Respect ‘spirit’ of financial rules Bank of England tells Lenders

11th July 2017

British financial firms need to respect the spirit, and not just the letter, of rules designed to prevent another financial crisis, one of the Bank Of England’s (BoE) deputy governors said on Monday.

Sam Woods, who is in charge of the BoE’s day-to-day regulation of banks and insurers, said “fixed rules could never keep up with financial market innovation, and that the central bank also expected firms to respect broader principles designed to reduce risk. Some innovation is pure regulatory arbitrage – that is, action taken by firms to reduce specific regulatory requirements without any commensurate reduction in their risk,”

His remarks were originally intended for a conference of Britain’s Building Society Association in May, but the BoE delayed publication until Monday to avoid clashing with campaigning for June’s parliamentary election.

Woods said “there were several areas where he had particular concerns that financial firms were trying to get around rules. These included borrowing that did not appear on firms’ balance sheets, the accounting treatment of liquid assets, and insurers’ sales of certain savings products. Shrinking net interest margins at building societies in the face of greater competition were also a worry, Woods said, as they could spur lenders to take on too much risk.”

“Something similar took place in the run-up to the 2007-09 financial crisis. One concerning trend was the increased number of mortgages issued for 35 years, not 25. As survivors, (Building) Societies ought to be well aware of the warning signs, but I’m conscious that corporate memories can be shed surprisingly fast,”