LONDON (Reuters) - Britain named veteran Bank of England official Andrew Bailey on Tuesday to head its new banking regulator just a month before he must present a plan to help two partly state-owned banks to become independent.
Bailey will become a deputy governor of the Bank of England and chief executive of the bank’s new prudential regulation authority (PRA) from April 1.
He is already head of prudential supervision at the UK’s Financial Services Authority and was expected to be confirmed in the new job. The FSA will be scrapped at the end of March when the PRA becomes Britain’s main banking and insurance supervisor.
The revamp is part of the country’s attempts to draw a line under supervisory failures in the run-up to the 2007-09 financial crisis that forced Britain to take a controlling stake in Royal Bank of Scotland (RBS.L) and a large minority stake in Lloyds (LLOY.L).
“Andrew Bailey has the right skills and experience to lead the Prudential Regulation Authority as it moves into the new era of judgment-led supervision,” UK finance minister George Osborne said in a statement.
The Bank of England, which will be led by Mark Carney from July, becomes one of the most powerful central banks when it takes on its new prudential supervisory role. It is also home to the new Financial Policy Committee, on which Bailey sits, to set the direction for supervision.
Bailey’s immediate challenge is to present a plan in March to the FPC outlining how much extra capital and restructuring RBS and Lloyds may need so they can each stand on their own two feet. Prime Minister David Cameron said on Tuesday he wanted changes at RBS to be accelerated.
It will be a tricky balancing act for Bailey as the government will want to make sure the banks can plug any capital gaps themselves and not depend on taxpayers again.
Bailey is looking at whether all the UK banks are properly capitalised though the focus is largely on RBS and Lloyds.
In an interview with the Times on Tuesday, Bailey said there were still some problems with banks’ balance sheets.
“Some assets are valued in a way I don’t think is sufficiently prudent. That is not lying. That’s a matter of judgment,” Bailey told the Times.
He also said there was a small “tail risk,” that fines for Libor, mis-sold interest rate hedging products and other wrongdoing could cause institutions to “keel over.”
“His leadership will be instrumental in shaping a much-needed cultural change at the regulator, moving away from the failed box-ticking exercises of the FSA toward more judgment-led regulation,” said Andrew Tyrie, chairman of parliament’s treasury select committee.
“The size of the task facing Mr Bailey should not be underestimated,” added Tyrie’s committee will hold an appointment hearing next month, though with no power of veto.
The British Bankers’ Association welcomed news that Bailey would also be a member of the FPC and the new standalone Financial Conduct Authority to ensure supervisory coordination.
Last week, Bailey said the financial crisis has moved on from its early, prudential phase when the focus was on topping up capital at banks.
Supervisors are now having to deal with the second phase - the misconduct coming to light such as the Libor and loan insurance mis-selling scandals - at a time when regulators are still “building architecture” in response to prudential issues.
Bailey, whose signature appeared on bank notes when he was the Bank of England’s chief cashier, will be deputy governor for prudential regulation.
Hector Sants, then chief executive of the FSA, was due to fill the role and head up the new PRA, but last year resigned to become head of compliance at Barclays (BARC.L).
Reporting by Huw Jones, additional reporting by Abhishek Takle in Bangalore; editing by Sinead Cruise, Stephen Nisbet and G Crosse