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As we have thus far noted, there is no single body, in truth, in the regulation of the financial system (even though the upper-hand powers seem to lie with the FSA). Also, what should be noted is that the Treasury also plays a part in this (this includes the politicians- hence why politics plays a role in banking and banking regulation); and together (the 3 bodies) has a shared objective of financial stability. They work together towards their objective by what’s called the tripartite agreement (in which stipulate it is their shared responsibilities to achieve financial stability- or so it says as we will see) and this was the position until the recent global financial crisis where not even one of the bodies sees it coming. Initially, it was believed that none of the bodies were effective in satisfying their job but after investigation, it was claimed that essentially it was the FSA who was “asleep” in their job.
讨论反对将权力逆转给央行的理由-Argument for and against the reversal of powers back to BOE
As we shall see later, the arguments for the programme described to be “restoring the previous glory of the BOE” are relatively strong, at least so far as demonstrating that changes to the current governance of the financial system are eminent. In Sir Martin Jacob’s report: “Re-empower the Bank of England”, the former Director of the Bank of England seem somewhat supportive of the view of Mr Osborne and described the arrangement of the 3 bodies “…contributed to the failure of the regulatory system… and which is, in turn, a central cause of the catastrophe which engulfed our economy”. What appears relatively clear since the recent global financial crisis is that, it is quite unlikely that anyone would (any longer) back Gordon Brown’s decision in 1997 on the transfer of BOE’s responsibility for prudential supervision of banks and financial institutions to the FSA. It was said that whilst the tripartite agreement appears to give the responsibility for financial stability to all of the 3 bodies, the main role (if not the sole) in fact lies with the BOE- as could be seen in the agreement; the BOE has to ensure the stability of the financial system through its monetary policies and maintaining a broad overview of the system. Consequently of this de facto responsibility, the supporters claimed, the fact that the supervision of individual banks and the financial institution has been taken from the BOE meant that they no longer have any direct touch with them making it impossible to know what was going on in the credit markets. The effect of the transfer of powers meant that the BOE have no access to information, and more significantly, they lacks what’s necessary to fulfil their responsibility of financial stability- as they no longer have direct touch with banks (what’s important in our perspective) and financial institutions, the BOE could not have (sufficient) influence them (and thus in no way could it actually have any control). On that front, one may argue that this does not matter since the tripartite agreement depends upon the flow of information between FSA and BOE; and thus as long as there was an effective flow of information, there couldn’t have been any issues since BOE can simply alert the FSA if it notices any warnings that could harm the stability of the financial sector. Yet, this is precisely the point, the BOE could only alert if they are direct touch and without that power, it meant it is impossible for them to do so. Also, this counter-argument was flawed on the ground of the recent financial crisis- for example: The FSA has explained that the happenings with Northern Rock were the outcome of the lack of the flow of information between it and the Bank- “The Bank of England left in the dark and was thus unaware of the danger”.
The Proposals put forward by the Chancellor in which will be of major significance to banking law (if it were to be brought) were that the FSA would be broken up, the supervisory and regulatory powers would be taken by a new Prudential Regulation Authority (“PRA”), it will operate as a subsidiary of the BOE. Moreover, a new committee (the Financial Policy Committee- “FPC”- another subsidiary) will be introduced and it will be responsible for attaining financial stability (which obviously is a function of the BOE). With regards to the part of the FSA which was supposed to protect consumer and crack on crimes, it will be injected into 2 new agencies. Our main focus, evidently, lies with the creation of PRA and FPC, which as far as the proposal suggests, will become the subsidiaries of the bank.
