More eyes on the prize: FSA and the Bank of England

Although attending the Treasury Select Committee hearings on the banking crisis sometimes felt like being in the audience at the Jeremy Kyle Show, between the Punch and Judy repertoire there were some flashes of insight that felt as though a little bit of history may have taken germination.

Brought as witnesses on consecutive days to assess their roles, the Financial Services Authority and the Bank of England’s top brass both made strong indications before the committee towards wanting a closer working relationship post-crunch.

Both argued that they do not have the requisite legal and political firepower to do the fuller, more forensic, more collaborative job that will be required of them in the future, given the light-touch regime underpinning their mandates.

The hearings made clear that enforcing the spirit of regulation as well as the letter is difficult when the agencies are hamstrung by this philosophy – which, as Lord Turner told the committee, created an “implicit, or sometimes close to an explicit assumption” that “it was not the role of the FSA to cast doubt upon the whole business strategy of [an] organisation.”

“And it sometimes was an explicit assumption,” he added.

Taking charge
When asked who was responsible for being the all-seeing eye over the “business strategy” of the financial services industry, Lord Turner quoted the Bank’s deputy governor elect, Paul Tucker: “[Paul] said that between the FSA and the Bank of England, there was so much desire to avoid overlap that there was an underlap… there was, at the FSA, a focus on the supervision of individual institutions according to a philosophy that was based upon structures, systems, processes and things like that,” he said, “and not enough focus on what we now call macroprudential analysis, on identifying what is the overall big picture of what is going on.

“I think, in future it is much better to have an overlap than an underlap, and it would be better in future for [the FSA and the BoE] to be both involved – and intensively involved – in those debates about what we think the situation is and what we do about it.”

The committee put it to BoE governor Mervyn King that the Tripartite Authorities – the group created by the Bank, FSA and the Treasury – had failed in what it believed was its job of “holding the system together”. King argued that it is far less powerful. “You need to recognise that the tripartite is not a decision-making body,” he said. “It is a body which shares information and communicates what each player is doing.”

King batted away claims that the BoE did not do enough to steer the economy away from crisis, arguing that it did not have responsibility or power to do anything beyond rate setting than to warn on upcoming risks in its reports. “You and others will expect the Bank to play more of a role than in fact we did, but you also need to recognise that we do not have any powers at all other than dealing with banks that have already failed,” he said. “We literally have the power only of our speeches, our reports and the words that we use when speaking to others in the tripartite process.”

He added that the Banking Act – created to give the Bank more powers to establish stability after the Northern Rock collapse – did not go far enough, not giving him the right to request information from the banks, but forcing the Bank to rely on the FSA to provide it by choice. “The FSA clearly said it will try hard to give us the information we want, but I find it very hard to see why, if people feel the Bank should play a major role in financial stability, we should not have the right to request information from banks. We have to persuade the FSA that the data to be collected are appropriate.”

Shared responsibility
Both the BoE and the FSA indicated they could share elements of oversight, if not establishing a much closer relationship going beyond sharing information.

“I am very happy to engage with the FSA in a debate about what the outlook is and what the consequences would be for the banking system. I have talked to Adair Turner about this… he would welcome the Bank’s team under [executive director, financial stability, BoE] Andy Haldane saying to the FSA, ‘Look, our judgement is that this group of banks or the banking system as a whole seems to us to be facing some quite serious problems which you have not really taken on board’ and maybe that will be a better way forward,” King told the committee. “There has to be a matching between responsibilities and powers.”

Lord Turner’s opinion was not dissimilar. “Both we and the Bank should have formal financial stability responsibility; it should be defined that both of us have a significant role in macroprudential analysis and in thinking about overall financial stability,” he said. “The situation in legal terms was that we did not and nor did the Bank.

“However it is done, we need very intense joint working between us.”