Monday 18 December 2017

Bank of England warns banks to respect spirit, not just letter, of rules

The Bank of England
The Bank of England

David Milliken

BRITISH financial firms need to respect the spirit, and not just the letter, of rules designed to prevent another financial crisis, one of the Bank of England's deputy governors has said.

Sam Woods, who is in charge of the BoE's day-to-day regulation of banks and insurers, said fixed rules could never keep up with financial-market innovation and that the central bank also expected firms to respect broader principles designed to reduce risk.

"Some innovation is pure regulatory arbitrage - that is, action taken by firms to reduce specific regulatory requirements, without any commensurate reduction in their risk," he said.

His remarks had originally been intended for a conference of Britain's Building Society Association in May, but the BoE delayed publication until yesterday to avoid clashing with campaigning for June's general election.

Mr Woods said there were several areas where he had concerns. These included borrowing that did not appear on firms' balance sheets, the accounting treatment of liquid assets and insurers' sales of certain savings products.

"As survivors, (building) societies here today ought to be well aware of the warning signs, but I'm conscious that corporate memories can be shed surprisingly fast," he said.

Shrinking net interest margins at building societies in the face of greater competition were also a worry, Mr Woods warned, as they could spur lenders to take on too much risk.

One concerning trend was the increased number of mortgages issued for 35 years, not 25, he added.

Last week, the BoE signalled that it would take a tougher approach to consumer lending. (Reuters)

Irish Independent

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