By Edward George, the Governor of Bank of England.
The Governor of the Bank, Eddie George, considers whether banks continue to have a distinctive identity. He argues that beyond institutional identity lies the important question of whether banks continue to justify central banks’ special concern for the stability of the banking system as reflected in both macro and microprudential oversight and in their role as lender of last resort. The Governor reviews changes in the make-up of banks’ balance sheets, and contrasts these with the structure and functions of other financial institutions. He notes that, while in some respects banks may be less special than they were, they remain special in several important respects. He concludes that he would be very cautious about extending last resort liquidity provision to financial institutions not engaged in banking activity, particularly where banks’ distinctive functions and the distinctive characteristics of banks’ balance sheets did not clearly apply. While he does not think that such intervention can, realistically, be excluded altogether, he is concerned that an unduly liberal interpretation of systemic risk would increase the scope for moral hazard and ultimately weaken the safety and soundness of the financial system as a whole.