BoE to unveil new face of financial regulation
The Bank of England is expected to tear up the Financial Services Authority rulebook and adopt a totally fresh approach to policing the banks and financial institutions when it takes on the role of prudential regulator.
Fresh approach: Move away from box-ticking to principles-based method
Details of the new approach will be unveiled tomorrow at a conference on banking regulation at the QE2 Centre in Westminster.
It is expected that the new Prudential Regulatory Authority (PRA), which will be based close to the Bank of England on Threadneedle Street, will abandon the present 'traffic light' system used by the FSA.
Instead it will use a new matrix which will focus far more closely on the financial institutions which currently sit in the 'amber' category, where there are questions about capital adequacy and their business model.
The PRA, which will be headed by Hector Sants, the current FSA chief executive, together with Andrew Bailey from the Bank of England will rank the capital, solvency and liquidity of individual banks at five different levels.
It will use a similar ranking to assess the quality of loan books and the conduct of their business.
Supervisors at the Bank want to move away from the FSA's box ticking approach which was so catastrophic in the financial crisis. It will move back towards a more principles-based method for banking regulation.
In particular the Bank wants to re-establish close relations with the leading figures in the largest financial groups and will press them to disclose their own private causes of concern.
It is recognised in the Bank that it lost banking supervision to the FSA in 1997 because the then Chancellor Gordon Brown felt it had been tainted by a series of collapses down the decades including Johnson Matthey Bank, BCCI and Barings.
The reality was, however, that each of these failures was closely investigated, the reports published and the lessons immediately learned.
Senior officials contrast the response of the Bank itself and the authorities to these events with the apparent failure or unwillingness of the FSA to investigate and publish the results and findings of the inquiries into the 2007-2009 financial crisis.
So far the only report to be released is that by the internal auditors into Northern Rock. The content of the report into the Royal Bank of Scotland is still under wraps. Similarly, the report into the events which led to the implosion of HBOS, before it was folded into Lloyds Banking Group, has not yet been completed.
In an effort to bring new openness into the system the Prudential Regulatory Authority would like the quarterly returns made to the Bank, as part of its supervisory effort, to be published as they are in the United States.
This will give investors, the markets and customers a far clearer view of what the banks are up to rather than the airbrushed versions which are currently released as trading statements.
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