Reforms to the “how” approach to the banking system oversight The Governor of the Bank said earlier this week that we face a choice between an overhaul of the regulatory regime and directly altering the structure of the banking system. As earlier policymakers would have put it, this is a choice between, on the one hand, regulating what banks and other financial firms can do and, on the other hand, leaving open the scope of what they may do but regulating and supervising how they do it. Since the thoughts on macroprudential instruments I shall go on to outline this evening are based on something like the existing structure of the banking system persisting, I shall briefly recap what I have said in a series of speeches earlier this year about the current reform agenda. 3 The three necessary planks are re-regulation and a return to supervision; for the first time, agreeing effective resolution plans with banks and any other key firms; and, I would hope, a clear Capital of Last Resort regime designed to avoid perverse incentives. 3  See “Remarks by Paul Tucker”, panel session at The FSA’s Turner Review Conference, 27 March 2009, “The Repertoire of Official Sector Interventions in the Financial System: Last Resort Lending, Market-Making, and Capital”, Tokyo, 28 May 2009, and “Regimes for Handling Bank Failures: Redrawing the Banking Social Contract”, at the British Bankers’ Association Annual International Banking Conference: Restoring Confidence – Moving Forward, 30 June 2009.
There are essentially two objectives here. So there is a missing set of instruments. And the big question is whether a set can be devised that stack up not only in theory but in practice; instruments that can be used in the real world. Having first flagged 18 months or so ago that the Bank would work on this general area, earlier this year I set out four questions which the debate would need to address; 7 objectives,  6  See, Bean C. R “The Great Moderation, the Great Panic and the Great Contraction”, Schumpeter Lecture at the Annual Congress of the European Economic Association, Barcelona, August 2009 and “Some Lessons for Monetary Policy from the Recent Financial Turmoil”, remarks at Conference on Globalisation, Inflation and Monetary Policy, Istanbul, November 2008. Also Dale S, “Inflation Targeting: Learning the Lessons from the Financial Crisis”, remarks at the Society of Business Economists’ Annual Conference, London, June 2009. 7  My remarks at the Institutional Money Market Funds Association Annual Dinner in London on 2 April 2008 included the following on macroprudential policy: “Looking ahead further, the big question will be whether the authorities can tame the credit cycle without sacrificing the incentives to enterprise that are so important in a dynamic economy. The debate about the micro regulation of banks will need to take account of whether or not we can deliver that macroprudential objective. For too long, the debate has got sidetracked. Into whether we can rely on monetary policy “mopping up” after bubbles burst.