HSBC boss Stephen Green warns the crisis is 'far from over'

Hugo Duncan
30 Jun 2009

HSBC chairman Stephen Green today declared that the financial and economic crisis is a long way from being over as regulators warned that the overhaul of the banking system could result in lower profits.

"We are almost two years into a financial and economic crisis which is far from over," he said. "We cannot even say we are past the worst."

Billionaire investor George Soros added to the gloom as shocking figures showed the UK economy contracted at its fastest pace for more than half a century in the first three months of the year.

Soros predicted a "stop-go" economy, and warned that fears of inflation will drive up interest rates and choke off growth.

He also said that it is a misconception that markets are self-correcting.

It came as Chancellor Alistair Darling draws up a roadmap for future financial regulation in Britain including handing greater powers to City regulators to inspect and intervene in banks' business models.

Green described as "fantasy" the idea that small, "narrow" banks provided the best way to return to financial stability.

"Customers, both businesses and individuals, need a wide range of services," he told the British Bankers' Association (BBA) conference in London.

"To force them to go to different types of institution for different services would be totally unrealistic."

Paul Tucker, Deputy Governor for financial stability at the Bank of England, called for a "radical simplification" of some of the biggest banks under contingency plans for future financial crises.

He said some banks that are "too big to fail" need a structural overhaul to aid rescues in an emergency.

"The authorities cannot afford to stand back and allow disorderly systemic failure," said Tucker.

"We cannot have a regime where the upside for risk-taking goes to shareholders and management, but the downside falls to the general taxpayer."

He called for better regulation and supervision, improved arrangements for liquidity insurance and a new regime for resolving bank distress.

"In particular, banks must structure and run themselves to permit orderly wind down. And they must invest to provide the authorities with the information they need to do so," said Tucker.

"This will not be easy. And it will not be cheap. Over time it may well mean a lower headline return on equity for some banks.

"But of course it would also entail lower risk for bank equity and bond investors, and surely it is risk-adjusted returns that matter. And it would also deliver lower risk to society more generally."

Financial Services Authority chairman Lord Turner said politics may get in the way of banking reform.

"We are not going to have total certainty until a little matter of an election is put behind us," he said.

He also denied reports of a power struggle between the FSA and the Bank which he described as a "soap opera".

"I read accounts of this with interest but with little recognition, and I also read of concerns that a focus on future arrangements might distract us from the substance of what we need to do to fix the system," said Turner.

BBA chief executive Angela Knight said the new rules for banks must "not impede economic recovery".

She added: "The danger is that an over layering of multiple capital measures could result in an undue constraint being placed on the ability of banks to support households and firms through continuing to lend as the UK emerges from the recession."