The Deputy Governor considers three questions: why regulate financial institutions?; how should financial regulation be conducted?; and who should be responsible for doing the job? On the first, he explains that the Bank of England, as banking supervisor, views reducing the risk of individual bank failure as its essential supervisory task, but that—in view of banks’ economic function as risk-takers and also the need to avoid moral hazard—depositors must accept that the possibility of such failure cannot be entirely excluded. In examining the manner in which regulation should be conducted, the Deputy Governor reviews the familiar tools such as capital requirements, but also considers the insights on best practice learned from the Bank’s own review of supervision. Finally, he considers the case for reform of the regulatory structure in the United Kingdom. He argues that any structure should take account of the fact that banks remain a distinctive type of institution, and stresses that the priority is co-operation among regulators based on a clear understanding of responsibilities and the free flow of information.
Financial regulation: why, how and by whom?