But if failure is orderly, and does not compromise our public policy objectives, the responsibility should rest with the board and management for failing to serve the private interest of their shareholders and creditors. Last on the theme of failure, having firms that are either too big or too important to fail is bad for competition in the industries that we regulate. An industry where exit is too difficult is one where entry is likewise inhibited. This is what we see in the banking industry. Embedding resolution into the public policy objectives of financial regulation matters for two reasons relevant to competition: first, because, to repeat, exit enables entry; and, second, because if, as we will, we require new entrants to satisfy us on their resolvability in order to be authorised, we will lower the barriers and costs of opening for business. Put simply, if we don’t know how to deal with a failed firm, we will inevitably set a higher barrier to entry. We have already started to put this new approach into operation. Resolution of failed firms consistent with the public policy objectives is one key plank of the new approach to financial regulation. Another key plank concerns the macro prudential approach to regulation. The legislation has formally established the Financial Policy Committee (FPC) charged with the primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.
The FPC also has a secondary objective, to support the economic policy of the Government, including its objectives for growth and employment. The root of the introduction of macro-prudential regulation sounds quite obvious, which is to take into account the impact of financial regulation on the functioning of the real economy. Obvious you might say – yes, but it wasn’t done in the past. Macro-prudential regulation is focused on protecting the financial system as a whole. It is quite simply about ensuring that financial regulation is conducted with an eye on the state of the economy. In a very big picture sense, there is nothing new about this activity. The problems of the last five years have emphasised the close links between the health and behaviour of banks and the condition of the economy. This is a lesson of history, and one that should not have been forgotten. But, forgotten it was. A clear objective of macro-prudential policy is to act in a countercyclical fashion – to restrain booms by acting to tighten regulation, and to seek to dampen the impact of busts. Unfortunately, the record of the past shows that the behaviour of regulators has not been consistent with these objectives. The crisis illustrates the dangers of not applying restraint in what appeared to be good times. But it requires a very strong culture to allow this type of restraining to happen.