Overhaul of the FSA will put Britain’s central bank back in charge of financial stability, according to Paul Tucker
The radical shakeup of Britain’s banking watchdog, which takes effect this weekend, is essential is to avoid another financial crisis, according to a top Bank of England official involved in implementing the new regime.
Four years on from the crisis that threatened to bring down the UK’s financial system, the coalition’s dramatic overhaul of the City regulator will put Britain’s central bank back in charge of financial stability.
Paul Tucker, deputy governor of the Bank, said Threadneedle Street had a “historic mission” to prevent another collapse. Labour’s creation in 1997 of the Financial Services Authority (FSA) stripped it of that responsibility – but its return was a very good thing, he said.
Overlooked for the top job at the Bank last year, Tucker also acknowledged that the new setup, which formally begins on Monday, could itself need reviewing in the future.
Tucker told the Guardian that the institution was “in the business of stability”, but also keen on recovery.
“You lose stability and the costs are enormous. This country learned the hard way about the inflationary boom and bust and now learned the hard way about banking boom and bust. It mustn’t happen again.”
Putting the Bank back at the heart of oversight should help as “separating banking supervision from the lender of last resort is hazardous unless you grow an umbilical cord that connects the two”.
While banking supervision did not always need to be inside the central bank, communication was key, he said.
“I do think it’s essential that the connection is really close, and supervision and central banking grew apart in this country and they’re now being reconnected. Given where this country finds itself, that is a very good thing. It was always the historic mission of the Bank of England to look after stability.”
If the new system had been in place in 2006 – just before complex financial products turned so toxic that they locked up financial markets in a credit crunch – Tucker thinks regulators would have been “worried by the resurgence in credit growth throughout the west from 2004″.
It would also have worried about the ballooning market in credit default swaps and the booming securitisation industry. It would have intervened in wholesale markets and banks would have been required pump up their capital to make them safer in 2005 and 2006 – even then it might not have been enough to stop the crisis.
“I wouldn’t go so far as to say it would have stopped the boom but it would have made the bust a lot less bad,” said Tucker, who acknowledged that he helped to design the new system ripping apart the FSA, which shuts down on Sunday and puts the Bank of England back at the heart of ensuring the financial system is safe from speculative bubbles and spectacular busts.
It means the blame for any future financial implosions can be placed firmly at the doors of the Bank, which during the 2008 crisis argued it had bark without bite, as blame was shuffled around between Threadneedle Street, the FSA and the Treasury – though some would argue that even the Bank’s bark had been rather quiet.
A new financial policy committee (FPC) is being formed inside the Bank – it is the body that this week caused controversy by ordering banks to plug a £25bn capital shortfall. The Bank is also creating a new subsidiary, the Prudential Regulation Authority (PRA), to regulate the big banks. Tucker sits on the FPC and the board of the PRA. Meanwhile, a new Financial Conduct Authority is being spun out of the FSA to regulate the behaviour of the City.
Already though, the FPC, which has met on an interim basis since June 2011, has had a difficult birth. A reshuffle of its external members this week led some to wonder if its most outspoken members were being neutered. The requirement for banks to raise more capital saw the business secretary, Vince Cable, express concern about the impact on lending, while the smaller than expected size of the capital shortfall sparked speculation that the FPC had been leant on. The lack of detail about the requirements for each bank frustrated the City too.
The FPC, borrowing the words of the former Federal Reserve banker William McChesney Martin, will be able to “take the punch bowl away while the party is still going”. But Tucker admits it is hard to gauge whether attempts to impose sobriety on the system will be needed within five years or 20 years.
And then, such a move might be very unpopular. “Eventually there will be a moment when the bankers and the public are on the same side, opposing measures by the Bank of England, its financial policy committee, to slow the party down,” said Tucker.
“The biggest problem with stability is people forgetting and taking stability for granted,” he said. “I think the most important thing about the FPC is an institutional structure that says these 11 men and women will not forget.”
The Bank has published 17 indicators that will be used to look for bubbles. While Tucker notes “there is no indicator that will whisper the answer in our ear”, he cites a rapid growth in credit as one factor to watch closely.
The PRA, led by Andrew Bailey, will be able to use its judgment about each individual bank, which should be “fantastically rewarding” for the regulators. Boards, too, will need to provide leadership in setting a new cultural tone.
Nine months ago, when he was the frontrunner to replace Sir Mervyn King as governor, Tucker got caught up in the Libor-rigging scandal when exchanges between him and Barclays’ then boss, Bob Diamond (who was forced to quit), became the subject of scrutiny.
The appointment of the Bank of Canada chief Mark Carney as the next governor has led to speculation about the future of Tucker – whose five-year term as deputy governor for financial stability ends a year from now.
Speaking in his parlour-like office at the Bank of England, he is keener to focus on regulation regime changes rather than discuss his past or future. Asked if he intended to stay on, Tucker replied: “I am the deputy governor for financial stability. It’s been the most extraordinary privilege being in this room while the system has been completely redesigned.
“Whether I like it or not, I’ve been one of the architects of the new system. I think it can serve this country well.
“No system is perfect and it will eventually be found wanting and we will need to keep it under review and improve it from time to time. But I think it’s fit for purpose for now.”