FSA managing director of prudential regulation Andrew Bailey says banks should expect to come under continued scrutiny while they are either taxpayer-owned or implicitly supported by the Government.
Speaking at an Institute of Chartered Accountants in England and Wales conference in London today, Bailey (pictured), who is also an executive director at the Bank of England, was asked how the regulator knew that the policy response to the financial crisis was the right one. He was also asked how banks can be expected to deal with conflicting objectives of boosting capital while encouraging lending.
Bailey said he often tells banks they should expect public scrutiny, whether they are state-backed or are benefiting from implicit support due to the expectation that if banks run into trouble they will be bailed out by Government.
He said: “I do not think it is at all surprising that the biggest financial crisis in anybody’s living memory has been the prompt for a sizeable response in terms of regulation and public intervention. Indeed, one of the points I frequently make to banks is as long as you are either explicitly or implicitly dependent on the support of the Government, do not think you will get them off your back, and speaking as a member of the public, nor should you.”
Bailey acknowledged the Bank of England’s aim to establish a resilient financial system and its aim to support growth can contradict each other.
He said: “The really challenging question for us how you make these two things work together. They can be going in opposite directions as they are in the moment, but of course they also interact. There is a reasonable proposition that can be made that supporting lending will make the financial system more robust.
“But that interaction is a very hard thing to explain. I do not in any sense want to minimise or trivialise how challenging it can be to explain what seem to be competing objectives.”
His comments echo those made by outgoing FSA chairman Lord Turner last month, who said there was a difficult trade off to be made between strengthening banks and encouraging lending and growth. Turner said there was a need for “further policy innovations” if schemes such as Funding for Lending fail to boost the economy.