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Tyrie warns on fresh regulatory ‘vacuum’

Monday 24 October 2011 – by Andrew Hickley & Will Henley

The abolition of Britain’s Financial Services Authority could lead to a dangerous regulatory “vacuum”, a senior British parliamentarian has warned.

Andrew Tyrie, who chairs Parliament’s treasury select committee, has said in an open letter to policymakers that the changeover to new authorities could leave vital areas of compliance unsupervised.

In his appeal to Bank of England governor Mervyn King and FSA chief executive Hector Sants, sent on Thursday and revealed on Monday, Tyrie also says that incoming new Basel III liquidity requirements risk a second recession.

In the letter, Tyrie warns of the risks entailed by the FSA moving its operations to the Bank of England before its successor, the Prudential Regulation Authority, becomes active.

The 54-year-old calls for clarification and reassurance about who is currently in charge of liquidity regulation.

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“Some concerns have been raised with me about the need to avoid the risk of a regulatory vacuum, given that the FSA is preparing to move its prudential operations to the Bank, but the PRA – which will assume responsibility for micro-prudential regulation of the banks, including on capital and liquidity levels – has not yet been formed.

“We cannot afford a repetition of what, at the start of the crisis, became known as regulatory underlap.”

In his letter, Tyrie adds that the Basel III liquidity rules are further dampening the country’s stagnant growth. Even though the standards are not effective until 2015, he says they have already begun to have an impact.

Banks are competing aggressively for stable sources of funding, such as retail deposits, resulting in a more cautious attitude to lending to the real economy, he says: “The squeeze on bank liquidity is running the risk of continued credit contraction, setting back the prospects of economic recovery.”

Banks’ funding pressures are also compounded by the removal of government emergency liquidity funding and the burgeoning eurozone crisis, he says, which has made it harder for them to obtain stable deposits.

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