BoE’s Bailey says stronger internal governance needed

The Bank of England (BoE) needs stronger internal governance and "substantial changes" in its organisation, according to Andrew Bailey, an executive director at the central bank.

The central bank's court must be effective in holding people to account and then itself be accountable to parliament, he said, while giving evidence to the UK Parliamentary Commission on Banking Standards yesterday (November 19), alongside Adair Turner, chairman of the UK's Financial Services Authority.

In a financial supervisory role, the BoE is committed to making judgmental supervisions, and this calls into question the legitimacy of the central bank, Bailey said. Consequently, there should be greater transparency of the judgements taken and the decisions reached.

The question of how banks' activities should be ring-fenced under the Financial Services (Banking Reform) Bill is a key theme of the commission's enquiry. In yesterday's sitting, Bailey expressed concern about the possibility of institutions "burrowing under" the ring-fence, and warned a strong lobbying force would seek to "neutralise" such a structure.

"I do not think [the banking lobby] is as influential as before the crisis, but there are signs of it reappearing," said Bailey. Turner agreed, and noted its energies were directed more at the politicians than the regulators.

Lord McFall of Alcluith, a Labour peer and a member of the commission, likened Bailey and Turner to Tonto and the Lone Ranger in their shared pursuit of fighting the injustice of the banking lobby.

The banking industry is "tremendously innovative at dressing things up to look slightly different", Bailey said, as it is basic human nature for the people involved.

If a bank is found masquerading as something it is not, he said, it has effectively voided its rights to continue functioning in the system, as there is no way to guarantee its plans are operable. This is the ultimate sanction.

Turner admitted having previously held doubts about the "Volcker-type rule", and believing the necessary reform could be achieved solely with capital standards. As the deep-set nature of the problems became clear, he said, he was convinced of the value of structural change.

The Vickers and Volcker rules are not mutually exclusive, Turner said; he is not completely against a ‘three box solution' combining elements of both, if the latter was seen to work in the US first.

Turner said previous relaxed attitudes towards capital requirements were a "half-century long mistake", and advocated pursuing even higher levels than Basel III will impose on institutions in some instances. However, the more capital demanded the less SMEs will be able to access, he warned, which needs to be balanced when setting requirements.

The FSA chief said the goal of all the measures being discussed and eventually implemented should be to reduce the risk of crisis to as small a probability as possible, but he conceded it would not be eradicated entirely. "The optimal way forward is to say ‘yes, we will have to do this every couple of hundred years'," he said.