One cheer for Darling’s reforms
Chancellor Alastair Darling has ignored the first rule of holes: if you’re in one, stop digging. He could have produced a few motherhood-and-apple pie reforms of the banking system, to give the impression of activity. Instead, he has dug in, proposing an upgrade of Britain’s failed “tripartite” system of regulation.
No one expected him to admit as much, but the arrangement that split responsibility between the Treasury, the Bank of England and the Financial Services Authority (FSA), was doomed from the start.
Unfortunately, the Conservatives have already pledged to dismantle it and give more power to the Bank so, faced with political reality, Darling has plumped for reinforcing failure. His new “Council for Financial Stability” is effectively the tripartite authority on a statutory footing. It will be required to review the Bank’s and FSA’s publications on financial stability and to make public recommendations. The FSA is also given a “statutory objective” to strive for financial stability.
It’s hard to see how this will make any difference. The FSA and Bank are engaged in a turf war, while Mervyn King, the Bank’s governor, revealed recently that the Treasury had not shared this White Paper (policy document) with him.
At the retail level, Darling’s introduction of a new “national money guidance service”, to be funded by a levy on the financial services industry, looks like an attempt to grab the headlines. Banks and insurers undoubtedly sell complex products whose main purpose is to generate fees but the FSA already has a mandate to protect and to educate the consumer.
He has also accepted the recommendations from Adair Turner, chairman of the FSA, to oblige banks to have more capital and sufficient liquidity. However, he seems to have no more idea than anyone else quite how to do it.
He has resisted the temptation to split commercial banking from investment banking, instead requiring banks to “make a will” so that they are easier to wind up in the event of insolvency, thus limiting the damage to the rest of the economy. Again, much easier said than done.
Darling proposes to fix one flaw in Britain’s deposit protection scheme by pre-funding it. That looks like yet another demand on banks’ scarce capital. Better communication, coordination and transparency between regulators is needed to avoid another crisis. Unfortunately, as Turner has himself admitted, they were not competent to spot the last one, and all the transparency in the world will not equip them to spot the next. Perhaps these measures are just motherhood-and-apple-pie, after all.
(Edited by David Evans)