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Buck stops at Treasury

• Robert Peston
• 4 Jan 08, 10:00 AM

The with the is perhaps more interesting for what he doesn鈥檛 spell out, rather than what he makes explicit.

Alistair Darling says:
鈥淭丑别 has two clear responsibilities: one is monetary policy and the other is financial policy. I won鈥檛 do anything that impairs or affects the Bank of England鈥檚 duties with regard to monetary policy鈥�.

However he pointedly refuses to give the same commitment that he won鈥檛 erode the Bank of England鈥檚 powers relating to the maintenance of the stability of the financial system.

That鈥檚 a pretty clear nod that, as the tries to mend the gaps in the regulatory net exposed by the Northern Rock debacle, the Bank of England will be a loser 鈥� with the empire of the likely to be expanded.

Otherwise, he gave a sense of direction without committing the Treasury to the detail of future reform.

This is what I took away from it:

a) In any future financial crisis, the Chancellor would be firmly in charge through a emergency committee. The FSA and the Bank of England would be relegated to an advisory role, as opposed to their current status in the so-called 鈥渢ripartite鈥� as full decision-making principals.

b) A new insolvency system would put be put in place for banks, to address the inadequacy of the current corporate bankruptcy regime as it applies to banks that run out of funds. In the case of Northern Rock, the Treasury has not dared put it into administration under insolvency procedures, because the Rock鈥檚 depositors would be unable to draw on their funds for weeks and possibly months. Darling wants a new system that would allow retail savings and deposits in a troubled bank to be ring-fenced 鈥� such that depositors in that bank could have confidence that they would still be able get hold of their precious cash.

c) In the application of this new bank insolvency system, powers would be given to the Financial Services Authority to break up any seriously troubled bank into a 鈥済ood bank鈥�, that would hold the retail deposits and the decent assets, and a 鈥渂ad鈥� bank, that would hold the rest.

d) Once any bank asked for emergency funds from the authorities, its board would no longer be in charge. The directors of the bank would lose their ability to direct the organisation as a condition of receiving help 鈥� and the rights of the bank鈥檚 shareholders would also be reduced in the process. That would prevent a recurrence of the extraordinary stand-off at the Rock, where the taxpayer is exposed to the tune of 拢57bn but where the power of the Treasury to direct the bank is highly circumscribed.

All that said, many vital questions remain unanswered by the Chancellor. These include:

1) What would constitute the kind of 鈥渆mergency鈥� that would put the Chancellor in the hot seat in this way?

2) How would the authorities distinguish between banks that run out of money due to their own ineptitude and banks that suffer in a general liquidity crisis?

3) Would shareholders in a troubled bank lose all rights when that bank is given emergency support?

But what Alistair Darling really needs to explain is why the FSA deserves to receive more powers. Arguably if it had exercised its existing responsibilities in a more rigorous way, Northern Rock would never have been allowed to lend so much money underpinned by so little capital 鈥� and we as taxpayers would not now be propping it up to the tune of 拢2000 for each and every one of us.

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