Speaking at this morning’s Treasury Select Committee, Bank of England governor Mervyn King told MPs that counter-cyclical capital adequacy requirements need to be made law in conjunction with the FSA’s work to stop banks getting too big.
He said: “We have been through a period where the UK had light touch regulation, the US had intrusive regulation, in Europe we had governments working closely with regulators – and every single one of them failed to spot the seriousness of the risk taking going on.
“You can’t expect too much from regulators. If they had said to banks before 2007 that you are taking too big risks, they would have been seen to be arguing against success.”
He warned that no one could solve regulatory challenges “by creating committees and processes”. King said: This isn’t the answer to fundamental challenges to regulation. No regulatory system in the world dealt well with what happened, why? Because the nature of risk is very hard to assess.”
King told MPs that there is a lot to be said to trying to build in some mechanisms to allow “someone to put sand in the wheels of the expansion of the financial sector” and raise the capital requirements as the rate of growth of the “excessively exuberant” banks, or counter-cyclical capital requirements.
He said “One of the lessons that old-time banks supervisors always used to tell us there are only two types of banks you have to be careful of – banks that are losing money and banks that are making too much money. We should not indulge in self-congratulation, we should say hang on there are too many risks here.”