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The cowardice of regulators should worry us

So it's official. The Governor of the Bank of England does indeed have more power than God, at least when it comes to London's financial centre. Even though he's not (officially) a regulator and didn't know there was anything wrong with Libor for ages. The Financial Services Authority's top brass was screaming for change at Barclays for months, but to no avail.

One quiet word from Sir Mervyn King in the ear of the Barclays chairman Marcus Agius, however, and the job was done. The era of Bob Diamond as chief executive was over.

That sort of apparently unfettered power frightens people. It certainly scared Andrew Tyrie, the chairman of the Treasury Select Committee, particularly when Sir Mervyn admitted that he didn't discuss what he planned to say to Mr Agius with the Bank's Court or with anyone much beyond Lord Turner and a couple of very senior colleagues.

Mr Tyrie won't be alone. The pro-business lobby will be spitting tacks about the "dangerous development" of a central bank being free to hire and fire the bosses of private institutions at will. "This should be a matter for the board and for shareholders", they will huff and puff. Such an argument is quite wrong, even delusional. Banks are no ordinary private-sector institutions. They operate under a de facto state guarantee. Even now, after a swath of regulatory reforms and reams of new rules, the prospect of a giant or even a medium-sized bank failing stops watchdogs from sleeping at night. It probably ought to stop us from sleeping, too. Because it is very real. So it won't be allowed. If a bank in future finds itself in a similar place to that in which Royal Bank of Scotland found itself in 2008, it will run cap in hand to the taxpayer. And the taxpayer will cough up.

It is only right that regulators should be able to exercise veto power on appointments and have the power to terminate appointments that go wrong. Ask yourself this question: would we be in quite the mess we are in now if the watchdogs had been more assertive when a certain Fred Goodwin was driving RBS off a cliff?

Barclays' own governance arrangements certainly weren't up to the job of reining in Mr Diamond. Lord Turner, the chairman of the Financial Services Authority, couldn't have been much clearer about his concerns in a letter he sent (and which has since been published) to Mr Agius in April. Yet it only merited a relatively short discussion at Barclays board.

It is not the apparent power of the regulators that should worry us. It is their cowardice and the contortions they were performing to avoid using their power when they needed to.

Perhaps this will change with the Bank of England again assuming real (rather than informal) regulatory powers.