Monday, July 27, 2009

Vince Cable on the FSA

[The Conservatives have proposed abolition of the Tripartite system, one leg of which is the FSA.] This is a secondary issue. But it has dominated the recent news and it needs to be dealt with sensibly. So far it is being dealt with very foolishly in the form of an old fashioned bureaucratic turf-dispute between the Bank of England and the FSA with Mr Darling and Mr Osborne egging on the two sides, like two schoolboys cheering on their heroes in a playground punch-up.

The Chancellor, who has evidently fallen out with the Governor and backs the FSA, appears to have set up a Financial Stability Committee based at the Bank of England in the Banking Act 2009, and then a Financial Stability Committee at the FSA and also a Council for Financial Stability, chaired by the Chancellor, in the White Paper. This is like setting up three Competition Commissions to investigate monopoly. There should be one Financial Stability Committee, led and chaired by the Governor of the Bank of England and with representation from the FSA and from the Bank.

Mr Osborne’s proposal is even more disruptive: moving the bank supervisors back from Canary Wharf to the Bank of England. City institutions which straddle bank and non-bank financial services despair at the idea of going back to separate, competing, regulators and at the prospect of endless office politics as desks are moved and jobs are reallocated after this quango war. Of course the Governor must have overall responsibility for systemic stability but he doesn’t need to oversee the accounts of Little Tidbury Building society. I would leave the FSA as a unitary regulator.

I won’t dwell on the structural issues since they are a side issue: the harness rather than the horse. My worry is that we are being deflected from the substance of what sensible regulation means. My party and I encouraged, indeed anticipated, the creative use of capital adequacy requirements to offset booms and busts and I note that this approach is being extended to manage risk across institutions as well as over time. But there is a danger of regulators becoming one-club golfers, albeit with a very adaptable club. Clever bankers will always be looking for ways round the rules. A number of investment banks have already been reported as engaging in the practice of securitising bank balance sheets in order to evade regulatory capital requirements. This type of innovative side stepping of regulations will have to be penalised heavily, otherwise the promised revolution in regulation will be stillborn.

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