andrew bailey : defining the objectives and goals of supervision speech by mr andrew bailey, deputy governor of prudential regulation and chief executive officer of the prudential regulation authority at the bank of england, at the new york fed conference “ defining the objectives and goals of supervision ”, federal reserve bank of new york, new york city, 18 march 2016. * * * first of all, many thanks to the new york fed for organising a conference on supervision of banks. this sounds a strange thing to say in one sense – not in another because the gratitude is genuine – but strange in the sense that surely supervision is such an important part of what we do that we shouldn ’ t be particularly surprised at the idea of having a conference on it. but in my experience, it is surprising how little time we spend being more reflective about supervision. i want to start with some important definitions. frequently, and mistakenly, “ supervision ” and “ regulation ” as terms are used interchangeably. that ’ s wrong. regulation is to do with the framework of rules and guidance that put the structure around the objectives that as authorities we are usually given in statute. in the uk, the pra has a primary objective in terms of the safety and soundness of firms we authorise to do business, and safety and soundness are expressed in terms of the stability of the financial system. there is then a rulebook that tells us what safety and soundness means. that ’ s the framework of regulations. supervision is about how we use it in practice. for me, two critical elements of supervision are that it is forward - looking, and it requires the use of judgement. sounds obvious, but sadly hasn ’ t been consistently done well in the past, with bad consequences. supervision is therefore a skill – in fact it ’ s quite a few skills. the essence of the job is to understand risks in firms, and where necessary to step in and do a number of things : point out risks, or their significance when the firm seems to have failed to notice – through either lack of awareness or intent ; or point out that while the firm may have identified the risk, it has failed to understand or calibrate its significance. this leads me to a couple of important points. first, our assessment of risks can differ from firms because our objective represents the public interest, and there is an externality in the risk in question which affects the public interest in ways that do not register with a definition of private interest.

greater supply - side flexibility - that is increasingly being followed by uk regional and national authorities. and it's the path being followed here in wales by the national assembly under first minister rhodri morgan. it is the path that is being followed by the wda and its subsidiary finance wales, as well as elwa. if we know at the bank about plant closures and job losses, we know, too, about neds ( the welsh national economic development strategy ) and we know about the new activity, creating new jobs, including, for example, technium. i said a moment ago that some of the current micro - economic problems are inevitable - a normal and necessary facet of economic progress. but the pressures we currently face go well beyond that. the effects of bse and then of foot and mouth disease on agriculture, and the impact on the rural economy more generally, have been wholly abnormal. and the pressures on the wider economy have recently been hugely aggravated by the international economic environment - first, by the persistent strength of sterling against the euro ; then, by the global economic slowdown - including the dramatic contraction of activity in the previously booming high - tech sectors, and most recently by the vicious terrorist attacks in the united states. with the best will in the world, there is nothing that we can do - certainly not through our domestic monetary policy - that goes to the causes of these problems. that's obviously true in the case of the problems in agriculture. many people suppose that interest rates would have a predictable effect on exchange rates, but in fact it's not as simple as that. many other factors influence exchange rates which can respond perversely to interest rate changes even for quite long periods of time. despite the 4 % cut in the us rates this year the dollar is still stronger against the euro - where rates have fallen by only 1 % - than before the interest rate cuts started. and sterling, too, rose against the euro even though we cut interest rates earlier, and by more, than the ecb. the conundrum in fact has been the persistent relative weakness of the euro, since its introduction, and i very much welcome its modest recovery since the summer. but on top of this exchange rate effect, external demand for goods and services produced in this country has been adversely affected by the unusual simultaneous slowdown in the world's three largest currency areas - the us, the eurozone and japan - that we have seen this year.