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Tories To Give Sweeping New Powers To Bank

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Tories to give sweeping new powers to Bank

The Bank of England would regain primary responsibility for regulating big banks and financial institutions of importance to the health of the economy under radical plans to overhaul financial regulation being drawn up by the Tories.

I've learned that the shadow chancellor, George Osborne, will overhaul in a fundamental way the Tripartite System created by Gordon Brown in 1997, which created the Financial Services Authority as the super-regulator for all financial institutions, with the Bank of England and the Treasury retaining a role in decisions affecting the stability of markets and the economy.

Mr Osborne believes the distribution of responsibilities between the three institutions has been blurred and inefficient. So as part his overhaul, the Bank of England would get back much of the regulatory and supervisory functions that Gordon Brown removed from it, when he was chancellor.

However the Conservatives are unlikely to confirm any of this for several days. They will unveil the precise details of which financial institutions would fall under the sway of the Bank of England in the coming fortnight - probably after the Treasury publishes its paper on financial regulation next week.

What's unclear is whether the Bank of England would be given responsibility for the health only of big banks, or whether it will also be charged with monitoring and supervising substantial insurers too.

However, the essence of what George Osborne wants to do is similar to what the US president unveiled last week: Barack Obama said he intended to give the lead role to the US central bank, the Federal Reserve, in maintaining the soundness of all systemically important financial institutions.

It's plain that the chairman of the Financial Services Authority, Adair Turner, has an inkling of what the Tories are planning.

When giving evidence yesterday to the Treasury Select Committee, Lord Turner said there was an argument that the Bank of England should take back from the Financial Services Authority total responsibility for banking supervision - and he would not be fighting to the death to keep it.

He was "agnostic" about such a reform, he said.

As it happens, the Governor of the Bank of England, Mervyn King, has been demanding that that the Bank should have the formal power to boss banks around (see my note, "Why King changed his mind").

But he has implied that he wants to share this responsibility with the FSA, rather than to have the lead or primary role.

The Tories, however, are not in favour of giving Mr King only the power to meddle in what banks are doing, as and when it suits the Bank of England, while leaving the burden of the regulatory role with the FSA. That would lead to confusion and wasted effort, it believes.

Mr King may not, therefore, be completely thrilled by the Tory plans - because supervising banks has the potential to do more damage to the reputation of his venerable institution than anything else a central bank can conceivably engage itself in.

In practice, it may be seen to suit the Bank that when there's a public outcry about the unholy mess at a Northern Rock, or an HBOS or a Royal Bank of Scotland, the Bank is well clear of the line of fire, as the smelly stuff coats the FSA.

When King and his colleagues reflect on the risks associated with banking supervision, they may determine that co-operation with the FSA is superior to taking over one of its central functions.

Turner yesterday offered Mervyn King a model of co-operation that paid due deference to the majesty of the Bank of England.

A new committee for curtailing excessive lending by banks, as and when credit and asset bubbles start to form, should be chaired by the governor and have a majority of its members drawn from the Bank, said Turner.

But it would also include FSA representatives and it would be informed by analysis provided by both Bank and FSA.

As for responsibility for ensuring that the decisions of this mooted Credit Policy Committee were implemented by banks - that if banks were instructed to increase their holdings of capital relative to loans or to hold more cash - that would naturally fall to the FSA, if it were to retain its banking supervisory role.

In the City, bankers tell me that what they most want is an end to the bickering between the Bank of England, the FSA and the Treasury about who does what.

Update, 11:32: Having dug a little deeper, I have learned that - under the Tory plans - the Bank of England would have supervisory and regulatory responsibility for our biggest banks and our biggest insurers. So the likes of Royal Bank of Scotland, Barclays, HSBC, Lloyds, the Prudential, Aviva and Legal & General would all fall under its sway.

The role of the Bank of England would be to ensure that they were not taking excessive risks, that they had sufficient capital and liquidity, and so on.

As for the FSA, it would retain a relationship with these institutions, in the sense that it would still be in charge of making sure they conduct business with customers in a fair and proper way. To use the jargon, it would remain the authority in respect of "conduct-of-business" rules.

What's driving the Tories to make these changes?

Partly, it's down to feedback received by George Osborne's team from City firms, to the effect that the FSA hasn't raised its game sufficiently since it pledged to do so more than a year ago, after the Northern Rock debacle.

But the primary motivation is the widespread acknowledgement that the health of certain big banks and huge insurers, and the way they invest and lend, has profound implications for the health of the economy.

In other words, what's known as micro-prudential issues dovetail with macro-prudential issues. And if that's the case, it would make sense to put the central bank, the Bank of England, in charge of both. Or so the shadow chancellor believes.

Makes sense, but do we really want Merv in charge of the commerical banks again?

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Guest UK Debt Slave
Tories to give sweeping new powers to Bank

Makes sense, but do we really want Merv in charge of the commerical banks again?

Why?

More control to an unelected bank that operates beyond any democratic oversight

Similar things happening in America. Obama is giving more power to the Federal Reserve to regulate

Very frightening frankly.

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Why?

More control to an unelected bank that operates beyond any democratic oversight

Similar things happening in America. Obama is giving more power to the Federal Reserve to regulate

Very frightening frankly.

Having one unelected institution in charge is better than three I imagine, and a heck of a lot cheaper.

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Having one unelected institution in charge is better than three I imagine, and a heck of a lot cheaper.

Agreed. Also it's better than having government directly be responsible!

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Agreed. Also it's better than having government directly be responsible!

I take the point that government isn't fit to run monetary policy

I just don't believe giving that kind of power to the Bank of England is very sensible either.

If anything, it just demonstrates that democracy and parliament is an utter shambles. At least you can kick them out every few years. How can you challange the power of a central bank?

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