The Bank of England’s Governor Mervyn King has predicted that when the central bank takes over bank supervision next year, Britain’s biggest banks will be answerable to more senior and experienced officials who are less susceptible to external pressures.
Mr. Kings told the Commons Treasury committee on Tuesday that the central bank will initiate a ‘radically different approach’ to measure the safety and soundness of banks and insurers while the coalition government plans to break up the Financial Services Authority (FSA).
The new so-called Prudential Regulatory Authority (PRA) – supposed to be an arm of the central bank, would “aim to focus on the big questions, to have more senior people interacting regularly with the big institutions and challenging them … We plan to avoid excessive focus on detail”, said Mr. King.
The new regulator will save on costs as it would not engage in detailed data gathering processes followed by the FSA, but would rather employ senior supervisors, he argued.
“We need to build up a cadre of people who are willing and able, and sufficiently self-confident and experienced, to exercise judgment”, said Mr. King.
“It makes no sense to second-guess management across the board. It makes sense to challenge management on the big decisions”, he added.
The new entity will not require to consult the industry extensively like the FSA does presently, Mr. King said the committee.
“It makes no sense for the regulator to go through those steps, it should go through (parliament). We shouldn’t be accountable to industry itself. That was one of the things that had gone wrong”, said Mr. King.
“Our job is to make sure there are limits on how much risk is taken”, he opined.
He said that banks can continue to operate according to old rules till new set of laws are approved by the parliament. He said he would prefer entirely new set of legislations as “it is easier to understand what is going on”.
The PRA will have different mandates than FSA and it will certainly not try to prevent bank failures.
“Banks will fail … Our job is to make sure they do not contaminate the rest of the system”, said Mr. King.
The new laws “will change the face of banking supervision”, said a deputy governor of the bank, Mr. Paul Tucker.