Bank of England Financial Policy Committee member Michael Cohrs said the culture and incentives at banks need to change in order avoid systemic problems.
“Ultimately, it is the culture within individual banks and the incentive systems that drive risk taking which need to be changed,” he said in the text of speech delivered March 23 in Edinburgh. “The good news is that I see evidence that banks are changing incentive systems and this will lead to a different culture within the banks which society will prefer.”
The record of the FPC’s March 16 meeting published last week noted that banks have made progress in limiting pay while they build buffers against future shocks, though the panel said they still need to raise more capital. The FPC meets quarterly on an interim basis while legislation on its powers is considered in Parliament.
The 11-member panel, chaired by Bank of England Governor Mervyn King, will ask lawmakers for three tools to help it limit system-wide financial risks. It set aside a request for tools to limit mortgages in part because these would need a “high level of public acceptability,” and said it would welcome debate on the issue. Lawmaker Andrew Tyrie said the decision reflected an “accountability gap” in the legislation.
Cohrs said accountability and transparency are “extremely important” as the panel may one day need to make politically unpopular decisions such as constraining an “electorally popular credit boom,” said Tyrie, who chairs the Treasury Select Committee that scrutinizes the Bank of England. Making such decisions will require a panel that is independent in the same way as the Monetary Policy Committee.
“The howls one will inevitably hear when doing it make it hard unless the FPC, and the Bank, have a strong degree of independence,” he said. “The FPC is in a tricky position as it faces a difficult balancing act between public accountability and the need for independence.”
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