Banking Crisis: regulation and supervision - Treasury Contents


7  The way forward

Generating ideas and maintaining momentum

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.[218] 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.[219]

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.[220] 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.[221] Lord Turner had noticed, for example, that investment banks had already resumed "aggressive hiring" for their trading activities.[222] The 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.[223] 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.[224]

142.  Professor Buiter was convinced that two inevitable consequences of the financial crisis would be both over-regulation and wrong regulation—measures 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".[225]

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.[226] 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.[227] 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 instruments.[228] He 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 was "crucial".[229]

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 supervision.

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 … The Government will consult on options for broadening and strengthening channels of democratic accountability.[230]

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 flawed.

147.  On 22 April, in his Budget speech, the Chancellor promised that he would "shortly" publish his proposals for reform of financial regulation.[231] 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 Paper.

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.[232] 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".[233]

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 conceded.[234]

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

219   Qq 127, 130 Back

220   Referred to by Lord Turner in Q 103 Back

221   Q 103 Back

222   Q 56 Back

223   Q 115 Back

224   Q 166 Back

225   Banking Crisis: International Dimensions, Q 105 Back

226   Q 78 Back

227   Ibid. Back

228   Q 126 Back

229   Q 163 Back

230   Reforming financial markets, p 50 Back

231   H Deb, 22 April 2009, Col. 246 Back

232   Q 180 Back

233   Q 182 Back

234   Seventeenth Report from the Treasury Committee, Banking Reform, Session 2007-08, HC 1008, Q 203 Back


 
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