On 8 October Paul Tucker, the deputy governor of the Bank of England since March 2009, made several revelations in his final appearance before the House of Commons Treasury Committee.
This week, will leave his post. Tucker seems an affable man with a habit of waving both hands as he talks, a little like a conductor for a complex orchestra, which is not far from the truth.
When he presented the BoE’s plan for annual stress testing of banks to the Treasury Committee, he revealed that “The Court [of the BoE] has agreed, as the governing body of the whole bank including the subsidiary of the PRA, that it will oversee the PRA;
the details of that are still to be worked out.”
This was news to Committee Chair Andrew Tyrie MP and the rest of us. Tyrie suggested that confusion over the issue indicated that accountability structures were ‘Byzantine’. Tucker said that the crossover allowed the BoE to have supervision without concentrating
decision making power with the BoE itself.
He also asserted that, “Most of the big banks in Europe will have to be reorganised in a scale going beyond ring-fencing [retail and investment banking],” which is the UK proposal for managing large banks that are taking risks and pose a systemic threat.
In response to questions from Jesse Norman MP, Tucker said that UK stress testing would eventually have to become a collaborative exercise with Asian regulators (and those in other jurisdictions) to reflect the large operations that UK banks have overseas:
“I can’t see how the BoE will ever know more about those portfolios and risks than the authorities on the ground.”
He stressed the importance of knowing that systems will always go wrong, and therefore of having a regime that can deal with failure.
“I think for decades this country amongst others had an approach to supervision where it would minimise the probability of failure, but that doesn’t rule out failure,” he said. “So you have to be able to handle failure and make it an ordinary part of life
and that way you can let more banks into the financial system.”
He acknowledged that the focus on monetary independence by the Bank of England post-1997 meant it retreated from a wider brief which “was a mistake.” Underlaps between remits were more comfortable for bureaucrats as they limited turf wars but allowed things
to slip through the net. “There has to be overlap, even with the BoE itself.”
He said that sanctions would be taken against banks if the management were found to be, “outright cheating or running the bank abysmally and not knowing what they were doing. You could imagine a strong bank, financially, but that was always obscuring your
line of vision rather than being straight forward.”
“The idea that a supervisor can write down a perfect set of rules, for banks or dealers of insurance companies, whether it be the Basel Committee or Brussels or Washington or the Banks of England, is absolutely for the birds,” he said. “That is the judgement
element of what the Bank of England will be doing and it is what this stress testing paper is about.”