HIGHLIGHTS BoE's King in UK parliament hearing on regulation

LONDON Nov 3 (Reuters) - Comments from Bank of England Governor Mervyn King, Deputy Governor Paul Tucker and Andrew Bailey, Deputy Chief Executive designate of the Prudential Regulation Authority during a question and answer session in parliament on Thursday:

KING ON FPC AND BANK LENDING:

"Deciding whether we should encourage lending to manufacturing versus services and so on, I think that's a slippery slope, which is not one on which I think the FPC has either particular expertise and certainly no legitimacy, in my view, in trying to distinguish between different parts of the real economy."

KING ON FPC'S SUCCESS:

"If the FPC can manage to have a major influence on the rate at which the banking sector as a whole is expanding its balance sheet or contracting it, I think it would have made an enormous step forward."

KING ON NEEDED REGULATORY CHANGES:

"What needs to change in the culture of regulation is to get away from this game in which the regulators write ever more complex regulation and the banks and their lawyers (write) new products which are the same essentially as the previous products but defined in such a way as to not to be caught by the latest rule and regulation.

"And this leads to a very expensive and unnecessary complex system. And I think there are two very important things (that need to happen) to get over this.

"One is to make sure that regulation is about judgment so that the examples I gave you earlier about complexity, capacity, simple leverage developments, are ones that Paul (Tucker) can say to a bank 'look, frankly, we don't understand why your organisation needs to be so complex, we can't work out what you are doing, so you're going to have to change it, you haven't broken a rule, but too bad, you've got to change it'.

"If you don't want regulation of that kind I don't think you will ever get any proper regulation.

"The second thing we have to do is to recognise that regulators can't regulate everything. There's a limit to what regulation can do. In my judgment it comes pretty quickly.

"And once regulators get bogged down in excessive detail they'll never be a match for the banks. So we have to have a framework in which most of these firms can fail. If they screw up, that we just let them go, go bust.

"What we have to have is a system that enables us to allow the failure of a firm not to undermine the rest of the system.

"And that is why MF Global ... was quite a good example of a company where frankly there was no public interest in saving it. The public interest was in making sure it was possible to administer the failure of the institution without it causing damage to the rest of the financial system.

"That's what we didn't have when Northern Rock failed. That's what we have now apart from the very big global cross-border institutions which are so big that we haven't yet solved that problem, but we are working on it an international level and maybe we will find a solution down the road."

KING ON REGULATORS' JUDGEMENT:

"I'll give you two examples of where we think it's going to be important for regulators to exercise judgement and when they do need to make a break with the style of (rules-based) regulation that we've seen in the past... The regulator should be free to make a judgement about that degree of opacity, even though there is nothing that's written down that could be said to violate a specific detailed rule."

KING ON BOE'S PREFERENCE OF REGULATORY SYSTEM:

"If you want to stay in a highly legalistic and bureaucratic regime for regulation which I think many of the institutions would prefer, then please don't give it to us, we would not want to take on that responsibility. If you want judgement to be exercised, then we are prepared to take it on."

KING ON VICKERS REPORT:

"I'm broadly comfortable with where they (ICB recommendations) are. I think it's a very good report, I think we've created, the government created a commission of outstanding individuals and it would be unwise to go against their recommendations."

KING ON BANK FAILURE:

"The purpose of regulation is about ensuring that the system as a whole is safe, and that the banks that are badly run do fail but their failure doesn't jeopardise the rest of the system."

KING ON FPC:

"The FPC should be responsible for a symmetric response... It certainly can't be (for) credit in the real economy because that will move up and down according to many factors outside the control of the FPC."

KING ON BUFFERS:

"Certainly the role of the FPC is to (play) symmetrically which is to slow things down in a boom but to try to make clear that the buffers of capital and liquidity that banks hold can be run down in a downturn."

KING ON ACCOUNTABILITY:

"A key point I'd make to you is that there's a big difference between consultation and accountability.

"We should not be accountable to the industry, we should be accountable to parliament and the public.

"We should consult the industry and you should be able to ask the industry 'do you think the regulator is doing its job, did it consult you appropriately, is it carrying out its task in a fair and sensible way?'.

"But I don't think we should be accountable to the industry - that's the slippery slope to regulatory capture which was one of the major problems leading up to the crisis."

KING ON SUPERVISORY STRUCTURES:

"The only one (responsibility) that you could conceivably take away that would make sense would be the PRA. I think the MPC and macroprudential is intextricably linked with the sort of issues that central banks are bound up with. If you feel it's too much, then the PRA is the body that you should take away from the Bank of England."

KING ON HARMONISATION OF EU BANK CAPITAL RULES:

"I think the Commission have got themselves in a position, where, as I said, for reasons to a large extent of theology this has become something they find hard to back off.

"But I very much hope they will reconsider it because I don't believe that abandoning maximum harmonisation would in any way undermine the single rule book, or what they're trying to achieve in Europe or a common regulatory framework. I can't understand why this is an argument people are pursuing to this stage."

KING ON ROLE OF BANK'S COURT OF DIRECTORS:

"I think it will be a mistake to think that a body like (BoE) Court (of Directors) should be the vehicle for holding us accountable for policy. It seems to me that we should be accountable for policy, decisions of the MPC, the FPC and the PRA to parliament and to the public."

KING ON CAPITAL REQUIREMENTS FOR BANKS:

"The (European) Commission's current proposal is still, they want to impose maximum capitalisation (on banks) and I'm completely baffled as to why they want to do it."

KING ON RING-FENCING OF BANKS:

"To what extent should the definition of a ring-fence be a role for the regulator as opposed to a role of parliament in setting out the legislation? ... My view quite strongly, our view is that as far as possible it should be down to legislation and not left to the regulator."