Bank of England deputy defends U-turn on banking reform

Top policymakers at the Bank of England have defended last week’s dramatic government U-turnto water down rules intended to make top bosses of banks more accountable for their actions.

Mark Carney, governor of the Bank of England, and Andrew Bailey - one of his deputies who runs the Bank’s regulation arm, the Prudential Regulation Authority - also defended the implementation of rules intended to separate high street banks from riskier investment banking operations following Sir John Vickers’ proposals in 2011.

MPs on the Treasury select committee asked them about the sudden move by the government last week to remove a rule placing the onus on bosses to prove they had done the right thing. Instead, the regulator will now have to prove the case against bank chiefs.

Bailey cited warnings that the proposed new rules could have breached European human rights regulations.

This reversal of the burden of proof was only legislated for in 2013 after the government implemented the findings of the parliamentary commission on banking standards which was set up in the wake of the Libor rigging crisis. That commission was chaired by Conservatives MP Andrew Tyrie, who also chairs the Treasury select committee.

The changes to burden of proof on bosses is part of the new so-called senior manager and certification regime which is a response to the face that bosses escaped action from regulators following the 2008 banking crisis.

“I am worried this piece of the regime might not work,” Bailey said. “I don’t want a regime which has a flaw in it which they [banks and lawyers] can exploit.”

In response to accusations from John Mann, a Labour MP on the committee, that he had changed his tune, Bailey said he had changed his mind “in that there are signs of developments in the way people are approaching this regime which introduces unhelpful behaviour”.”

Bailey said that in the past the regulator would have to prove a boss had signed a loan agreement, for example, which had gone wrong. The new rules are a key plank of the recommendations of the parliamentary commission on banking standards which was set up after the 2012 Libor-rigging scandal.

Carney told MPs the new senior manager regime had “morphed into a legal discussion” and not focused on the changes needed to reform banking culture.

“There was too much noise about it. It needed to change,” said Bailey. The rules will be extended from bankers – who are are subject to the regime from next March – to 60,000 firms from 2018.

Bailey also denied that the ringfencing rules from the Vickers commission in 2011 had been watered down.

Banks had been braced for rules prohibiting the release of any such payments to the parent company.

Carney admitted that it would be “miracle” if all the regulatory changes introduced after the crisis had not either gone too far or missed out an important area. He pointed to the EU cap on bonuses and the leverage ratio as potential areas to revisit.

He also repeated warnings about the ability of the National Audit Office to judge if the Bank was good value for money.

The MPs on the select committee had called Carney and Bailey to give evidence on the banking bill currently going through parliament which will bring in changes to way the Bank is structured.