Brown hits the ground not running but sprinting
Wednesday 21 May 1997
It is also an eminently sensible piece of institutional reorganisation, so much so that the real curiosity is that it has never seriously been contemplated before. For this we can largely blame the Bank of England, which until Howard Davies arrived as deputy governor a couple of years back refused to countenance any question of separating its monetary from its supervisory functions. Since then the Bank has been dropping heavy hints that it might be prepared to trade away these powers in return for independence, but even this was done with reluctance.
This dogged defence of turf has long been a cause of some bemusement, for being responsible for supervision has never brought the Bank anything but grief. Regulatory failure has to varying degrees been a contributory factor in all the last three big banking collapses, Johnson Matthey, BCCI and Barings. The effect has been to tarnish the Bank's reputation more generally and undermine its case for independence. If the Bank cannot be trusted with supervision, how could it be trusted with monetary policy, was the all too frequent observation.
Never mind the fact that the Bank is actually a rather good supervisor and getting better at it all the time. Per head of staff relative to banking failure, it is one of the most effective regulators in the world. However, it is not for the unpublicised successes that regulators get judged, but for those high-profile cases that slip through the net. Post Barings, the Bank has come to accept that there might be a reputational case for severing its links with supervision.
There are also some very practical reasons for doing so. First, it would not be appropriate for such an important regulatory function as banking supervision to be handled by an independent central bank. The Bank's insistence that great benefit is derived in the conduct of policy from what it learns in pursuing its duties as a supervisor was never a convincing one. Much better to make supervision directly accountable to government through an enhanced SIB (or Investor Protection Agency, as we may have to start calling this behemoth once it has absorbed all the other City regulators).
Second, globalisation and rapid growth of financial services and markets have blurred the borders between modern securities regulation and old style banking supervision. As Barings illustrated, this is already causing a dangerous confusion in lines of responsibility and action. The two functions, then, are in any case being driven together by a common need and purpose.
There is also one further good reason for going this route - it gives Howard Davies a big job to do. So much so that a cynic would suspect he might have had a hand in persuading Mr Brown of the sense of this approach. Not true. Although it looked as though Mr Davies had been left out in the cold by the announcement of operational independence for the Bank two weeks ago, he played no part in this latest development. All the same, it's good to see such an accomplished practitioner making the transition between governments, for in his brief reign as deputy governor he has made great strides in revitalising the Bank's demoralised supervisory ranks. We can expect more of the same once he takes over at the SIB.
As for the planned wider regulation of City regulation, there is thankfully going to be a period of public consultation on all that, both on its structure and funding. The new Government is none the less off to a good start. This isn't change for the sake of it, but rather, a long overdue and necessary reform.
Electricity reforms heading for more delays
The electricity supply industry has fallen foul of Professor Stephen Littlechild again, and 20 million domestic customers can but sit back and watch the sparks fly - unless of course the lights go out first.
The cause of the dispute this time is how much it will cost the regional electricity companies to gear up for 1998 when they lose their cosy monopolies and emerge blinking into the harsh light of competition. According to the RECs, the bill for all the new computers and software that will be needed to make the changeover a success works out at pounds 854m, or pounds 43 for each customer in the land The professor says it will, at most, cost pounds 383m. Clearly the RECs are trying it on.
Since electricity supply only accounts for 6 per cent of the total household bill, it is becoming apparent that, whatever the true costs, the benefits to customers of shopping around will be negligible.
The professor disputes this, insisting that competition in supply will give the RECs increased incentive to buy their electricity more cheaply. This will deliver meaningful price reductions because generation makes up a much bigger proportion of the average household bill.
The reality is that the RECs have got the professor over a barrel. In truth they are not interested, nor ever have been, in competing in anyone else's franchise market and have done their best to sabotage the whole project. Now some of them are telling the professor that if he is not prepared to make customers pay for their gold-plated computer systems then he had better put back the whole process or risk a meltdown.
Liberalising the market but failing to deliver worthwhile price cuts would be an embarrassment to the professor. But presiding over the collapse of the system would be unthinkable. Stand by for more delays to the timetable.
Perceptions of UK catch up with reality
What has changed in a year to cause Britain to scoot on up the World Economic Forum's league table of international competitiveness into seventh position? Not much is the honest answer, but these rankings never were a very objective or scientific exercise.
The text of the report claims Britain's progress is the reward for the upheaval of deregulation and privatisation, and for the two recessions that accompanied the creation of a flexible labour market. There are few experts who would argue any longer with the view that the reforms of the Thatcher years did boost the British economy's potential for growth, but the most important of them were in place by the late-1980s.
The truth is that the jump reported in the latest findings is the result of perceptions catching up with reality. Most of the hard figures that go into the construction of the rankings change very little year to year. What changes most is the results of the survey of international executives which also feeds into the league table. It is these executives who have realised at last that we are now well over the British disease.
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