The U.K. needs additional regulation to cope with so-called too-big-too-fail banks, the Bank of England Executive Director of Banking and Chief Cashier Andrew Bailey said.
The U.K. mechanism for dealing with failed banks “is essentially a resolution regime for dealing with smaller institutions,” Bailey said in an interview broadcast today on BBC Radio Scotland. “What we don’t have yet is a regime added on to that which can deal with the larger banks without having to resort to public money, and that is one of the big issues that remain outstanding.”
Regulators and authorities are redesigning the global financial system to withstand shocks after the collapse of Lehman Brothers Holdings Inc. in 2008 exacerbated the financial crisis. Bailey, who will become deputy head of a new agency at the central bank, the Prudential Regulation Authority, being created to prevent future crises, said stability needs to be put at the heart of the financial system.
“A lot of that comes down to who bears the cost and what cost of the creditors of the bank bear,” Bailey said. “That has not been resolved yet and this is a big issue for this calendar year and it’s an international issue. We can’t do this just in isolation from the rest of the world.”
A stable financial system should allow financial institutions to fail without resorting to using taxpayers’ money regardless of their size or importance and will allow lending and consumer protection to thrive, Bailey said.
“We need a clearly established common policy framework,” Bailey said. “One of the changes is that regulation has to be more forward looking than it has been in the past. I’ve had to resolve too many banks where people have come in and said ‘Well, you know our balance sheet is all right today’ -- I say I’m sorry that’s not the point. The point is what your balance sheet’s going to look like in a year, two years’ time.”
Echoing comments made in a speech on Jan. 10, Bailey said contagion from the euro zone sovereign debt crisis among banking systems appears to be limited as lenders seek to bolster their financial position after the global credit crunch.
“We’ve seen over the past 12 months, there is growing risks in other parts of Europe,” he said. “There has been contagion, we have seen that in financial markets and that raises the risk there will be contagion in other banking systems, including our own. The good news is that so far I think the evidence of that sort of contagion is extremely limited.”
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