HM Treasury has published a speech that Paul Myners (Financial Services Secretary) gave at the Financial Times Global Finance Forum on 18 September 2009. The speech is entitled Developing a new financial architecture.
The core message in Lord Myners’ speech is that the financial crisis exposed a fundamental imbalance between the power of the financial system and its accountability for its actions. He also states that the financial crisis has shown that the power of the financial system was not matched by responsibility for its actions, creating an accountability gap that has had to be filled by taxpayers across the globe.
He continues by stating that a “strong, independent, and commercial banking system must be our goal for the future. But as we rebuild the architecture of our global financial system, the task of rebalancing the power and accountability of the sector must define our efforts.”
To understand this task:
- There must be renewed understanding of the basic function of finance in society and the economy. The financial sector must profit by enabling the ambitions of the economy, not by dictating its direction.
- There must be reflection on the failures of both regulation and market discipline in keeping the financial system safe and focused on its long-term health.
Lord Myners also states that some hard lessons have been learnt from the financial crisis including:
- There were systematic flaws in the operation and regulation of financial services markets.
- There has been a mismatch of risks and rewards, benefits and losses.
- The challenges faced are much broader than just making sure that the right solutions are found in the UK.
Lord Myners states that the regulation of financial institutions will be tougher in the future and that focused legislation will be produced later this year.
He adds that firms that are systemic, and that will cost more to resolve in times of failure, must be supervised and regulated more intensively. This means higher capital requirements and tougher standards of liquidity than for smaller firms. Lord Myners briefly discusses "living wills" stating that:
- The Government’s emerging view is that living wills will become key elements of the FSA’s risk assessment framework and prudential supervisory processes.
- At the core is a plan that will allow the authorities to resolve a bank quickly in the case of it getting into difficulty - essentially a blue print for resolution.
- There are elements either side of the actual resolution. Banks will have to produce clear plans as part of their living wills of how to reorganise or de-risk, should the institution get into difficulty - essentially preparing for resolution.
- There is a question of what happens after resolution - a living will would also contain a plan for orderly wind-down of the residual elements of a bank once the deposit book has been resolved.
- The Government will be taking action, including legal powers where necessary, to ensure the FSA is equipped to insist on the implementation of these living wills.
Lord Myners states that regulation alone will not be enough. He argues that good companies with credible strategies and effective boards do not fail as a result of regulatory shortcomings. It is critical that there is effective corporate governance. He said that company directors "must make decisions based on long-term performance considerations; investment managers must engage with the companies in which they invest and hold them to account when they fail to think long term; shareholders, for instance pension fund trustees, must ensure that their managers are appropriately incentivised to engage and held to account when they don't." He adds that shareholders "must take front-line responsibility for the companies in whose equity they have invested their client funds."