In line with the reforms being rolled out in various European countries, it was moreover decided to extend deposit guarantee coverage from € to € As from 2009, the difficulties in the financial system intensified. In March that year the case of Caja Castilla la Mancha marked a turning point, as it highlighted how necessary new arrangements were to address the restructuring of ailing institutions. Given the constraints on savings banks (duly detailed in the Report), a strategy was adopted between 2009 and 2011 turning on two pillars: to assist the restructuring of the system through voluntary  6/14  mergers and the resolution of less viable institutions; and the strengthening of solvency through the clean-up of institutions’ balance sheets and the shoring up of their capital. As regards the first of these pillars, two measures are worth noting: the creation of the Fund for the Orderly Restructuring of the Banking Sector (FROB), and the reform of the institutional protection scheme (IPS). The FROB was created in June 2009 to support restructuring and voluntary integration processes, including financial support, in the main, through the acquisition of “participaciones preferentes” (preference debt instruments) or, where appropriate, through managing bank interventions. Later, in February 2011, the FROB was reformed following the worsening of the sovereign debt crisis in Europe, which increasingly hampered access by banks from various countries, Spain among them, to the wholesale funding markets, and which had led to the Greek and Irish programmes in May and December 2010.
Are these repeated crises the inevitable result of human nature at work in financial markets, with greed and fear alternating as sentiment swings from irrational optimism to irrational pessimism? Or is it the failure over many years to find the right incentive structure for banking markets? Or is it a mixture of both? I don’t pretend to be able to offer a complete answer to those questions. But I do want to focus on the relationship between the Bank of England and the banks because it helps to explain why crises occur and what we can do about them. Let me start by saying that, although I do think the role of the Bank needs to be enhanced, it would not be right for the Bank to take back banking supervision from the FSA, as some have suggested. We should remember that the period before 1997, when FSA and the “tripartite arrangements” were set up, was not seen at the time as a golden age of official oversight of banks. Before 1997 the relationship between the Treasury and the Bank of England in respect of banking supervision was often fraught. Remember too that the experience which shaped the design of the 1997 settlement was that of idiosyncratic problems in Johnson Matthey, BCCI and Barings, not a system-wide crisis affecting the liquidity of the banking system as a whole. As a result, the tripartite Memorandum of Understanding which underpinned that settlement was not so much faulty as incomplete.