The FSA under Hector Sants have been saying much the same thing, and it was what an earlier generation focused on most. It involves supervisors making judgments; and, no doubt, occasionally judgments that individual banks find unwelcome. They need to cover competence. But also the adequacy of liquidity portfolios and the reasonableness of asset valuations; over the decades too many banks around the world have failed after they reporting apparently healthy ratios. Not a new lesson. But a vital issue is whether we are ready, today, collectively to back an approach based on judgments rather than on enforcing a book of detailed rules? If we are to tolerate supervisors where necessary substituting their judgment for that of managers and boards, then commentators, appeal tribunals and even parliamentarians will need to give supervisors the benefit of the doubt occasionally. Of course, such judgments need to be grounded and reasoned. But we need to go further than this. Today, there is a realisation that it is not enough to look solely at individual firms atomistically. The resilience of the system in the face of seriously adverse disturbances – whether from the real economy or from within the financial system – depends heavily on common exposures and interconnectedness. In a way, this is another reremembering.
And they will fail in circumstances that, at least with – and possibly without – hindsight, could have been prevented. So it has been a mistake, over recent decades and in a number of countries, to claim to have a regulatory framework that is not premised on zero failures when we lacked a resolution regime that could cope with failures of even quite simple banks. In the UK, this was cruelly exposed in August 2007 when Northern Rock failed, denting confidence in UK mortgage banks generally. That is the backdrop to the suggestion, stressed by the Governor earlier this week, that the market should explore whether banks can raise contingent capital from private sector investors. Beyond that, we need an effective resolution regime. The UK does now have a decent resolution regime for small and medium-sized banks, which we used directly for the Dunfermline Building Society and indirectly in getting a few cases satisfactorily worked through. More important for today, it is the origin of the Bank pushing the “Living Wills” idea, which dovetailed with international conclusions about the horrendous problems of managing cross-border crises. The G20 heads of government have made it clear that something must be done about this. It is being pursued by the Financial Stability Board, a grouping of regulators, central bankers and finance ministry officials drawn from the G20 countries and a few other key centres.