This Report is the last to be published under the Committee's Banking Crisis inquiry.
By any measure the FSA has failed dreadfully in its supervision of the banking sector, but it has already begun to rectify its mistakes. The first chapter considers the steps already taken by the FSA to improve its regulation of banks in response to the failings exhibited in its handling of Northern Rock. We welcome the Supervisory Enhancement Programme (SEP) and the increased intensity of supervision which it will bring to bear on the financial services sector. The SEP is a necessary but not sufficient reform.
We note that the regulatory philosophy of the FSA has changed. It has less faith in market forces than before; it is more willing to challenge firms' business decisions; it now considers the competence of new bank directors and appears more willing to remove 'the punchbowl from the party'. All of this is good, but all of this is also fashionable. The FSA must develop the confidence to take unpopular decisions when the economic boom begins again, in the face of both industry and the political class.
Many banks are systemically significant because they are too big, they conduct many types of business, or they are too complex and interconnected. This Report addresses each of these issues in turn. We believe it to be unlikely that all banks could be shrunk to a size where they posed no systemic risk, but the Government can and should still act. First, it should ensure that there are no banks which are 'too big to save'. It should review the wisdom of allowing a banking market to be dominated by firms whose balance sheets are larger than the national economy. Second, banks must not operate under any incentive to grow large just in order to benefit from the status of being 'too big to fail'. We suggest that this market failure be addressed through a 'tax on size' administered through the capital requirements regime.
Access full Report.
Posts
