The Treasury Select Committee inquired the legitimacy of the capricious influence of regulators, specifically the Bank of England over the senior board executives of private companies in the financial district. Albeit errors of many of the cartel banks it would be erroneous to assume that regulating bodies can better run businesses than boards. In the past decade central banks have failed to produce regulators with the competencies to drive the banking sector away from bad loans.
Internal Capital Adequacy Assessment Process of the ICAAP methodology is hardly an enough effective regulating approach to know how much and where the banks are giving their loans. Effective administration is more than just management but a talent that needs experience and careful calculations of the risk / reward ratio of seasoned bankers who lived through good times as well as bad times also.
When a crisis is imminent, a central bank requires authority to act as quickly as possible. In the 1974 banking crisis event that hit the UK although not as hard as it was several decades later in 2007 and 2009, it had similarities that can be considered. The main cause was attributed to government policy of allowing licenses too easily to a new banking establishment. At first the banks started to finance their own operations which led to the building of loan portfolios etc. As inflation grows which also caused by government policy the result was a speedy run on these new banks. They can no longer cope with the rollover of their wholesale deposits which led to it becoming ruined. The Bank of England was partly at fault for not being able to identify the potential threat. Those who did try to resist was quietly advised that they will probably encounter problems when renewing their banking licenses. The Bank of England was forced to clear the problem without the cost of their patrons.
With the widespread commonality at the time, one of the major clearing institutions found itself on the brink of bankruptcy and was forced to call on the Bank of England for monetary support. This resulted in the wide acceptance of the central bank’s responsibility to act without falter whenever a crisis is getting out of hand by exercising subjective decision making.
It is quite sensible for a central bank to grant banking licenses and selections of individual bank directors. But it will make a bit more sense for these influences to be copied by newly created regulatory bodies. It is also practical and crucial for the central bank to actively use its subjective position in the event of such crisis. It should however be cautioned that this arbitrary use of digression should not be habitually used.