One of the reasons for putting the PRA inside a central bank is to integrate the work of the two institutions more closely. In particular, the market intelligence team at the Bank will work closely with the supervisory body. I believe that we can operate prudential supervision at lower cost than hitherto by reducing the burden of routine data collection and focussing on the major risks to the system. It is vital that we collect and process data only where the supervisors have a need to know. Targeted and focussed regulation, allowing senior supervisors to exercise their judgement, does not require ever-increasing resources. For example, we will reduce the number of people subject to the intensive regulatory interview process before appointment by limiting such interviews to the most senior people. And one of the benefits will, I hope, be to make entry into UK banking easier and so promote competition. Let me return to the question of which aspect of financial regulation is most deserving of the adjective “tragic”. Is it light touch regulation? No – it is the mistaken belief that by compromising on unduly low capital requirements and inadequate limits on leverage, regulators can compensate by a detailed oversight of every aspect of a bank’s activities. It did not take complex reporting to see that the balance sheet of the banking system nearly trebled in five years, or that leverage ratios had reached levels of 50 or more. The obsession with detail was in fact a hindrance to seeing the big picture.
To force nominal wages below their already depressed level would have meant much higher unemployment, a greater erosion of living standards, a marked degree of “undesirable volatility in output” (contrary to our remit), and a risk of inflation falling well below the target in the medium term. With the freedom granted from having our own currency, the mix of tight fiscal and loose monetary policy is necessary for a rebalancing of the economy. Because of the measures taken to reduce the enormous fiscal deficit here at home, UK sovereign debt funding costs have actually fallen relative to those in Germany since the start of last year. Of course, there can always be differences of judgement about the overall stance of policy, but to change the broad policy mix would make little sense. Of course, at some point, Bank Rate will need to rise to more normal levels in order to ensure that inflation returns to its 2% target. There has been, as you know, a lively debate among the members of the MPC as to when that point will come. The Committee is watching extremely carefully for any signs of a pickup in domestically generated inflation and it will take action as soon as it is appropriate to do so. So far, subdued rates of increase in average earnings, as well as remarkably – some might say disturbingly – low growth rates of broad money have provided strong signals that inflation will fall back in due course. Banks are still contracting balance sheets and reducing leverage.