UK: the Bank of England Governor on the financial crisis and three Rs to make banking safer

The Governor of the Bank of England, Sir Mervyn King, delivered the 2012 BBC Today programme lecture yesterday. A copy of his speech is available here (pdf) and an audio recording is available here.

In his speech Mr King sought to identify the causes of the financial crisis, the lessons to learn and the changes to make. What did go wrong?  To quote Mr King: "In a nutshell, our banking and financial system overextended itself". Whilst acknowledge that the Bank could have been more vocal in respect of its concerns with the underestimation of risk within financial markets, Mr King suggests that there was little the Bank could have done because it was not (then) responsible for supervising banks. Those wanting more contrition from the Governor will be disappointed.

Elsewhere in his speech Mr King identified what he described as "the three Rs" of a new approach to make banking (and the economy) safer: regulation, resolution and restructuring. With regard to regulation he stated:

Next year, the responsibility for regulating banks will return to the Bank of England. Next time we find ourselves with steady growth and low inflation, but with risks building in the financial sector, we shall be able to do something about it. The Bank’s new Financial Policy Committee will have the power to step in and prevent a hangover by taking away the punchbowl just as the party in the financial system is getting going.

We believe that successful regulation means understanding and guarding against the big risks, not compliance with ever more detailed rules. That means focussing on the wood not the trees, looking not just at individual banks but also at how their fortunes are tied together with other banks and with the rest of the economy. For example, the biggest risk to banks at present stems from the troubles in the euro area. These are far from over. That’s why we’ve been pushing banks to pay out less to their shareholders and employees and instead retain profits as a cushion against possible losses. In future, to protect the rest of the economy from failures in the banking system, we need to ensure that more of banks’ shareholders’ own money is on the line, and banks rely correspondingly less on debt. If banks and their shareholders have more to lose, they will be more careful in choosing to whom they lend. And, when banks make losses, there is more of a cushion before the bank fails, and less chance that the taxpayer will have to foot the bill".