The scrapping of the FSA gets us back on track.
Oscar Wilde's -- or, scholars being divided on the issue, possibly George Bernard Shaw's -- famous quip about England and America being "separated by the same language" is as true as it ever was, except in central-banking speak.
By chance, US Fed chairman Ben Bernanke gave a talk on the same day as our fresh-faced chancellor George Osborne announced the scrapping of the FSA at the annual Mansion House address, to the ill-concealed delight of Bank of England governor Mervyn King. Apart from the governor congratulating the Lord Mayor for the success of his cricket charity, Ben and Merv could have been talking from the same script.
Chairman Ben's speech was about the way ahead in the reform of big banks.
Among other things he promised "living wills" -- in effect, a system for scuppering a stricken institution with the minimum of fuss -- and something called "consolidated supervision". A new kind of strategy (well, not that new as we see), consolidated supervision would split the job of measuring the health of the banking industry between micro authorities working the nitty-gritty and macro ones surveying the big picture.
One's got a microscope, the other a telescope.
A big cause of the American crisis, explained chairman Ben, was "a flawed regulatory framework that allowed some large financial firms to escape strong consolidated supervision and gave no regulator the mandate or powers needed to effectively evaluate and respond to risks to the financial system as a whole." Now, he promised, everything would come under one umbrella.
One coin, two sides
The chancellor's announcement of the scrapping of the FSA amounts to the same thing. It hands back to the Bank of England the supervisory chalice for the bank industry through the new prudential and financial policy bodies.
"Monetary stability and financial stability are two sides of the same coin," opined governor Merv. "During the crisis the former was threatened by the failure to secure the latter."
Translated, the Old Lady of Threadneedle Street should never have been sidelined from its historic role in running both. In short, consolidated supervision.
As an avid reader of King's encyclicals over the years, it's long been obvious that he chafed at the dislocations created by Gordon Brown's practically unique -- at least, in Europe -- three-cornered structure involving the FSA, Treasury and the Bank of England.
You can't read too much from history but consolidated supervision, although it wasn't called that at the time, served Britain well in its various banking crises.
Half the time, the public never knew anything was amiss because the rescue of a troubled institution was stitched up over a weekend lunch. Exactly the same process has become standard in the US, with the management and board being ejected on Friday night, the coffers replenished and a new shingle stuck up before Monday morning. Compare that with the performance over Northern Rock.
Two's better than three
What the governor actually said was "The experience of the financial crisis taught us two important lessons. The first is that …..putting prudential regulation into the same organisation as the oversight of consumer protection and market conduct didn't work in practice. The two types of regulation require different skills and a different approach. Separating them -- the so-called "twin peaks" model of financial regulation -- is the right direction of reform."
Those words should be engraved in stone because we might never have had this latest banking crisis if the Bank of England hadn't been sidelined.
This strategy is fast becoming accepted practice, too. France, for instance, has brought banking and insurance supervision and licensing into the Autorité de contrôle prudentiel under the umbrella of the Banque de France.
The three-cornered model was always cumbersome. A central bank can hardly be expected to act as lender of last resort without also having under its wing full responsibility for supervising the health of the industry. As the governor added: "In a crisis decisions must be made quickly and decisively and the central bank…..needs to be in charge. That was one of our painful lessons."
In the long run, this will prove a blessing for the banking industry and investors. The FSA was going for a rules-based, box-ticking, legalistic approach whereas, as the evidence shows, we need a more subtle and graduated approach.
Here governor Merv is on the money: "We must reverse the seemingly inexorable trend towards more regulation and more regulators. That did not work in the past and is not the right response now."
But, you have to ask, how much investment capital would have been saved if we hadn't gone down the wrong path?
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