Barings report avoids central issue

Bank of England criticised but supervisory role is not questioned
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The Barings report published today will evade the central question of whether supervisory responsibility should be removed from the Bank of England.

The long-awaited report specifically criticises the way the Bank carried out its supervision of Barings and flaws in its oversight arrangements, but it does not question whether the Bank should relinquish this role, informed sources say.

An executive in the Bank's supervisory division, Chris Thompson, resigned early last week in response to criticism in the report. The Barings report is expected to add fuel to the controversy in financial and political circles about the continuing unsatisfactory nature of financial services regulation in Britain, and specifically whether the Bank of England should be stripped of its regulatory responsibilities and left to focus exclusively on monetary policy.

There is believed to be growing backing for a single, central regulator for financial services that would possess the expertise, resources and cross-sector coverage to look after firms active in banking, securities and fund management. One of the problems pointed out in the Board of Banking Supervision's 500-page report is that the Bank of England was formally the global regulator for Barings, whereas the body with real expertise in the securities business, the Securities and Futures Authority, only looked at aspects of how Barings conducted its business in Britain. The division of responsibilities and reporting lines is believed to have exacerbated the authorities' inability to get a full picture of its activities.

In another response to the collapse of Barings under nearly pounds 900m of derivatives losses, the Securities and Exchange Commission, the umbrella American regulator, and the Securities and Investments Board, the lead City regulator, yesterday said they were strengthening cooperation in overseeing big international securities firms. They are jointly to conduct a detailed study of the financial, operational and management controls used by selected securities firms that conduct significant cross-border derivatives and securities activities. The Barings collapse, which exposed massive failures of risk management and controls both within the merchant bank and inadequate international co-ordination between regulators, has spurred intense efforts to bolster derivatives supervision between various countries' authorities.

In a separate development, charges against Barings of fraud and negligence were lodged last week by a group of international banks. JP Morgan and GE Capital of the US, along with Creditanstalt of Austria and Union Bank of Switzerland, are among institutions that lost money in a German car parts manufacturer, Lignotock. The largest management buyout when it was completed six years ago was led by Baring Capital Investors, the British merchant bank's Munich-based subsidiary. The banks have begun a High Court action in London in an attempt to recover funds.

The complainants allege that they were supplied misleading information.

Hamish McRae, page 18