Bank of England Governor Regrets Not Shouting

But he only had the power to publish reports and preach sermons, he contended in a speech in which he also took issue with critics of his reforms.
Andrew SawersMay 7, 2012

Attempting to defend the performance of the U.K. central bank during the financial crisis, Bank of England governor Sir Mervyn King has set out a platform for reform of the financial system.

In a recent lecture given on British Broadcasting Corp.’s Radio 4, he said the Labour government that first came to power in 1997 stripped the bank of its regulatory role over the banks, leaving it responsible only for monetary policy and oversight of the financial system as a whole. Regulatory power over the banks was given to the newly established Financial Services Authority.

“Our power was limited to that of publishing reports and preaching sermons,” said King. While the bank, he argued, preached about the need to inject more capital into banks as far back as early 2008, months before the collapse of Lehman Brothers and the near-failure of Royal Bank of Scotland, “we didn’t imagine the scale of the disaster that would occur when the risks crystallized,” he said.

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“With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called light-touch regulation hadn’t prevented any of this.” He insisted that “We tried, but should have tried harder, to persuade everyone of the need to recapitalize the banks sooner, and by more.”

King said the success of future rule-making depends on the “three Rs”:

  • Regulation — “Understanding and guarding against the big risks, not compliance with ever-more-detailed rules.”
  • Resolution — “To make sure badly run banks can fail safely; that is, without causing damage to ordinary depositors and the rest of the economy, and without billing the taxpayer.”
  • Restructuring — Implementing the recommendations of the Independent Commission on Banking, chaired by Sir John Vickers, which called for ring-fencing retail banking operations so they could not be damaged by investment-banking activities elsewhere in the same banking group.

In the audience question-and-answer session after his speech, King took issue with a recent Financial Times article by Standard Chartered chief executive Peter Sands, who recently claimed that the Bank of England’s reform program amounts to “1970s-style quasi-nationalisation” of the banking industry, calling it “simultaneously extremely interventionist and extraordinarily blinked.”

King countered that “We’re certainly not offering anything like that. In fact, in my talk I didn’t argue for more regulation [but rather] the right kind of regulation to make sure we’ve got enough capital in the banks to make them safe.” He added: “The shareholders have a responsibility for ensuring their bank is well run. What we’re worried about is the rest of the economy and the system as a whole. And that’s why we need a different kind of regulation but not more regulation.”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.