The report looked into financial stability and transparency and detailed the risks faced by the financial market.
The TSC found that, while warnings were given by the Bank of England and the Financial Services Authority (FSA) on deteriorating market conditions in 2007, few appeared to have listened.
It said much more needed to be done by the regulator than merely giving speeches without confirming their message was being heard.
Yet, in evidence given to the committee, Mervyn King, governor of the Bank of England, claimed that it currently had ‘no other policy instrument’ than giving speeches when it was concerned over risks facing the financial market.
He said: “If by giving speeches which are sufficiently compelling and through the financial stability report we can convince people that what they were doing was to take risks that they did not fully understand, then maybe we will bring about some improvement.
"But I do feel that in the last few years we are seeing a certain degree of hubris and it is never easy to persuade people suffering from that to think deeply about risk. Alan Greenspan was not very successful in getting across the idea of irrational exuberance. We have to keep plugging away, but I think trying to win the argument is our main weapon.”
The TSC said: “We do not believe that public authorities should be prescriptive in how financial institutions must react to such warnings.
"However, given the strong public interest in avoiding banking crises, there is a strong case for establishing a mechanism by which receipt of warnings from public authorities would be formally acknowledged by financial institutions.”
The TSC went on to recommend that when issuing warnings, the Bank of England and the FSA should identify and highlight two or three of the most important risks in short covering letters to financial institutions.
Confirmation should then be sought that the warnings have been properly considered and subsequently publish commentaries on the responses received.
Giving further evidence, Hector Sants, chairman of the FSA, said that initial warnings had been heeded by some financial institutions, yet a further warning was given in July 2007 because it felt that ‘not all institutions had properly anticipated the possibility of an abrupt change in market liquidity and ratings so we have been concerned that not all institutions had properly anticipated the possibility or the likelihood of a significant deterioration in credit markets’.
However, Paul Field, head of lending at West Brom Building Society, commented: “The chairman said that the FSA’s warnings were not heeded but the warnings were not centred on funding. No one saw what was coming.
"At that time, the FSA was warning about loose credit scoring and the possibility of a house price correction, not problems with lenders’ funding models. If it was saying this, nobody heard it.”
Further problems highlighted in the TSC’s report included the complexity of financial products and investors’ lack of understanding, as well as its deep concern over the role of credit agencies.
