King and Chancellor at odds over intervention

Both the Chancellor of the Exchequer and the Governor of the Bank of England gave their Mansion House speeches to the City yesterday, and both addressed the issue of regulation of the banking system. But while the Chancellor emphasised that he had no plans to fundamentally change the regulation system, the Governor called for more powers for the Bank to intervene and prevent excessive risk taking. This is at odds with the approach outlined by Alastair Darling, who referred instead to encouraging a change of management culture in the banks which would encourage bankers to manage themselves more effectively, being “rewarded for long-term success, not for failure”. He seems to suggest that the solution lies more in ensuring that banks are led by Boards of Directors with “the right people of the right skills and the right experience …. and they need to be equipped to ask the right questions.” He also called for an end to short-termism: “Their focus must be on long-term wealth creation and not short-term profits.”

For Mervyn King, this does not seem to go far enough. He warns that the authorities lacked the powers they needed to prevent the financial crisis. He likened the Bank to a church whose congregation ignores its sermons and said “Warnings are unlikely to be effective when people are being asked to change behaviour which seems to them to be highly profitable. So it’s not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials.” His preference for more regulatory power is closer to the intention to regulate the US financial markets more strictly announced by Barack Obama on Wednesday.

Robert Peston’s blog about these two speeches – “Governor criticises government (again)” – sets out clearly the similarities and differences between the approaches of the two men at the top of the regulatory tree, and compares them to the emerging US approach. In “Rebuilding the foundations of finance” he sets out the changes that the Chancellor and the Treasury are proposing to ensure that the Financial Services Authority will ensure that the banks will be required to hold much more capital as a buffer against losses, especially in the parts of their businesses that trade in securities and debt. In this area too, Mervyn King would like to see the regulation going further, with a separation of high street retail banking and risky investment banking so that the secure finance provided by one is not jeopardised by the high risk use of finance for the other.