7 The way forward
Generating ideas and maintaining
140. It is evident that policy makers around
the world are not yet anywhere near reaching a conclusion on some
of the biggest issues discussed in this Report. There appears
to be a growing consensus regarding the necessary reforms, but
the painstaking task of seeking international agreement on the
detailed regulations required has only just begun. For example,
in capital regulation there is an agreement that counter-cyclical
requirements are a good idea, but different views exist on the
extent to which they should be formula-driven rather than based
on judgement, who (if anyone) should call the cycle, and the definition
of good-quality capital.
The Governor thought that we were "a million miles away"
from having translated the broad idea of macroprudential supervision
into a clear set of instruments.
141. Until recently Lord Turner and the Governor
had both believed that time was on the side of those wishing to
reform banking. The Governor argued that "exuberance of either
a rational or irrational sort was not in great supply at the moment",
so there would be no rapid return to the risky banking practices
which contributed to the financial crisis.
But in July, Lord Turner voiced concern that "we may see
a more rapid return to risky trading activities than we had anticipated".
It was therefore important, he said, that whilst pursuing the
necessary fundamental changes in, for instance, capital regulation,
the authorities monitor closely developments already taking place
in the marketplace.
Lord Turner had noticed, for example, that investment banks had
already resumed "aggressive hiring" for their trading
Governor was disappointed by the lack of attention displayed by
the financial sector itself to reform remuneration practices,
commenting that the message had "not yet sunk in" but
maybe it would come.
But overall the Governor was sanguine about these developments:
I think the most important thing is not to worry
so much what one or two banks are doing now, but we have got to
maintain this momentum to have a debate about the form and to
put in place a new structure for banking and its regulation
If we keep our eyes on that,
then what happens in the short
run elsewhere will not matter, but having that approach in the
long run is absolutely fundamental.
142. Professor Buiter was convinced that two
inevitable consequences of the financial crisis would be both
over-regulation and wrong regulationmeasures designed to
win the last war. The way to avoid such a response involved regulators
trying to consider risk generically, "rather than at the
most recent manifestations of particular kinds of risk".
143. Lord Turner told us that the FSA would be
thinking "over the summer" about their point of view
on the choice of appropriate macroprudential instruments.
In the autumn it would produce a paper on whether loan-to-value
or loan-to-income ratio limits should be used for consumer protection
or macro-prudential purposes, or, indeed, not used at all.
The Governor had also set his sights on the autumn as the time
by which the next stage of the debate would move on and said that
the Bank was "thinking very hard" on macroprudential
saw no merit in rushing the debate by the imposition of an arbitrary
deadline, because the banking sector was not behaving in a "gung-ho"
manner or taking a lot of risk. But whilst finding a solution
was not urgent, maintaining momentum towards finding a solution
144. This Report aims to contribute
to the very important debate over the future of regulation and
supervision of financial services. The debate is currently at
a point where agreement is being reached, nationally and internationally,
on the reforms that will be needed, but agreement is not particularly
close to being reached on the practical implementation of issues
such as counter-cyclical capital agreements, liquidity supervision
and cross-border handling of global firms. We acknowledge that
UK authorities are at the forefront of much of the agenda on the
international stage, which is vital given the size of the UK financial
sector. Now that immediate concerns over bank stability appear
to be subsiding the temptation to relax must be avoided. Whilst
there may not be an urgent need for new rules given the banks'
withdrawal from some of the risky business that got the sector
into trouble, there is an urgent need for momentum to be maintained
towards the design of a better framework. We expect further announcements
by the Tripartite bodies in the autumn, and look forward to reviewing
their progress towards the establishment of safer, calmer, banking
The role of the Treasury Committee
145. The White Paper Reforming financial markets
indicates the important role envisaged for the Treasury Committee
in strengthening regulatory institutions in respect of the scrutiny
of the new Council for Financial Stability:
The Government will also discuss mechanisms for increasing
the democratic accountability of the CFS given its role in public
policy making and implementation, possibly through greater, Parliamentary
scrutiny. The Government notes the important role that the Treasury
Select Committee (TSC) has played throughout the events of the
last two years in fulfilling this function
will consult on options for broadening and strengthening channels
of democratic accountability.
146. We are pleased that the Treasury recognizes
the important scrutiny function of the Treasury Committee. We
would, however, be more convinced that this vote of confidence
in the Committee was likely to be backed up by actions if the
process of scrutiny of the White Paper itself had not been so
147. On 22 April, in his Budget speech, the Chancellor
promised that he would "shortly" publish his proposals
for reform of financial regulation.
Rumours repeatedly surfaced that publication of the document was
'imminent'. Such rumours proved ill-founded. Indeed, it has been
a serious obstacle to us in pursuing our inquiry to be obliged
to await a key document whose production seemed always to be imminent.
We had to cancel a scheduled evidence session which was to be
devoted to this topic because of the enduring absence of the White
148. Right up to the last minute the White Paper
was held back. We understood that the White Paper would be published
on Monday 6 July but it in fact only saw the light of day on Wednesday
8 July, just two hours before we were due to take oral evidence
from Lord Myners, Financial Services Secretary, HM Treasury. Lord
Myners had not realized that our meetings had been altered to
accommodate the publication, apparently assuming that the publication
of the White Paper was not directly related to the hearing.
When we pointed out to him that it was hardly beneficial for our
scrutiny to have a mere two hours' notice of a complex document
occupying 170 pages, he dwelled instead on the benefits to us
of having "an opportunity to engage with it very early on
and to shape the debate".
149. As we pointed out to the Minister, the publication
of a key document just before our evidence session was not a unique
occurrence. On 22 July 2008, Kitty Ussher, the then Economic Secretary
to the Treasury, giving evidence on our inquiry into Banking Reform,
brought with her to our meeting a consultation paper on the Special
Resolution Regime which she announced was simultaneously being
placed in the House of Commons Library. We put it to her that
this was an unsatisfactory course of action, a point that she
150. We are pleased that the
Treasury acknowledges the useful role that the Treasury Committee
can play in scrutiny of the future performance of the Council
for Financial Stability and pays tribute to our work over the
last two years. Such praise, however, will be no more than empty
flattery if it is not supported by actions. If we are to offer
effective scrutiny this must be based on our considered analysis
of the relevant evidence, not on spur of the moment appraisal.
We are also unimpressed that the Treasury initially indicated
that the White Paper would be issued shortly after the Budget
but offered no explanation for the lengthy delay leading up to
its eventual appearance.
218 See, for example, Qq 66, 132 Back
Qq 127, 130 Back
Referred to by Lord Turner in Q 103 Back
Q 103 Back
Q 56 Back
Q 115 Back
Q 166 Back
Banking Crisis: International Dimensions, Q 105 Back
Q 78 Back
Q 126 Back
Q 163 Back
Reforming financial markets, p 50 Back
H Deb, 22 April 2009, Col. 246 Back
Q 180 Back
Q 182 Back
Seventeenth Report from the Treasury Committee, Banking Reform,
Session 2007-08, HC 1008, Q 203 Back