BOE Orders Review of Risk to Banks From Interest Rates

The Financial Stability Board, led by Bank of England Governor Mark Carney, said that his central bank may need to boost the number of regulators focusing on small lenders.

The oversight of small firms is “largely reactive,” the FSB, a group of central bankers and regulators, said in a report published on its website today. Only 150 supervisors focus on 1,300 “lower impact firms,” while 400 oversee the biggest 100 lenders.

It’s common for senior regulators and central bankers to have positions on various national and international regulatory agencies. Carney, who relinquished his role as Bank of Canada chief to become governor of the Bank of England in July, has also been chairman of the FSB since November 2011.

The Bank of England took over banking supervision from the Financial Services Authority in April. The FSA had been criticized for not doing enough to prevent the 2008 financial crisis, which led to the 66 billion-pound ($103.7 billion) bailouts of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

The Prudential Regulation Authority, the Bank of England unit that took over as the country’s banking regulator in April, may have to reallocate staff “should the need arise,” the FSB said. The PRA may also need to reassess whether it has enough resources to effectively carry out regular stress tests of lenders starting next year, said the FSB.

Satisfy Mandate

“It is unclear whether the number of frontline supervisors overseeing smaller firms, which collectively can pose risks to financial stability, will be sufficient to satisfy the mandate of the PRA and ensure their effective oversight,” the FSB said in the report.

Slovenia showed the risks posed by smaller banks when it liquidated two of them, Probanka d.d. and Factor Banka d.d., this month. Central Bank Governor Bostjan Jazbec said that officials were trying to “avoid the Cyprus scenario” with potential deposit withdrawals from other banks.

The Bank of England “welcomes the final report of the FSB’s peer review,” Carney said in an e-mailed statement. The central bank “looks forward to working with other relevant U.K. authorities to review and assess the report’s recommendations.”

Oversight of markets was given to the Financial Conduct Authority at the same time as the PRA took over banking supervision.

The two new agencies must “enhance formal and informal relationship building” to strengthen financial stability in the U.K., the FSB said.

The FSB, which is based in Basel, Switzerland, is formed of senior regulators and central bankers and reports to the leaders of the Group of 20 Nations.

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