Prudential Regulation Authority executive director Andrew Bailey says the “holy grail” of stopping large banks from being too big to fail is “within our grasp”.
Speaking to the Chartered Bankers’ dinner in Edinburgh last night, Bailey said the solution requires a “fundamental change” in the mindset of firms, regulators and society.
In 2008, the Government bailed out the Royal Bank of Scotland, Lloyds Banking Group and Northern Rock as their collapse would have seen savers and investors lose billions of pounds badly damaging the entire economy.
Governments and regulators have been working on rules such as bondholder bail-ins, extra capital requirements and bank retail arms being ring-fenced from their investment divisions, so banks can fail safely.
Bailey said: “For large banks, we are making progress on resolution planning, and this world is different to five years ago, but we are not there yet by any means.
“I have a background in resolving banks, and I regard having the capacity to resolve failed large banks – including the largest – as the holy grail of resolution.
“Unlike the legendary holy grail, I think there is a good reason to believe that the objective of being able to resolve large banks that fail can be within our grasp.”
Bailey also laid out his reasons for the failure of FSA supervision of banks, claiming a single organisation should not have been responsible for both prudential and conduct regulation.
It said the FSA did not encourage active debate when there was conflict between prudential and conduct rules and it varied between strong and weak prudential regulation.
He also defended the extension of the funding for lending scheme and said the “uneven pattern” of lending has justified a focus on small firms ahead of mortgages.
He said: “What we have seen over the last year is quite a substantial change in the funding costs of banks which has fed through into lower lending costs, but more so in terms of the amount of lending in the mortgage market than for small firms.”