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King laments ‘tragic’ regulatory failings

Mervyn King has claimed low capital requirements and inadequate limits on leverage have been the most “tragic” aspects of financial regulation.
In his Mansion House speech last night, the Bank of England governor looked ahead to the role of the Financial Policy Committee, which meets for the first time on Thursday, and the new approach to banking regulation.
He also answered his own question on what aspect of regulation was the “most deserving of the adjective ‘tragic'”.
“It is the mistaken belief that by compromising on unduly low capital requirements and inadequate limits on leverage, regulators can compensate by a detailed oversight of every aspect of a bank’s activities,” he said.
“It did not take complex reporting to see that the balance sheet of the banking system nearly trebled in five years, or that leverage ratios had reached levels of 50 or more.
“The obsession with detail was in fact a hindrance to seeing the big picture.”

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He added the FPC would have a crucial role to play in drawing attention to system-wide developments.
In his speech, King also insisted the Bank’s Monetary Policy Committee was keeping an eye on inflation, which remained at 4.5% last month, well above the 2% target.
He said: “So far, subdued rates of increase in average earnings, as well as remarkably – some might say disturbingly – low growth rates of broad money have provided strong signals that inflation will fall back in due course.
“Banks are still contracting balance sheets and reducing leverage. Spreads between bank rate and the interest rates charged to many borrowers remain at unprecedentedly high levels, if indeed borrowers are able to access credit at all.
“When conditions in the banking sector return to something closer to normal, those spreads will contract and the rate at which that takes place will have an important influence on the speed at which bank rate will rise.”
He also warned Britain faces three more years of pain before the economy stabilises to pay for the “seven years of plenty” enjoyed before the financial crisis.