I believe lawyers call this a purposive approach to interpreting legislation and regulations – in other words interpreting meaning in the context of regulations rather than a literal interpretation. This is necessary because history shows us that the financial services industry can be addicted to arbitraging regulations – exploiting the rules to suit short term purposes rather than longerterm stability. I want to finish by saying something about a further important feature of financial stability. For me, the most unacceptable aspect of the financial crisis is that large banks have required the support of so much public money. This is often called the Too-Big-To-Fail problem, or better the “Too-Important-To-Fail-therefore-public-money-has-to-be-used” problem. Why are large banks in this position? The root of this issue is common to the key features of banks, namely their dependence on the confidence of depositors, the role of banks providing each of us with the facility to manage our money – our savings, and in our everyday lives in terms of payments – and the externality caused by the failure of one bank spreading a loss of confidence to other banks. The failure of any company should be dealt with, wherever possible, using the standard insolvency or bankruptcy laws of the country. These provide a well-established and predictable framework for dealing with company insolvency. But, the insolvency laws do not operate quickly – resolving a company can take time.
So, establishing and maintaining financial stability should be high up everyone’s agenda, and we should embed financial stability as the objective of public policy towards regulating the financial system. You can reasonably ask, why is this difficult to achieve? Financial stability is difficult to define quantitatively and precisely. Some people say that you know it when you have it, but it might be better to say that you know when you don’t have it. What is being done to tackle the issue? A month ago, the Government issued a consultation paper which seeks to define the financial stability objective that will be given to the new Financial Policy Committee of the Bank of England under its plans. The objective is defined at the high level as protecting and enhancing the stability of the financial system of the UK. More precisely, the Bank’s objective “relates primary to the identification of, monitoring of, and taking of action to remove or reduce” risk to the stability of the UK financial system as a whole or to a significant part of the system, “with a view to protecting and enhancing the resilience of the UK financial system”. But the paper goes on to include in the objective the statement that: this does not require or authorise the Bank “to exercise its function in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term”.