The Bank of England must be free to police banks as it sees fit, and not be restricted by a specific set of rules, the central bank’s governor has told MPs.
By Angela Monaghan
6:15PM GMT 03 Nov 2011
Sir Mervyn King said the rules-based regulatory framework in place before the financial crisis had allowed banks to take excessive risks and left regulators unable to prevent them borrowing too much.
“What needs to change in the culture of regulation is to get away from this game in which the regulators write ever more complex regulation and the banks and their lawyers [create] new products which are the same essentially as the previous products but defined in such a way as to not to be caught by the latest rule and regulation,” the Governor said.
Sir Mervyn said regulators should have the freedom to tell a bank: “Look, frankly, we don’t understand why your organisation needs to be so complex. We can’t work out what you are doing, so you’re going to have to change it. You haven’t broken a rule, but too bad, you’ve got to change it.”
Addressing the Draft Financial Services Bill joint committee, the Governor supported recommendations made by the Independent Commission on Banking but urged the Government to be as specific as possible about the rules on ring-fencing a bank’s retail operations from riskier investment businesses.
“My view, quite strongly, is that as far as possible [the definition of the ring-fence] should be down to legislation and not left to the regulator,” he said.
The Governor said banks should be set up in a such a way that allowed them to fail. “Once regulators get bogged down in excessive detail they’ll never be a match for the banks. So we have to have a framework in which most of these firms can fail. If they screw up, [then] we just let them go bust.”
Sir Mervyn said he was “completely baffled” by the European Commission proposing to implement maximum harmonisation of capital requirements, arguing that although minimum requirements should be imposed, countries should be free to set higher capital requirements should they see fit.
He added that when bank regulatory powers transfer to the Bank of England, it should be accountable to the public and to Parliament, but not the industry. “That’s the slippery slope to regulatory capture, which was one of the major problems leading up to the crisis,” he said.