BANK of England governor Mervyn King welcomed his dramatically extended powers over financial regulation last night, pledging to “take the punch bowl away and turn down the music” at the banking party.
In an address sprinkled with jibes at Gordon Brown’s former government, King said the transfer of macro-prudential oversight from the Financial Services Authority to the central bank would complement its role as the lender of last resort.
“Monetary stability and financial stability are two sides of the same coin,” King told a City audience at Mansion House. “During the crisis the former was threatened by the failure to secure the latter.”
The governor suggested the BoE’s authority was undermined in the run-up to the financial meltdown by its inability to order banks to make changes such as raising their capital ratios. “The Bank’s sermons on the storms ahead would have had more influence if at the same time a collection plate was passed around the congregation so that money was available in the event the church roof had to be replaced,” he said.
King vowed to use the Bank’s expanded role as arbiter of both monetary and regulatory policy to underpin a calm economy: “Just as the role of a central bank in monetary policy is to take the punch bowl away just as the party gets going, its role in financial stability should be to turn down the music when the dancing gets a little too wild.”
King hinted interest rates would remain low for some time but reiterated the bank’s determination to keep inflation below its two per cent target in the medium term.
The 62-year-old closed his speech in a show of camaraderie with the chancellor. Referring to George Osborne’s youth, King said: “What better incentive [for restraint] than to have as chancellor someone who has a longer life expectancy than any previous chancellor on record?”