UK bank supervision reform prolongs muddle -parliament panel

By Reuters Staff
July 31, 2009

By Huw Jones
LONDON, July 31 (Reuters) – British government plans to revamp banking supervision fail to end a muddle over who is in charge and reform of the country’s top market watchdog falls short of what’s needed, a group of UK lawmakers said on Friday.
Britain, hit hard by the credit crunch, was forced to nationalise Northern Rock and Bradford & Bingley banks, engineer a speedy merger of Lloyds and HBOS, and take a majority stake in RBS, all at huge cost to the taxpayer.

Parliament’s treasury committee said in a cross-party report on the banking crisis published on Friday that the government’s proposed changes to the tripartite system of financial supervision were “largely cosmetic”.
But Financial Secretary at the Treasury Stephen Timms said he did not agree, saying the changes “were pretty far reaching”.

The government is looking to improve how the finance ministry, Bank of England and the Financial Services Authority work together to better spot build up of risks before banks are destabilised and require rescuing.

The report said such a revamp still left unclear who decides a bank needs winding up or saving.

“Where responsibility lies for strategic decisions and executive action was, and remains, a muddle”, the report said.

“When the dust eventually settles, the new system must answer the question ‘Who gets fired?’ if and when the next crisis occurs,” it added.

Lawmakers were told regulators occupied “wormholes”, only able to see one part of the financial system and unable to appreciate how risks in the broader picture were building up.

Timms said: “Securing the stability of the economy clearly is a big task and it does require different organisations to work together…I don’t think that can be avoided.

“The question is can we put in place a framework to make sure they make the right judgments, and I think that is what the White Paper does.”

The committee said no new supervisory responsibilities should be decided until decisions were made about the precise tools for intervening in a future crisis.

The report offers little that is radical or not already being addressed at national, European Union or global levels. Many of its more domestically-focused recommendations may fall by the wayside in any case.

The UK opposition Conservative Party, tipped in the opinion polls to win an election due by June 2010, wants far more radical action such as abolishing the FSA and making the Bank of England fully responsible for prudential supervision.

The committee reiterated its criticisms from earlier reports that the FSA “failed dreadfully” to supervise banks in the run-up to the credit crunch but it was changing for the better.

“The FSA must develop the confidence to take unpopular decisions when the economic boom begins again, in the face of both industry and the political class,” the report said.

The lawmaker panel also recommended that senior banking officials should have a qualification in banking.

The FSA said the committee report acknowledged it had identified and rectified “historic mistakes”, that the financial sector has clearly felt this change in approach, and it was actively making judgments about what might happen in future.

“We are using these experts judgments to test the robustness of firms’ business models, their governance framework and to assess whether individuals are fit to run them — regardless of their individual qualifications,” the FSA said.

The report said the FSA needed “automatic tools to put sand in the wheels of financial expansion” without having to prove beyond doubt such action is needed.

The government should ensure there are no banks “too big to save” and a “tax on size” through higher capital requirements would make very big, complicated banks less of a risk, the report said.
The FSA should not rule out a trading ban at retail banks, it added.

(Reporting by Huw Jones, editing by Stephen Nisbet/Toby Chopra) ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

See also: Factbox on committee recommendations

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