King defends his new role as super-regulator
MERVYN King last night defended the Bank of England’s new regulatory powers, arguing that the financial crisis demonstrated the limits of monetary policy in maintaining stability.
“Before 2007, central banks successfully set short-term interest rates to combine steady growth of output with low and stable inflation,” King said, speaking at the Lord Mayor’s banquet at Mansion House.
“But this did not prevent the emergence of unsustainable patterns of demand and unstable financial systems.”
The Bank’s new Financial Policy Committee (FPC), which meets for the first time today, “aims to deal with that problem by expanding the range of instruments available to the authorities,” King warned.
The FPC’s first report will be published on 24 June, he confirmed. King moved to reassure the City that the committee would not endorse central micro-management and heavy regulation.
“Process – more reporting, more regulators, more committees – does not lead to a safer banking system,” he said. King also dismissed the claim that “light touch regulation” was to blame.
“Is it light touch regulation? No,” he said. “It is the mistaken belief that by compromising on unduly low capital requirements and inadequate limits on leverage, regulators can compensate by a detailed oversight of every aspect of a bank’s activities.”
Instead, the FPC would be “drawing attention to system-wide developments” for the authorities, he said, and help overcome the “too important to fail” problem.
“London is a natural home for an international banking system,” he said. “But it cannot be allowed to benefit from an unsustainable dependence on the UK taxpayer. To allow that would be unfair to millions of people, not here tonight.”