Finance: A Return From Risk - speech by Mervyn King

In a speech to the Worshipful Company of International Bankers at Mansion House in London, the Governor of the Bank - Mervyn King - discusses the nature of risk in the financial system to draw lessons about the policy responses that are required to ensure greater monetary and financial stability in the future.
Published on 17 March 2009

He considers the design of future banking regulation and the more urgent need to recover from the present crisis.

The Governor states that at the heart of the crisis was an inability to perceive the true nature of the risks involved, which has been a persistent feature of crises over time. He notes that all forms of regulation, whether light or heavy touch ".failed to some degree to prevent the accumulation of risks. So it is unlikely that there is a simple answer". The Governor stresses that regulation should be "simple and robust". Regulatory design, he says, ".should be based on an explicit identification of the market failures that regulation can hope to correct". He highlights the need to reduce the exposure of the financial system to domino effects - arising from the interconnectedness of banks - and the pro-cyclical behaviour of risk-taking in the financial system. He says, "In particular, the authorities should maintain a clear focus on the issues that matter when the worst occurs - liquidity and leverage." He adds, "Given what has happened there is now international support for developing a counter-cyclical toolkit for the prudential supervision of banks."

PDFPress release


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