Macro-prudential regulation returns back to its maker

Macro-prudential regulation has returned to its maker, today after the Government announced it would be restoring the UK's Central Bank - the BoE as the chief regulator of the financial system.

Traditionally the regulator of the system, the BoE - Bank of England - was stripped of its power under the former Labour Government through the creation of the FSA - financial services authority - which then was added into a tri-partite system of management between the Government, the politicians - the Central bank - who issues the banknotes - and the FSA which governs the banks.

However, with the recent failures in mind, the Government has decided to step back from the regulating of the banks by removing the FSA and leaving the Bank of England to govern itself and its neighbours - the High Street Banks and investment banks.

The move leaves Mervyn King, Governor of the Bank of England, in charge of issuing banknotes - i.e. controlling inflation, and regulation, whilst the task of reducing fiscal deficit remains in the hands of the Government - specifically the Chancellor, currently George Osbourne, who in turn, will be regulated by the Office of Budget Responsibility.

The new system, which puts the onus of the Government regulating itself rather than others, is a new theme of 'decentralising responsibility' which the new UK Government is implementing after the General Elections saw them win a minority Government through which they could change things with the help of the Liberal Democrat party who formed with them a Coalition Government on 11 May.

The next major announcement on the Government's plans comes on the 'Emergency Budget' 22 June when the Chancellor announces his plans in tackle the deficit.

Meanwhile, Hector Sants, an american who announced his intention to retire from the FSA earlier this year, has become deputy Govenor in the new set-up where he will oversee regulation of the banks under the new set-up, along with the dismantling of the current tri-partite arrangement between the three - FSA, BoE and politicians.

"What we are proposing is a new system of regulation that learns the lessons of the greatest banking crisis in our lifetime," Mr Osborne said.

Mervyn King, who was also present at the event said: "Monetary stability and financial stability are two sides of the same coin."

"Over the next few years we will put in place a framework for financial stability to parallel that for monetary stability. We need both. As we have seen, one without the other is not enough."

"Just as the role of a central bank in monetary policy is to take the punch bowl away just as the party gets going, its role in financial stability should be to turn down the music when the dancing gets a little too wild," Mr King concluded.