UK: banks boards + the Bank of England and financial stability

At the Mansion House last night: two speeches; two different messages. In his speech, the Chancellor gave little away regarding the Treasury's forthcoming white paper on financial regulation reform. He did, however, repeat a point he has already made with regard to bank boards and corporate governance:

Bank boards must have the right people and the right skills and experience to manage themselves more effectively. And they need to be equipped to ask the right questions. Their focus must be long-term wealth creation, not short-term profits. They must recognise their duty to shareholders is best fulfilled by acting in the interests of their customers and all – not just some – of their employees. And ensure staff are rewarded for long-term success – not for failure. David Walker’s review of banks’ corporate governance will look at how bank boards and institutional investors can manage their businesses more effectively".

With regard to financial regulation, the Chancellor stated:

No one model of regulation has been successful in insulating a country from the current crisis – and we are not alone in strengthening regulation. The Banking Act gave us new powers to deal with failing banks and strengthened the Bank’s existing responsibility for financial stability by putting it on a statutory footing".

But has this gone far enough? In his speech - a video extract of which is available here - the Governor of the Bank of England provided an answer:

The Bank of England has a new statutory responsibility for financial stability. Bank Rate is the instrument we deploy to achieve monetary stability, and should be used exclusively for that purpose. To achieve financial stability the powers of the Bank are limited to those of voice and the new resolution powers. The Bank finds itself in a position rather like that of a church whose congregation attends weddings and burials but ignores the sermons in between. Like the church, we cannot promise that bad things won’t happen to our flock – the prevention of all financial crises is in neither our nor anyone else’s power, as a study of history or human nature would reveal. And experience suggests that attempts to encourage a better life through the power of voice is not enough. Warnings are unlikely to be effective when people are being asked to change behaviour which seems to them highly profitable. So it is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials".