Crisis showed combining powers under the FSA didn't work
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Mervyn King, governor of the Bank of England, has tonight admitted that having the Financial Services Authority in charge of prudential regulation and consumer protection “didn’t work in practice”.
King made the comments at the annual Mansion House Dinner in which he formally announced that the FSA would become a division under the Bank of England.
King says: “The experience of the financial crisis taught us two important lessons. The first is that, whatever its theoretical attractions - and there certainly are some - putting prudential regulation into the same organisation as the oversight of consumer protection and market conduct didn’t work in practice.”
He says that separating the two functions, as the new chancellor George Osborne is doing with the Bank in charge of macro prudential regulation - the so-called twin peaks of regulation - was the right way to go.
He adds: “That conclusion is not a reflection on the people who work at the FSA. They are an able group and have worked hard to improve prudential regulation over the past three years. I look forward to working with them in the future.”
While it wasn’t the necessarily a given that central banks should as a matter of course be in charge of prudential regulation, King argued that when banks got in trouble the central bank needs to be fully involved to resolve the problems.
He says: “The Bank of England cannot effectively perform its role as lender of last resort without first-hand knowledge of the health of the banks to which it might provide support.
“In peacetime, regulation can be conducted outside the central bank. But in a crisis, decisions must be
made quickly and decisively and the central bank, working with government which is always responsible for any use of public money, needs to be in charge. That was one of our painful lessons.”
Approaching its new responsibilities, King pledged that the Bank would build on the real improvements the FSA has made to its regime of prudential regulation over the last three years.
But he says the Bank will bring its own central banking culture, with the focus of regulation on maintaining stability of the banking system as a whole.
He adds: “We shall be looking not just at those aspects of a bank that make it look unsafe in comparison with other institutions, but even more so at whether there are common features that threaten the stability of the system, such as the dangerously high leverage prior to 2007.
“We shall aim to avoid an overly legalistic culture with its associated compliance-driven style of regulation. That is an important reason for the separation of consumer protection and market conduct from prudential regulation.”
King went on to reveal that Hector Sants, outgoing chief executive of the Financial Services Authority, would now be staying at the FSA before joining the Bank as its first chief executive for prudential regulation.
The British Bankers’ Association says that it welcomed the move to strengthen the system of banking regulation and to make it clearer and more effective.
Angela Knight, chief executive of the BBA, says: “The industry will work with the government to ensure transition between regulatory authorities does not cause disruption to the financial system and is implemented swiflty and well. The UK, and its banks, has already moved further and faster than other major economies on banking reform.”
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