Andrew Bailey: Financial reform Remarks by Mr Andrew Bailey, Executive Director for Banking Services and Chief Cashier of the Bank of England, at the Lord Mayor’s City Banquet, London, 21 September 2010. *  *  *  My Lord Mayor, Ladies and Gentlemen. Can I thank you Lord Mayor on behalf of the Bank of England for inviting us to contribute to your regulatory Banquet. Adair and I first met in our current roles when he was literally I think in his first day on the job, which was incidentally the weekend of the resolution of Bradford and Bingley. It is a great relief that the experience of that weekend did not cause him to have second thoughts, because we have all benefited from the leadership that he has provided since then. On the subject of the time of year, I should add that being here in September, enjoying your hospitality Lord Mayor is a distinct improvement on some recent Septembers when we were recovering banks. An evening at Mansion House beats the pizza and all night session at the Bank of England by a very long way. I am going to speak tonight about why the public interest in the stability of the financial system matters to all of us. Calmer times are the necessary environment for the task of rebuilding financial stability. It is a task that belongs to all of us, and it is certainly not just the task of regulators, central banks, or the authorities more generally.
Debt convertible into equity on the downside would also be helpful in that it would be a dampening mechanism – equity capital would be automatically replenished, but only when this was needed. Transparency There were many areas where a lack of transparency contributed to a loss of confidence, which intensified the crisis. One particular area was the case of over-the-counter securities such as ABS, CMBS, RMBS and CDOs and their associated derivatives. There was a lack of transparency in a number of different dimensions. A.  Valuation. CDOs and other securitized obligations were complex and difficult to value. This reduced liquidity, pushed down prices and created increased uncertainty about the solvency of institutions holding these assets. B. Prices. The lack of pricing information led to a loss of confidence about accounting marks. Sometimes identical securities were valued differently at different financial institutions. C.  Concentration of risk. Because there was no detailed reporting of exposures, market participants did not know much about the concentration of risk. This led to a reluctance to engage with counterparties, which, in turn, pushed up spreads and reduced liquidity further. The SCAP exercise was an example where increased transparency helped to generate a better outcome. We disclosed our stress test methodology and the results for each of the nineteen largest bank holding companies. This transparency increased confidence and made it easier for the banks to raise more capital.