Supervision, by contrast, is the dynamic pursuit of the relevant authority’s statutory objectives, through oversight of firms’ activities. To do this effectively, you of course need regulation – but one without the other in financial services would, in my view, be futile. At the PRA, we have committed ourselves to a judgement-based, forward-looking supervisory approach. This means that we proactively take action to meet our objectives and we evolve our methods to reflect emerging developments. It also means that we rely heavily on the judgement of supervisors and get them to unearth and scrutinise the top risks at any given firm. This is delivered by a keen supervisory focus on business models and the prudential health of firms rather than a sole preoccupation with firms’ compliance with regulation, important though that is. And because we rely heavily on judgements, the PRA has a central spine of decision-making committees, with the most important supervisory decisions reserved for the Prudential Regulation Committee (PRC). But where did this approach come from? Most comparisons between the PRA’s current supervision model and those that preceded it focus heavily on the differences between the PRA’s approach and that taken by the FSA before the global financial crisis. But the truth is that the practice of supervision in the U.K. has evolved slowly over time; indeed, the roots of supervision lie much deeper and can be traced back over the past 100 years or so.
But the crisis revealed something about the relationship between the state and industry at the end of the nineteenth century. Indeed, the institutional set-up explains quite a lot about the approach taken towards the oversight of financial institutions at this time. The Bank of England was still a private entity. The leading partners from each trading house sat on the Bank’s Court of Directors. This was a world of gentlemen’s agreements and moral suasion, or “what a later 6  generation would know by shorthand as the Governor of the day raising his eyebrows” . One reason the Bank developed a supervisory interest in the clearing banks was to protect its balance sheet given its role as banker to the banks but it was, at most, primus inter pares, and banks were largely self-regulating. Indeed, the crisis at Barings was ultimately one of solvency not liquidity and so the Bank would not devote its own resources to a recapitalisation. Instead, the rescue of Barings Bank relied on the collective action of its industry peers and some co-ordination by the Bank rather than any formal supervisory role. This is in contrast to later crises of liquidity during which, in line with Bagehot’s theory, the Bank extended credit at a penal rate to solvent but illiquid banks and became lender of last resort.