The FSA has blamed banks depending on credit rating agencies for their part in the credit crisis.
Hector Sants, chief executive of the regulator, met with the Treasury Select Committee yesterday alongside FSA chairman Callum McCarthy and Loretta Minghella, chief executive of the Financial Services Compensation Scheme.
Sants says complex credit derivatives had enough transparency for institutions with the time and resources to understand them and put the onus for the credit crisis on banks that depended on ratings agencies instead.
He says such dependency “proved to be unwarranted, inappropriate and not wise in the circumstances.”
He acknowledges the derivatives’ complexity but says “in principle, if you choose to and have the time and expertise, you can unpick the structures.”
Sants also refused to comment on whether or not UK banks had behaved recklessly when using the derivatives, despite admissions from banks last week that they had, and says they have “gone in this downturn in good shape”.
However, he admits the FSA knew some banks had failed to consider abrupt market changes earlier this year.
He says the FSA failed to foresee the circumstances that have arisen since the summer but says it gave clear advice to institutions on the complexity of derivatives earlier this year. He says institutional investors must draw their own conclusions from that advice and the FSA will not make commercial judgements for them.
He says: “Otherwise effectively we would be running the market, which I don’t think is desirable in terms of the overall process here and the type of market place the community is looking for.”
He adds the FSA has begun an initiative with the institutional community to help them consider the lessons they must learn from the crisis, and will address credit derivatives transparency and the credit ratings agency issue. However, he says the FSA could not solve the problems as a national regulator.
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