THE era of cheap credit may be over forever, consumers were warned yesterday.
Hector Sants, head of the Financial Services Authority (FSA), predicted that the markets would never return to the practices prevailing before the global turbulence sparked by last summer's subprime mortgage crisis in the United States.
He foreca
st that banks would back away from the innovative products that allowed them to package and sell on loans cheaply, and would instead return to the old methods of getting to know customers and forging long-term relationships with them.
"I don't think markets are ever going to return to the way they were," he said. "The new 'normal' will be different from the way that markets behaved in the past."
Mr Sants acknowledged that the FSA's supervision of Northern Rock ahead of its crisis last year was "not acceptable".
An internal review due to be completed next month would find that the FSA should have challenged the bank's management harder to ensure they understood the risks of the financial model they had adopted. He insisted the review would not be a "whitewash" but said its analysis of the crisis would not "undermine or detract from our basic regulatory philosophy".
The City watchdog's chief executive laid some of the blame for the credit crunch at the door of investors who put money into financial instruments they did not understand.
He was also critical of the City culture of big bonuses, which, he suggested, wrongly shifted the burden of risk away from executives who make decisions and on to shareholders whose investment is at stake.
He said: "There is a risk of an incentive for the employee to take the bonus – which in general is not to be handed back – and the shareholder may, in a few years' time, take the loss if the deal doesn't pay out in the way expected when the bonus was determined."
Mr Sants went on: "In the old days, banks basically kept the risk on their own balance sheet. When they entered into a transaction, they kept the risk of that transaction for the life of the transaction, of the mortgage.
"In recent years, they have been looking to pass that risk on to another party, which took it off their own balance sheet and away from their own shareholders. This, in theory, allowed them to write much more business, because they were dispersing that business more widely around the financial sector.
"Going forward, that is going to be more difficult."
He added: "I think we would all recognise that easy credit is not necessarily good for either consumers or the economy in the long term."
Mr Sants said the FSA would expect banks to take care of their customers' interests in the difficult economic period that is expected ahead.
"If we do see a deterioration in the real economy, consumers will find paying their financial obligations more difficult," he said. "So we will be looking for firms to treat their customers fairly."
The full article contains 508 words and appears in The Scotsman newspaper.
