Will society stand for decisions made by unelected central bankers?by Paul Tucker / June 19, 2013 / Leave a comment
Six years after the financial crisis began, changes are under way to reduce the likelihood of it happening again. Among them, many countries have given greater powers to their central bank—although debate continues about how best to do this. The relationship with the societies we serve as central bankers has become more extensive, raising questions about how we can demonstrate that we deserve the trust placed in us.
A central bank can have a wide or narrow set of functions, all centred on stability. At the Bank of England, the Monetary Policy Committee (MPC) has a mandate to maintain low and stable inflation. We have recently increased the transparency of our analysis so that people can see how we decide on the extraordinary monetary measures we are taking in these extraordinary times. But the Bank now, once again has powers to achieve and preserve stability in the banking system too, restoring and updating powers it held previously. Legislation passed earlier this year gave the Bank responsibility for supervising the financial soundness of banks, building societies and insurers operating in the UK—through a new arm called the Prudential Regulation Authority. To ensure that we look beyond individual firms, parliament also set up the new Financial Policy Committee within the Bank, to enhance the resilience of the financial system as a whole. These roles, for the first time brought together in legislation, touch every household and business in the UK—and beyond.
With the Bank of England once again supervising banks, we are returning to a judgement-based approach, with less reliance on rules or “box-ticking.” Rules-based regulators work on the basis of: first, write rules; then, check compliance with those rules; finally, punish breaches. But in the past, banks’ management hardly stopped their staff from circumventing the rules. Regulatory arbitrage—exploiting the gap between the spirit and the letter of the regime—was at the heart of the problems that led to the crisis. It would be a fool’s paradise to think we could write a set of rules on the financial health of a bank, or on the professional competence of bankers. Nor, as parliament has underlined, should we seek a zero-failure regime, in which regulators strive to ensure that banks never fail. In a market economy, the failure of individual firms has to be acceptable so long as they can be wound down or reconstructed in an orderly way without taxpayer support.