This is obviously an important change and an improvement from pre-1998. Prior to the decision taken by Gordon Brown, the BOE was responsible for the regulation and supervision of banks and financial institutions and this is one of its responsibilities along with many others. The meaning of this change, however, is that although, it is still the BOE which is still responsible but this is delegated to its subsidiary, and they will be accountable to the BOE. In such a way, direct flow of information could be, to a degree, guaranteed and this would avoid the problem that arose with Northern Rock. It has also been strongly asserted (by Melvyn King and Sir Martin Jacob for example) that the one of the flaws with the current system was that the BOE was not fully involved in resolving troubles which bank faces. Without direct touch and therefore no knowledge of the states of banks meant that the BOE cannot provide support when bank needs help. More so, even if there were effective flow of information between the FSA and the BOE, the BOE lacks the advantage of having first-hand information which would allow them to act efficiently. Remember, the BOE have many functions and amongst this was that it is the lender of the last resort. How could it possible make effective use this function if they do not have direct touch and the most up-to-date knowledge of the health of the banks? - as pointed out by Mervyn King (Governor of the BOE). Furthermore, as we said earlier, how could the Bank achieve its core objective of financial stability if they could not actually supervise and regulate banks and financial institution? The reliance on the working of the three bodies (and in particular; the FSA and the BOE) together towards the objective of financial stability are defective in the sense that we have already mentioned and was proved to be a failure in the recent financial crisis. Scrapping the division of control between the FSA and the BOE, accordingly, should certainly improve the state of our financial system.
Whilst we saw that there are a number of arguments in flavour of “re-empowering the Bank of England”, one thing we can possibly ask is to what extent could this avoid another financial crisis? The structure proposed appears to be a bureaucratic system of control whereby each of the subsidiaries; the FPC, MPC and PRA would be accountable to the BOE and in such a way, it was hoped the BOE to satisfy their two core objectives; monetary stability and financial stability. The problem with such a structure is that again there is a reliance on the flowing of crucial information between the subsidiaries. As with (for example) a company which operates a bureaucratic structure where all departments is under the control of the managing director and therefore are all going after the company’s goal, each department still have distinctive roles and communications can sometimes be very difficult. The same applies to the system we have here, although they are all under the same objectives, the fact that they have different role can make communication difficult. As proven by past experience, effective communication of information is not easy and subsuming the 3 bodies under the BOE can result in a complex structure and could simply not work. After all regulating and supervising banks so as to avoid them from doing unauthorised activities and avoiding risks from building up (by for example by setting a limit in capital holding and amount in which it could lend etc.) fall within the responsibility of PRA but all these could have an effect that coincides with the responsibility of FPC. Being able to work together and ensuring a sufficient flow of information, thus, is the key to any governance of the financial system. The structure is not necessary if we could guarantee these two elements between the FSA and the BOE. What we must not ignore is the fact that global financial crisis (as we have already said) is only part of the economic cycle and thus it is wrong for radical changes every time it ticks. Rather what should be brought are perhaps improvements, and the fact that the earlier Labour Government brought a new committee to help improve communications between the three bodies, may very well be adequate.
Having due regard of the arguments posed for and against the re-empowering of the BOE, it seems relatively evident that the arguments for the proposal stood much stronger than that against. If it is one of the BOE’s core objectives to sustain financial stability, it could not do so without the regulating and supervising powers of banks and financial institutions and the current division of control (that of FSA and BOE mainly) creates inefficiency in the financial system. Besides, the fact that the BOE is the lender of the last resort, and yet it is receiving information on the health of the banks (under the current system) after the FSA, will altogether, delay decision makings of the BOE (i.e. whether to give loan to a bank- for example: Lloyds TSB in the recent crisis). This could accordingly result the financial system in getting to the worse side- where remedial actions could no longer effective. Leaving it “too late” appears, however, inevitable under the current system. Even if it was true that we should not undertake radical changes every single time we suffer from a financial crisis, but the current changes appears essential to ensure the efficiency and effectiveness of the the financial system. Rather, what should be remembered for the next financial crisis (which will be inevitable) is that we are human-beings (which the BOE consist of) and so there is always going to be errors. We should allow for a margin of error and until it passes an unforgiveable level. In fact, nothing should really be changed if the system has been working so well until the financial crisis “pop-up”. |
