While speaking at a conference in London, Vicky Saporta of BoE discussed how banks and other financial firms should be regulated now that UK has left EU. Ms. Saporta sets out a framework for thinking about an ideal system of regulation for the future and argues that the financial system in the UK is more stable because the regulatory authorities are independent. In her speech, she builds on the principles that Sam Woods had set out last year to which any future UK regulatory framework should adhere. She builds on these principles to propose an ideal framework from the perspective of achieving the objectives of BoE. She then looked at whether the existing empirical evidence, including some new research, supports the framework.
Ms. Saporta maps the principles outlined by Sam Woods last year into three ideal features of the institutional structure of the prudential regulation: dynamism, time consistency, and legitimacy. She highlights that the regulatory authority needs to be given a mandate to achieve legitimacy. A mandate provides a regulator with legitimacy in two ways. First, it ensures there is democratic control over the shape of the regulatory regime; for example, the objective or objectives of the prudential regulation, the types of firm in scope, and the issues the regulator must have regard to in making policy. Second, it makes possible to hold the regulator to account.
Next, she sets out four alternative models for the institutional structure for prudential regulation. In the first model, prudential regulation is specified in primary legislation. In the second model, prudential regulatory power-setting could lie with government ministers. In the third model, these powers could be given to an independent regulatory body. This model is likely to ensure that prudential regulation is both dynamic and time-consistent. An expert regulator would be able to identify and implement necessary dynamic adjustments, and, for reputation reasons, it would have an incentive to maintain prudential standards provided that it avoided industry capture. However, in the absence of further accountability mechanisms to enhance it, this model would lack legitimacy. Keeping this in mind, she sets out and advocates the fourth model of prudential regulation.
This fourth model involves an independent regulatory body with a clear mandate set out in primary legislation and a clear set of accountability mechanisms to Parliament. This model combines the benefits of an expert regulator that can adjust prudential regulation dynamically, with an objective that incentivizes the regulator to maintain prudential standards, while using the mandate and the accountability mechanisms to ensure legitimacy. In theory at least, this fourth model is preferable because, unlike the other models, it possesses all three of the ideal features, according to Ms. Saporta. In this context, she also examines the mandates of various financial sector regulators in the UK. She highlights that this model of independent regulators with mandates making rules is common practice in most jurisdictions outside the UK. Finally, she discusses the evidence supporting the theory that the independence of prudential regulation increases financial stability with no cost to efficiency.
Keywords: Europe, EU, UK, Banking, Post-Brexit, Regulatory Framework, Brexit, Victoria Saporta, BoE
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