King wants stronger powers to implement bank reform

BANK of England governor Sir Mervyn King yesterday called for far-reaching powers to force banks to implement reforms and said it was vital legislation covering the ring-fencing of retail operations was watertight enough to prevent risking another crisis.

King warned it would be impossible to effectively supervise the industry without sweeping powers to demand changes at banks even if they complied with the letter of legislation.

Giving evidence to the Treasury select committee scrutinising the Financial Services Bill, King said the regulatory framework should be set up in a way that allowed banks to fail.

“Once regulators get bogged down in excessive detail they’ll never be a match for the banks. We have to have a framework in which most of these firms can fail. If they screw up, that we just let them go, go bust.”

King said the “rules-based” approach followed in the run-up to the financial crisis was too easy for banks to circumvent.

“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 write new products which are...defined in such a way as to not to be caught by the latest rule and regulation,” King said. “We have to accept that regulators can’t regulate everything.”

He said the Bank’s new supervisory arm should be given broad discretion to force banks to restructure or cut back their borrowing without having to point to specific rules and that regulators should be allowed to tell a bank: “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 you’ve got to change it.”

King supported recommendations made by the Independent Commission on Banking, which suggested that banks must ring-fence their retail businesses and hold more capital for them.

“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.”

But he added that once parliament had established the ring-fence, the central bank should then be given the broad freedom to police the sector as it sees fit.

The Bank’s dominant role in the proposed new framework has triggered concerns among industry players and some politicians that the central bank and its governor will become too powerful without being properly accountable.

But King rejected the idea that the banking industry should be somehow involved in the supervision.

“We should not be accountable to the industry, we should be accountable to parliament and the public,” he said.

Proper consultation and a dialogue with the industry was important, he said. “But I don’t think we should be accountable to the industry – that’s the slippery slope to regulatory capture which was one of the major problems leading up to the crisis.”

As part of the plans to reform banking regulation, a new body called the Financial Policy Committee has been created which will sit within the Bank of England and will take over responsibility for maintaining the UK’s overall financial stability – a role that currently lies with the Treasury and the Financial Services Authority.

The FSA will be split in two, with one arm becoming the Prudential Regulation Authority, also under the control of the Bank, while the FSA’s consumer protection work will be carried on by the Consumer Protection and Markets Authority, an independent body.