Speaking to the BBC, Hector Sants, chief executive at the FSA, admitted that banks would have to change their business models to cope with the extra strain.
He said: “Banks need to give consideration to how their business models will need to adapt to the changed circumstances they have seen.”
Sants conceded that the industry had focused far too much on short-term gain rather than long-term stability. “There is a risk that the remuneration structures are too short-term and they do incentivise behaviour which is not helpful in maintaining long-term financial stability.”
However, Sants added that the regulator would be continuing its drive to implement ‘Treating Customers Fairly’ within the industry. He said: “We will be looking for firms to treat their customers fairly in these arguably more difficult times in prospect.”
The views of Sants were echoed by Rachel Lomax, deputy governor of the Bank of England. Speaking at the Institute of Economic Affairs, Lomax admitted that the UK was facing ‘the largest ever peacetime liquidity crisis,’ and added that the risk of financial crisis could ‘persist and possibly intensify.’
A number of commentators have already suggested that the UK is facing an economic crisis and Lomax conceded that the liquidity problems would act as ‘a deterrent and drag’ over the coming months.
Sants also admitted that the regulator had failed to do its job with regards to the Northern Rock situation.
Speaking at an FSA event, he said: “We have committed to publishing the conclusions next month. I can now say it will show that the supervision of the company did not meet the standards I would expect of the FSA.
“Being prepared to examine ourselves and learn from our mistakes is a crucial characteristic of a successful organisation. Successful organisations have a learning culture and an institution which expresses infallibility is one not to trust.
"I would thus like to think that our determination to be open and proactive should be seen as being to our credit and help give confidence to industry and consumers.”
