andrew bailey : the future of banking regulation in the uk speech by mr andrew bailey, executive director of the bank of england, at the british bankers ’ association annual banking conference, london, 17 october 2012. * * * it is a great pleasure to be here this morning. i am going to talk about what has become the hot topic of the time, namely the role of bank regulation in macroeconomic policy. but before i do so, just a few words on progress towards creating the new system of regulation in the uk. the treasury announced on monday that they expect that the new regime will formally come into existence at the start of april next year. i expect that the pra ’ s new home, near to the bank of england in moorgate, will be occupied by our supervisors shortly before then. on monday, we published two important documents on the pra ’ s approach to supervision, covering banks and insurers respectively. next monday, we are holding conferences at the qe2 centre, covering banks in the morning and insurers in the afternoon. please do come along. you can access the documents now on the bank of england and fsa websites. i should add that martin wheatley and his colleagues in the fca - to - be have also issued an approach document this week and are holding a number of events too. we are doing our best to keep you entertained! let me turn now to the issues around bank regulation and macroeconomic policy. the financial crisis has emphasised the close links between the health and behaviour of banks and the state of the economy. we are remembering a very uncomfortable lesson from history that should not have been forgotten. but, forgotten it was. we have a very big programme of reforms under way, with the central objective that we must not let a financial crisis of this scale happen again. at the heart of this programme we are trying to knit together monetary policy and financial stability in both its macro - and micro - prudential forms, something that has not been done properly for a long time. i say that quite deliberately, because such coherence was not present prior to the reforms of 1997, so this is more than a change to recent arrangements. the new macro - prudential approach to financial stability will see the establishment of the financial policy committee ( fpc ), charged with the primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the uk

inevitable uncertainty about the future. this would be the effect of raising new equity. an alternative could be to raise the capital in the form of contingent equity, or “ co - cos ” for short. the attraction of this is that existing shareholders will retain some of any upside, though they will pay via lower returns for the risk premium on the cost of co - cos. i am quite attracted to cocos, but we need to think through whether they will create the necessary incentives to new lending. i should add that, while we are seeking to discourage banks from deleveraging in the form of lending to the real economy, we are not against releasing existing capital to support new lending where that capital is currently tied up in non - core assets, which can either be sold or run off because they are not needed on the balance sheets of banks to support the real economy, such as trading book proprietary assets. bis central bankers ’ speeches finally on this subject, let me briefly describe what we have done so far. the government and the bank of england have introduced the funding for lending scheme ( fls ). fls is in large part a response to developments in financial markets, notably the increase in the cost of bank funding which was, inevitably, being passed on in the form of higher costs of lending. in the twelve months up to the middle of this year, business lending and mortgage rates rose and the evidence we had suggested that there was an accompanying tightening in the terms and conditions of new lending. the bank of england ’ s credit conditions survey suggested that household secured lending and corporate lending rates were expected to rise further and all of this on the back of two years of flat gdp growth and three years of broadly flat credit growth to households and business in the uk. this was notwithstanding the mpc ’ s action on quantitative easing. fls is designed to provide banks with medium - term funding at a more reasonable cost, with incentives that reduce the cost if banks lend more. this should improve credit creation in the economy through lowering rates on new lending, but to some degree it may also enable banks to improve their net interest margins and thus build more capital. at the same time the fls was introduced, the bank of england signalled its willingness to enhance its provision of liquidity insurance through the activation of the extended collateral term repo facility. for its part, recognising the need to balance macro - prudential objectives in the way that i described earlier, the fsa