Lawmakers are calling for a new bank regulator and it's a terrible idea

A general view of the sign outside the former home of the fictional Character Sherlock Holmes on March 26, 2012 in London, England. 221B Baker Street is the London address of the fictional detective Sherlock Holmes, which was created by author Sir Arthur Conan Doyle. (Photo by )Dan Kitwood/Getty ImagesThe detectives are on the case.

British lawmakers have called for the creation of a new “enforcement body” to bolster public confidence in bank regulators.

The Treasury Committee made the request following a review into a the failure of HBOS.

The bank failed in 2009, and was rescued by a combination of a public bailout and a merger with Lloyds TSB, costing the taxpayer around £20 billion ($27 billion).

So far, only one person — former HBOS wholesale banking chief Peter Cummings — has been fined and banned from working in the City by regulators investigating the collapse.

The now-defunct Financial Services Authority decided not to pursue sanctions against Andy Hornby and James Crosby, the former HBOS chief executives, who took huge risks in the lead up to the financial crisis. Similarly, the Financial Reporting Council decided not to investigate the auditing of HBOS in 2013.

“This was a serious mistake,” the Treasury Committee said. But another regulator isn’t the answer.

The committee made three key points:

  1. The Financial Conduct Authority has “the bulk of enforcement staff and expertise” despite having no role in the prudential supervision of banks, which is the job of the Prudential Regulation Authority and Bank of England.
  2. A new, separate enforcement body “would bolster the perception of the enforcement function’s independence” from other supervisory duties, such as making sure markets operate fairly.
  3. Freeing the FCA to focus on its “other objectives” would help clarify what the different regulators do and help them focus.

The UK seemingly has just two dedicated financial regulators. But the real figure is closer to four. In a crisis, the Treasury steps in and has a financial oversight function when it comes to banking rules.

Meanwhile, the Serious Fraud Office has stepped in to chase bankers in actions over Libor manipulation and is investigating Barclays over alleged payments to Middle Eastern investors during the crisis.

It sounds like a lot but, in the US, banks have about seven different regulators, not including the Department of Justice.

There’s the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Commodities Futures Trading Commission, the New York Federal Reserve and the New York Department of Financial Services.

Not one of these was able to prevent the biggest banking crisis for a generation. They couldn’t even stop the US becoming the epicentre of that crisis.

And, just like in the UK for HBOS and RBS, no individuals have been held to account for running Lehman Brothers and Bear Stearns into the ground. So having more regulators doesn’t always equal more stability.

It’s hard to see how another regulator will add value in the UK and it could even be disruptive.

If the new body is independent from the FCA and PRA, does that mean it won’t share information gleaned during investigations, even if it’s important for financial stability? Also, this dual structure is only three years old. It makes sense to let it settle and allow the FCA’s new boss, ex-Bank of England deputy governor Andrew Bailey, to impose himself on the organisation.

The collapse of HBOS was a failure of prudential regulation and supervision, not enforcement. The capital and liquidity rules at the time were far looser than they are now and supervision was “light touch.”

The bank took too much risk and was too exposed to the liquidity crunch and losses on assets that ultimately led to its demise. The FSA, the regulator at the time, didn’t act until it was too late and was eventually disbanded, with the PRA taking over those responsibilities.

It’s not clear from the Treasury Committee’s proposal how a new body would do more to stop this happening in the future than the FCA and PRA working together as normal.

There’s a case to be made for more proactive enforcement from the regulators, but the best way to get there is to give the regulators we already have better funding to attract high-flyers from the investment banks and City law firms.

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