Measuring exactly what a regulator does is not easy. But the Bank of England and the Financial Services Authority share a conspicuously high output of one product: worrisome lists of risks to the financial system.
The City was reminded of this last month when the deputy governor of the Bank and the chief executive of the FSA gave “red flag” speeches on very similar subjects within two days of each other.
Neither man, it seems, was aware of what the other was planning to say. As a result, the two appeared to be treading on each other’s toes, if not competing for attention.
Sir John Gieve, deputy governor, said investment banks and other financial groups were taking on ever-increasing risks in the face of intense pressure for new business and higher profits.
John Tiner, FSA chief executive, said investors were willing to take on more risk to get the same returns, and warned that benign markets often concealed problems.
John Tattersall, a partner in the financial services regulatory practice at PwC, said: “It is rather strange that both are making these speeches and producing financial stability reports. You wonder why they bothered to set up the FSA if the Bank carries on doing that.”
With the FSA less than 10 years old and the Bank adjusting to a recent overhaul of its financial stability team, it would not be surprising to find the two bumping into each other.
But each has an input into the other’s main risk report: the bank’s Financial Stability Review and the FSA’s Financial Risk Outlook. Last year, they also signed a new tripartite memorandum of understanding with the Treasury to clarify their respective responsibilities.
An FSA official said: “I wouldn’t say there is duplication. The issues are covered with a particular perspective and informed by the roles of the different institutions.”
The FSA takes a bottom-up view of risks, grounded in data gathered from its day-to-day supervision of financial services groups.
The Bank, because it is not tracking specific institutions, has the freedom to step back and take a top-down approach. It is informed by economic analysis linked to monetary policy, the intelligence it gleans from its activities in the money markets, and its own models of the financial system, which are often more sophisticated than anything run by investment banks.
In the past, the Bank’s financial stability work appeared to be sprawling.
A reorganisation last summer led to 25 job losses on Threadneedle Street and Mervyn King, the governor, told the financial stability team to drop its peripheral interests and focus on a more intelligent analysis of the most important issues.
One result was a revamped Financial Stability Report last month which zeroed in not on what could go wrong, but on vulnerabilities that “could lead an initial shock to turn into a crisis”, as Sir John put it.
Exactly what the central bank and the watchdog are seeking to achieve with their red flags is another question. Sceptics suggest a degree of back-covering, particularly by the FSA, which does not want to be blamed for failing to spot the next blow up.