indicated caution towards the term “tighter laws”, saying he preferred “better laws” and pointed towards a breakdown in vision and morale as opposed to enforcement. “There was a failure of intellect”, he said.
However, Sants defended regulators, arguing that while they will take responsibility where necessary, the problems on a whole went deeper than regulators and the central banks. “Regulators are not infallible and we shouldn’t set ourselves up as infallible,” he said.
Sants urged consideration of the wider issues at play in order to deliver a “measured and sensible system” that will serve society over a long period of time.
On the issue of global regulation, Sants said there is no case for “genuine global regulation”.
“There is some degree of unevenness in supervisory standards around the world,” he said, but argued that the Basel accord provides “a harmonised set of rules”.
Sants welcomed the idea of a “risk radar”, which he said has been gaining traction in recent times. He said it’s necessary to improve the mutual understanding of crisis management and develop better mechanisms to deal with and spot problems ahead of time.
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