SO WHO'S in charge of the clattering banking train? Not the government, which barely seems to be in control of anything. Not the Bank of England, and not, without challenge at any rate, the Financial Services Authority (FSA).
Any tripartite system of banking regulation cannot work without communication. Nine months on from the worst banking crisis in 70 years, that basic requirement is struggling to be met. It is not just that there is ill feeling between the Bank and th
e FSA. In evidence to the Treasury Select Committee last week, Bank of England Governor Mervyn King said the Bank had not been consulted about the proposed banking reforms due to be announced this week, and had not even seen a draft of the White Paper.
"I haven't seen a draft of it but no doubt at some point I will", he told MPs. "I'm sure the Chancellor will show it to me before it appears."
King also confirmed that the tripartite committee, comprising the Bank, the Treasury and the FSA, had not met to discuss the legislation. In what many regarded as a sideswipe by the Governor at the Chancellor, King added: "White papers tend to be written somewhat faster than they used to be."
John McFall, chairman of the Treasury Select Committee, described the communication failure as unbelievable: "The tripartite authorities are a communications black hole, which is worrying." Michael Fallon, the leading Conservative on the committee, said the lack of consultation was "staggering – it sounds like the Governor and the Chancellor are growing more distant by the day."
It was at this same torrid session that King described the government's budget deficit as "truly extraordinary" and said that the government needed to have "slightly greater ambition" to bring borrowing down.
This is brave beyond belief. But on the second leg of his tenure, King has nothing to lose. He is determined that big-picture financial market regulation should not go to an FSA that Bank insiders dismiss as incompetent. His stand widens the gulf between the Bank and the Treasury over bank regulation, the public finances and the economy.
But who's listening? Brown is determined to maintain public spending. So the budget deficit gets worse. Meanwhile, the Bank looks set to lose powers. Informed leaks this weekend suggest that Alistair Darling is planning to strengthen the hand of the FSA in the new Banking Act later this year. According to reports he intends to give it a new statutory objective of maintaining financial stability, making it partly responsible for a function currently entrusted to the Bank.
The Chancellor believes the FSA should be responsible for not just for regulating individual banks but for ensuring that the combined impact of their business models is not dangerous to the system.
This is a highly confusing approach. The Bank in its interest rate setting has a critical role in monetary policy and financial stability. But to give the FSA statutory responsibility in this area muddies the waters. What is the competence of the FSA in macroeconomic stability? And who really is in charge?
Earlier last week Lord Adair Turner, chairman of the FSA, warned King that his proposals for the Bank to take charge of financial supervision could be damaging for stability and lead to turf wars. He suggested sharing the role of tackling system-wide risk through a committee.
This smacks of fudge. King has demanded powers for the Bank to carry out its stability role, and he returned to the attack last Wednesday, brushing aside Turner's proposal.
The truth is the tripartite arrangement looks more questionable than ever. Adding to the uncertainty is the likelihood of a change of government soon. Civil servants will be loath to set the seal on permanent change, expecting it would be ripped up by an incoming Tory administration.
Then there is Europe. Gordon Brown returned from the European Council earlier this month claiming to have denied the EU the right to determine which financial institutions he, or his successors, would have to bail out. But has he really succeeded? President Nicolas Sarkozy proclaimed that "Anglo-Saxon" capitalism has been altered by the establishment of new pan-European regulatory bodies. Their names are ominous, and include: the European Banking Authority; the European Insurance and Occupational Pensions Authority; the European Securities and Markets Authority; and the European Systemic Risks Councils. They will have binding powers to investigate and oversee cross-border banking, insurance, pensions and securities, and can issue orders to resolve disputes between member states. Far from these agencies being boxed in, as Brown believes, Sarkozy reckons their remit will increase. History is on Sarkozy's side. All efforts to hold EU institutions to their original remits have struggled to succeed. No-one knows this better than Lord Mandelson, a former EU trade commissioner and strong Europhile. Mandelson would have been in an excellent position to warn the PM of the pending loss of still more national sovereignty.
In the wake of the banking crisis, we have ceded or lost by default huge tranches of control over our financial institutions to the EU, with agendas inimical to our own.
So far there has been an almost total absence of front-page coverage and outrage. While the political focus here has been on MPs expenses, the EU has made a power grab that will cost us billions.
There is now every possibility, even without counting in an SNP financial regulation body for Scotland, a tartan FSA, of our Scottish headquartered banks – Lloyds Banking Group on The Mound and Royal Bank of Scotland in Gogarburn – having to contend with no less than four regulatory masters: the EU, the Treasury, the Bank of England and the FSA. This is simply not sustainable.
The pending regulatory revamp is set to tackle some of the problems arising from the banking debacle. It will include heavier capital and liquidity requirements as well as tighter scrutiny over remuneration. Critics say heavy requirements will make it harder for banks to lend to companies and help the economy revive.
An overhaul of the tripartite supervisory system that failed to spot the risky behaviour two years ago looks unlikely. The Bank appears to have lost the battle for more powers and King looks unlikely to prevail either in his call for big banks to face statutory limits on their size. Rather than decoupling of retail and investment bank activities, riskier functions will be ringfenced, with higher capital charges to keep people's deposits safe and avoid more government bailouts.
This is far from the sweeping changes called for in the immediate aftermath of the crisis and will be seen as a weak Treasury solution. Given the pasting it received last week from the Commons Public Accounts Committee on its handling of the Northern Rock crisis, its authority has been shot to pieces. More credible reform will have to await a general election and a Prime Minister and Treasury with authority to act.
