British lawmakers target complex finance products
British lawmakers, criticizing bankers and financial supervisors over their handling of the global credit crisis, warned investment banks to make their financial products more transparent or face extra regulation.
Lawmakers want to avoid “detailed regulation,” although such an approach may be needed unless banks address the “problem of overly complex products,” the House of Commons Treasury Committee said in a report.
The panel is investigating how defaults on sub-prime mortgages in the U.S. rippled through the financial system after credit markets froze.
The largest banks and securities firms have reported $163 billion in write-downs on holdings tied to sub-prime loans. In Britain, Northern Rock was forced into public ownership after finding itself unable to raise funds.
“The best and the brightest at our top investment banks have expended great energy designing ludicrously complex financial products,” Treasury Committee Chairman John McFall said. “Product complexity has introduced increased opacity into our financial system, making it almost impossible to determine where risk lies.”
Northern Rock, the first British bank to suffer a run on deposits in more than a century, was nationalized Feb. 17 after a five-month search to find a private buyer ended in failure. The bank has required 55 billion pounds ($109 billion) of public loans and guarantees to stay afloat since its credit lines dried up.
The Treasury Committee urged financial regulators to improve communication with the directors of banks. The Bank of England and the Financial Services Authority, the market regulator, should highlight “two or three” of the most important risks and discuss them with the boards of banks, the committee said.
It also pledged to examine whether bonuses encourage bankers to take too many risks. Hector Sants, chief executive of the Financial Services Authority, said last week that bank bonuses contribute to financial instability because they encourage short-term behavior and fail to penalize deal makers when trades go wrong.
