Today, the House of Lords Economic Affairs Committee published a report on Banking Supervision and Regulation in the U.K. The Committee states that the causes of the crisis "were not simply management failure" at some banks but also "commensurate failures in regulation and supervision, together with shortcomings on the part of the ratings agencies." The report sets forth the following reasons why U.K. regulation and supervision failed to avoid or mitigate the financial crisis:  

  • The application of the regulations themselves contributed to the crisis by "failing to pay enough attention to liquidity, built-in over-reliance on ratings agency opinions and were wide open to regulatory arbitrage";
  • The Bank of England, the Financial Services Authority (FSA) and H.M. Treasury (the tripartite authorities in the United Kingdom) "failed to maintain financial stability and were found wanting in dealing with the crisis, in part because the roles of the three parties were not well enough defined and it was not clear who was in charge";
  • "Too little attention was paid to macro-prudential supervision" (oversight of the aggregate impact on financial stability of individual banks' actions) and "only the Bank of England and the FSA were in a position to assess it";
  • The FSA was "concerned mainly with consumer protection" and "did not pay full attention to micro-prudential supervision (the solvency and sustainability of individual banks)";
  • "The FSA had an inadequate understanding of the complexity and limitations of the risk assessment models used by the banks it was supervising."

The report recommends revisiting "the tripartite supervisory system in the United Kingdom" and returning "responsibility for macro-prudential supervision to the Bank of England, with executive powers to be exercised through a broader-based Financial Stability Committee (FSC), including substantial representation from the FSA and the Treasury." This recommendation echoes one of the issues being debated in the U.S.: should overall financial market stability be the province of a single regulator (such as the Federal Reserve) or a committee of regulators (as suggested by, among others, FDIC Chairman Sheila Bair).

The report also recommends that U.K. authorities address specific issues highlighted by the financial crisis, including the regulation of liquidity, removing rating agency ratings from regulations, giving rating agencies an economic interest in the accuracy of their ratings, and improving the governance of bank boards. In addition, the Committee also recommended that:  

  • Supervisors and regulators should subject bank risk models to much more rigorous stress-testing;
  • Credit default swaps should be reported and centrally cleared;
  • Regulatory capital requirements for assets on banks' trading books should be substantially increased; and
  • Multinational bank branches in the U.K. should be subject to greater oversight by U.K. authorities.

The report comes approximately one month after a similar report published by the Financial Services Global Competitiveness Group which examined the competitiveness of financial services globally and to outlined a proposed framework on which to base policy and initiatives to keep U.K. financial services competitive over the next 10 to 15 years, and a March 18 report prepared by Lord Adair Turner addressing how the U.K. can create a more stable banking system.