(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.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- 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
- Reuters: Bank of England warns against risky bets on weak
- For previous columns by the author, Reuters customers can
click on [HAY/]
(Editing by Chris Hughes and David Evans)
Keywords: BREAKINGVIEWS BOE/
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