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Alistair Darling Promises Tough Regulatory Approach

U.K. Chancellor of the Exchequer Alistair Darling has had to put all of his political skills and energy into salvaging Britain's crisis-hit financial sector. Darling explains why a tough new regulatory approach is needed to restore the fortunes of the City of London.

Having served as minister for everything from Social Security to Transport to Trade and Industry since 1998, Alistair Darling has developed a reputation as a dependable workhorse for the Labour government. Since succeeding Gordon Brown as Chancellor of the Exchequer in June 2007, Darling has had to put all of his political skills and energy into salvaging Britain’s crisis-hit financial sector and combatting a devastating recession. In an interview last month with London Bureau Chief Loch Adamson in his spacious Treasury chambers, Darling explained why a tough new regulatory approach is needed to restore the fortunes of the City of London.

Institutional Investor: The International Monetary Fund has expressed concerns about the U.K.’s indebtedness and the prospect of a slow, jobless recovery. How is the country going to dig its way out of the morass?

Alistair Darling ProfileDarling: It is essential that we and other countries support our economies just now, because if you don’t do that, you run the severe risk of a crash, plunging the economy into a much deeper — and far more painful — recession. But as a recovery becomes established, then all countries will have to make sure that they take steps to reduce their borrowing and their debt levels. You have to do that in a way that is fair to people and doesn’t damage businesses — and doesn’t put at risk the recovery itself. What the IMF made very clear [last month] is that the job isn’t done yet. What markets and investors want to see is that just as we have a credible plan for supporting our economy through the immediate problems, we also have a credible plan for reducing borrowing. In the budget [in April], we announced a plan to halve the deficit over a four-year period.

Much of the regulatory focus to date has been on remuneration. Is that sufficient to get at the underlying problems in the financial services industry? Is regulation going far enough?

Whilst some in the financial services industry see regulation as an unwelcome intrusion, people should recognize that if you don’t have a sufficiently regulated system, the risks will always be there that we will have another crash. It is important that banks recognize that they simply can’t go back to the days when some of the brightest and best got into a situation where they started to develop ever-more-exotic products that they didn’t fully understand, and what is worse, it was quite clear that their board members failed to comprehend what on earth they had got themselves into. Therefore that means that you have to create a more intrusive regulatory regime. I also think it means that you have to have board members who are prepared to put their hands up and say, "Excuse me, what does this mean? Could this bring down the bank?"

To those people who are saying, "You shouldn’t don’t do anything that might damage our competitiveness," part of being competitive means that you can be a good place to do business and people can have confidence that if you’re regulated here that actually stands for something.

Should there be a pan-European systemic risk regulator?

In terms of having cross-border resolution and a common rule book for banks, that is all advisable. But at the end of the day, the national regulators have to be responsible for what they do. You can’t be in a situation where somebody else is telling you what to do, because they don’t pay the consequences of it. The deal that we eventually got in Europe last summer, I think it has the makings of a solution. We made it very clear that we need to cooperate — no more, no less. It would have helped us immensely with the Icelandic problem. We wouldn’t have been in a situation where we basically had to go underwrite the branch of a foreign bank whose government was prepared to simply pull down the shutters.

As a consequence of bank failures and bailouts, we now have a few select banks that have consolidated even greater power. Are those banks a source of potential future risk?

FSA Regulatory PolicyIt is a concern if we end up having just half a dozen banks that can make markets. Our regulatory regimes are posited on having a proper, competitive market, and concentration doesn’t help that. Which is why I said in [a recent] speech that when we come to sell our shares in the banks that we have, one of the things that we will be looking at is, how do we get new entrants into the market? And the best way of dealing with high [fees] is to make sure that there is competition.

Are there any plans to divest the government’s stakes in Royal Bank of Scotland and Lloyds anytime soon?

Our position is the same as when we distributed the white paper in the summer — we will sell them when the time is right. My primary objective is to make sure that we can get back the money we’ve lent them — and that has been a lot. So I’m not in any hurry, and I’m not going to get into a forced sale. But when it comes to a bid, we would like to see how we can get more competition into the system. It doesn’t necessarily mean more competition if you’re simply transferring bits of big banks to other big banks.

Now I have no time for people who say that they want to reduce the industry’s size almost as a matter of principle. A million people work in the finance industry in this country. Billions of pounds are paid in taxes. So I would want London to remain one of the world’s — if not the world’s — greatest financial centers. But part of that will mean that we’ve got to change our mind-set. We’ve got to change culture, change our approach.

A few months ago the Conservative Party suggested doing away with the Financial Services Authority and having the Bank of England supervise banks. Is the tripartite system, under which the FSA, the Bank of England and the Treasury cooperate on financial regulation, the best way to address risk?

Well, the Tory proposal, as I understand it, has changed a bit — it is now simply to reverse the FSA into the Bank of England. And I can’t see for the life of me how on earth that would make things any better. And I’ve noticed that, since then, they’ve said they might actually do it over a longer time period, which seems to me politician-speak for "Maybe we won’t do it." Certainly, at this time there is still a lot of work to be done, and any reorganization is very disruptive.

There is no large country in the world where you don’t have at least three people at the table: the central bank, the regulator and the Treasury. I certainly don’t start by saying we can’t improve — far from it. What I do think is that the way the FSA and the bank and the Treasury operate needs to be more transparent, needs to be more formalized, which is why I’ve set up the Council for Financial Stability. We meet together regularly and will publish the minutes of those meetings. When the bank puts out its quarterly report, or when the FSA puts out a report saying that there is trouble on the horizon, we will then be in a position to look at those and say, "What are we going to do about it?" Not, "Let’s push it under the carpet and hope it doesn’t turn up."

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