(Corrects date in final paragraph)
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, Jan 16 (Reuters Breakingviews) - Mervyn King’s departure from the Bank of England could well detoxify relations between the UK central bank and its domestic lenders. The financial sector and its regulators shouldn’t be best buddies. But bankers whisper that the outgoing governor’s tough regulatory stance, seen once again in front of UK lawmakers on Jan. 15, partly reflects his own previous mistakes.
King has long been perceived as a regulatory hawk. He has championed a strict interpretation of proposals from the UK’s Independent Commission on Banking to ring-fence retail and investment banking. And he has persistently called on banks to raise more capital. Analysis in November for the Financial Policy Committee, which he chairs, suggested that a proper risk-weighting and provisioning of domestic banks could identify a capital hole of more than 35 billion pounds. Although the final shortfall will not be known until March, King used yesterday’s appearance to reiterate his point.
Whether or not King is correct, there’s nothing wrong with a UK supervisor erring on the side of too much regulation after UK banks’ self-imposed catastrophe in 2008. The problem is partly that banks see him as a doctrinaire academic economist rather than one with real market experience. More importantly, they fear his public bank-bashing pronouncements via the FPC are motivated more by a desire to erase memories of his flat-footed response to the rescue of Northern Rock in 2007/08.
This atmosphere of mutual mistrust is not helpful, given that the BoE is about to replace the soon-to-be-defunct Financial Services Authority as the lead bank regulator. Under the new set-up, it’s even more important that the governor starts with the goodwill of all sides. The FSA’s direct replacement, the Prudential Regulation Authority, will directly regulate banks. But the FPC’s macroprudential brief will allow it to periodically issue public recommendations to the PRA. It will also be able to direct yet another agency, the Financial Conduct Authority, as well as go over many heads to slap extra “counter-cyclical” buffers on the banks.
The BoE governor will therefore need to be a leader, a peacemaker and a coordinator all at the same time. It’s not yet apparent whether Mark Carney, the current Bank of Canada boss who formally joins the BoE on July 1, will be any friendlier to banks than his predecessor.
What he does offer, apart from a more market-savvy CV, is a clean slate. Given how the BoE is changing, that’s just as well.
- Bank of England governor Mervyn King used an appearance in front of UK lawmakers on Jan. 15 to reiterate his warning that UK banks could be undercapitalised.
- In front of the House of Commons’ Treasury Select Committee, King said that the United States had developed the idea of a recapitalisation of its banking sector “faster and better” than the UK had managed, and that the UK was now suffering from the consequences of not following suit.
- A study conducted by the Financial Services Authority’s Andrew Bailey will report in March on the size of any UK bank capital hole.
- Reuters: Bank of England warns against risky bets on weak economy [ID:nL6N0AKAEX] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Chris Hughes and David Evans)
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