As regular readers of this blog know, ultimately effective regulatory oversight and market discipline are based on transforming all the banks' current asset and liability-level data into information.
It is nice to see that the Financial Times' Lex column supports this observation and recommends that the Bank of England change how it is using the data (this blog has long advocated sharing it with all market participants so that banks can truly be subject to market discipline) and start investing in computers!
Back to the future. As the Bank of England prepares to take back regulatory oversight of banks in the UK at the end of next year, bank supervision will change. But not as much as Sir Mervyn King, governor, may hope.
He wants to cut the mass of data required from banks so that policymakers and supervisors can see the wood for the trees, the better to spot systemic risks. The BoE will also have far greater powers for top-down regulation. But Sir Mervyn cannot hope to wield his supervisory baseball bat effectively unless he has decent data.
Sure, the tripartite regulatory system failed UK taxpayers. For all the previous government’s love of more regulation and more reporting, the box-ticking did not make the banking system safer. In the words of George Osborne, chancellor, the tripartite’s failure was not “a series of unfortunate accidents – it was hard-wired into its design.” Responsibility for monitoring systemic financial risks and changing financial institutions’ behaviour was split.
But supervisors from the BoE’s new Prudential Regulation Authority will need as much data as ever from banks if they are to do their job properly. It is how that information is used and the regulatory culture that must change.
When tomorrow’s supervisor calls on banks’ senior executives, armed with intelligence from the BoE’s new, financial bubble and systemic pitfall-detecting Financial Policy Committee, he should be better able to zoom in on the two or three key risks that could bring down the bank. Or so goes the theory.
The proposed new regulatory framework under the BoE’s aegis looks broadly sensible. But whatever Sir Mervyn’s determination to cut red tape and costs by doing things differently, looming Basel III reforms and European Union variations on them could still derail his plan. Time to start investing in more computers, then.