Large banks are governable and they are not too big to fail, Bank of England’s Deputy Governor Andrew Bailey said Wednesday.
“I do not accept the proposition that we can only abandon all hope of understanding the risks in banks,” Bailey, who also heads Prudential Regulation Authority said.
“Likewise, I do not agree that large banks are unsupervisable and ungovernable.”
“And, I do not concur with the view that large banks can never be resolved, thus leaving too big to fail always with us, and with the answer then to either require a lot of equity funding or to hope that the shadow banking system does not cause risks that threaten the whole system,” he said.
The best policy would be to adopt a mixture of capital buffers, risk management, governance, supervision and resolvability of the banks.
In many countries, supervision failed badly in the run-up to the crisis, Bailey noted.
“Prudential supervision of banks is all about understanding the risks firms take, the effectiveness of the controls in risk management, using the framework of rules and regulations to create the right incentives to control risks appropriately, and where necessary intervening directly to require actions to be taken that would otherwise lead the firm to a potentially unsafe or unusual position,” he said.
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