Lord Myners Defends UK Proposed Council of Financial Stability

As debate in the US rages over whether the central bank or a council of financial regulators should be the new systemic risk regulator, the UK Financial Services Minister Paul Myners defended the government’s proposed Council of Financial Stability in testimony before the Treasury Committee. Under the UK proposed financial regulatory reform, the Council of Financial Stability would analyze and examine emerging risks to the financial stability of the markets and coordinate the appropriate response. The Council would be composed of the Treasury, the Bank of England, and the Financial Services Authority. This would be the US equivalent of the Fed, the Treasury, and the SEC.

According to the Minister, the Council would meet as necessary to discuss particular risks to financial stability, involving specific sectors or firms, and to coordinate any regulatory action or intervention required. In addition, regular quarterly meetings are envisioned. In order to increase public transparency and accountability, the minutes of the standing meetings of the Council would be published.

Lord Myners said that the reports considered by the Council should feed directly into effective supervisory and regulatory action. The central thrust of the legislative reform, he explained, is to ensure that, as a result of enhanced governance and regulation, the risk of failure is significantly reduced, and that firms have to internalize through capital the likely consequences of failure.

In his view, the creation of the Council elevates the responsibilities of the Financial Services Authority, giving it new responsibility for financial stability, new powers. The Council also gives the central bank a new forum for articulating its concerns about the financial markets and, importantly, to set out very clearly what actions it believes should be taken. The risk-focused Council for Financial Stability provides the forum in which the central bank will be able to express with considerable clarity, and require a response, their assessment about things such as credit extension and leverage.

Responding to concerns that financial innovation will always be ahead of regulation, Lord Myners pointed to a proposed new requirement that the FSA should advise the Chancellor twice a year on new areas of innovation and their consequences for systemic risk and any statutory changes that will be required to take account of that. Moreover, the proposed draft addresses the perimeter of regulation where risk may lie, having previously not been appropriately identified, measured and monitored. In this context, the Minister mentioned conduits, structured investment vehicles, and the activities of hedge funds. The legislation will also lead to enhanced risk disclosure to shareholders, in his view.

Responding to concerns about international coordination and avoiding regulatory arbitrage, Lord Myners would rely on the Financial Stability Board and the concept of colleges of supervisors to coordinate the regulation of global financial institutions operating in multiple regimes with multiple regulators. He said that the new European Systemic Risk Committee, which is being established by the de Larosie"re's recommendations, would monitor the performance of these colleges, as will the Financial Stability Board, because in regulation, "the answer has got to lie globally, regionally and nationally.’’

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