Member Article

Financial services should not be dragged into reform

The Bank of England’s chief executive of the new Prudential Regulation Authority (PRA) says financial regulation should not entail “dragging the rest of the financial services industry into reform,” to solve a banking problem.

Speaking at the Chartered Banker Dinner in Edinburgh this week, Andrew Bailey told guests that while banks were “in the dog house,” it would be wrong to believe they were irrelevant and unwanted.

He admitted the newly established PRA had its work cut-out, and stressed that banks should not be dependent on public money.

Mr Bailey referred to FSA regulation reforms in 1997 and how they have failed due to: the difficulty in balancing the demands of 25,000 authorised firms; the tendency for inbuilt regulation to “play down” conflicting objectives; and periods over the last 15 years when either conduct or prudential supervision has been more in ascendancy to the detriment of the other.

He went on to say: “I am very clear that when firms mess up, they should be allowed to fail, and by doing so they are putting at risk the money of their shareholders and if necessary after that those who provide debt funding according to levels of seniority. But I am also very clear that really achieving the objective of avoiding a no failure regime requires a fundamental change of mindset both inside firms, the authorities and in society more broadly.

“Fear of failure is an important conditioner of behaviour in a financial regulator, and achieving a change on this front depends on establishing a wide acceptance of our approach that orderly failure which does not compromise our public policy objectives is an acceptable outcome.

“To be clear, we should be criticised where failure compromises those objectives and we could have taken steps to avoid it. But if failure is orderly, and does not compromise our public policy objectives, the responsibility should rest with the board and management for failing to serve the private interest of their shareholders and creditors.”

Having firms that are either too big or too important to fail is bad for competition, Mr Bailey added.

This was posted in Bdaily's Members' News section by Tom Keighley .