andrew bailey : the outlook for financial regulation in the uk speech by mr andrew bailey, executive director for banking services and chief cashier of the bank of england, on a regional visit to edinburgh, edinburgh, 10 january 2011. * * * andrew bailey will become the deputy chief executive of the prudential regulation authority ( pra ) on its creation. thank you to linda urquart for inviting me to speak today and morton fraser for allowing us to use your venue. i would also like to thank will dowson, the bank ’ s agent for scotland for the assistance that he has given me, and for the work that he does to ensure that the bank is well connected to the uk ’ s most important financial centre after london. will worked for me when he first joined the bank as a graduate entrant, and i can assure you, drawing on that experience, will is an excellent person to ensure that the bank and you as our contacts in scotland are well informed and understand the relevant developments that affect each of us, and of course that we in the bank understand the state of the economy in scotland and the financial sector here. it is quite right that first and foremost our agents support the needs of monetary policy and the mpc. the information that they gather from you, their contacts, makes a real difference to the monetary policy process. there is a parallel in our responsibilities for ensuring financial stability. in an important financial centre like edinburgh, we need to be well connected, and to understand your assessment of the threats to financial stability and we need to explain what we are doing to tackle these threats. our market intelligence function under my colleague paul fisher plays an important role here, and is in frequent contact with the scottish financial community. this contact will be even more important under the new arrangements in which the bank will be responsible for macroprudential policy and its focus on the stability of the financial system, with a new policy making body, the financial policy committee, or fpc. alongside and feeding into the bank ’ s macroprudential role will be our new responsibility for microprudential supervision of deposit takers, insurers and major securities dealers, also in a new body, the prudential regulation authority, or pra. it is therefore a period of major change at the bank, and we are taking very seriously our role in building a system of regulation in the uk that must meet the very reasonable expectations of the public for a safer and sounder financial

system. the overarching objective for the bank is to put the stability of the financial system at the heart of the mission of financial regulation. we are now in the fourth year since the financial crisis started in the middle of 2007. the scottish banking system took a pounding during the earlier stages of the crisis. that was not just deeply regrettable for the institutions concerned, but also it damaged a proud and long tradition of sound banking in scotland. it pained me, in my role as the person responsible for resolving a number of these problems, to see the lack of regard for the basics of a well run bank, the foundations which must be there to be sound and successful. i have spent the last seven years also responsible for the bank of england ’ s banking operations, and i know from this experience that unless you really understand your balance sheet and its risks, the systems and control environment that supports the balance sheet, and you have the basics needed well covered – the reconciliations work, the right management information available promptly – you aren ’ t doing your job. it isn ’ t sexy or headline grabbing, but it is surely what the good scottish bankers of the past taught us to do, and what i hope is back with the current generation. the financial crisis has moved on since those earlier days. over the last twelve months, concerns with both sovereign states and their banking systems have intensified in other parts of europe. recently, the imf and european authorities have moved to put in place a substantial package of support for ireland. this intensification of concerns has raised the bis central bankers ’ speeches threat of contagion from these countries, and the consequent financial market developments that have affected several other european countries have added to the risk of a spill - over to the largest european banking systems, including our own. so far, the threat has been limited. an important reason for this is that banks have done the right things over the last two years, namely to focus on their resilience by refinancing debt at longer maturities and raising their buffers of capital. it is hard work in an environment that is still affected by the crisis, but there is no doubting that it is the right thing to have done and continue to do. sound banking is about having a strong capital base and a funding profile in terms of maturity that can withstand the sorts of shocks in the world that will happen from time to time. it is not about expanding your bank rapidly and funding the growth