Banking supervision and regulation: 2nd report of session 2008-09, Vol. 1: Report
The Stationery Office, Jun 2, 2009 - Business & Economics - 67 pages
2007 and 2008 saw the biggest financial crisis since the 1930s. Banks looking for better yields from plentiful, cheap money made much more use of complex financial instruments, without fully understanding the risks to which they were exposing themselves and the financial system. Defaults on subprime mortgages underlying some of the instruments shattered confidence and financial markets seized up. The framework of regulation and supervision in Britain failed to avoid or mitigate the crisis. The tripartite authorities in the United Kingdom (Bank of England, Financial Services Authority (FSA) and Treasury) failed to maintain financial stability and were found wanting, 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); only the Bank of England and the FSA were in a position to assess it. The FSA concentrated on its responsibility for conduct-of-business supervision (concerned mainly with consumer protection) and did not pay full attention to the solvency and sustainability of individual banks. It also had an inadequate understanding of the complexity and limitations of the risk assessment models used by the banks it was supervising. The Banking Act 2009 showed the Government had learnt the lesson that special resolution provisions are needed for banks since their failure can threaten the whole financial system. The Committee calls on the Government urgently to revisit the tripartite supervisory system in the United Kingdom and it should return responsibility for macro-prudential supervision to the Bank of England. Other recommendations cover bank capital regulation, ratings agencies and bank governance.
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The History and Causes of the Financial Crisis 11
Consequences of Financial Sector Complexity 34
Operational risk 60
International Supervision 128
Ratings and Regulations 161
Remuneration of Bankers 194
Financial Institution Scale and Scope 231
argued assessments auditing firms auditors bank assets Bank of England bank's bankers Banking Act 2009 banking sector banking supervision Basel Accord Basel Committee Basel II building societies capital regulation capital requirements CDS trades central bank clear complex conduct-of-business supervision corporate governance costs counter-cyclical CRAs Credit Default Swap credit rating agencies depositors effect ensure executive failed failure financial crisis financial firms financial institutions financial markets financial regulation financial sector Financial Services Authority Financial Stability Committee financial supervision financial system insolvency institution-specific information instruments investors issuers judgement liquidity risk loans Lord Turner macro-prudential supervision mark-to-market mark-to-market accounting monetary policy Moody's non-executive directors Northern Rock operational risk Paragraph pro-cyclicality problem Professor Goodhart Professor Perotti prudential supervision regulatory arbitrage remuneration responsibility for macro-prudential risk models riskiness role securitisation shareholders Sir Callum McCarthy supervisors systemic risk told Trading book assets tranches Treasury twin peaks UKFI