City: Untouchables at the Bank of England

IF YOU thought Lord Justice Bingham's report on the Bank of England's handling of BCCI would provide angry depositors with the ammunition they need to take legal action for negligence, think again. A number of local authorities which lost money in the collapse are already suing. They are only wasting their time and money. That is not because the report is the whitewash many once feared it would be - far from it. In its totality, it amounts to a devastating indictment, an appalling chronicle of supervisory mismanagement, cock-ups, failings and inaction stretching back over 19 years.

The language is admittedly considered and restrained. Lord Justice Bingham bends over backwards to understand the imperfect, difficult nature of banking supervision and the particular problems associated with regulating BCCI. 'It is not a story which lends itself to simple categorical judgements', he says. So his judgements are complex, fair and balanced - and all the more devastating for it.

For the local authorities and thousands of others who were let down by the Bank of England's failings, however, it really does not matter what Lord Justice Bingham says. He could have accused those responsible for supervision of being a bunch of lazy incompetents who couldn't have regulated a whelk store and it would not have made a blind bit of difference. Under the 1987 Banking Act, the Bank of England is given legal immunity in all but the most extreme and unthinkable of cases. In order to sue the Bank successfully for supervisory failure, you have to prove bad faith - in essence, that the Bank deliberately set out to damage the interests of depositors. To be able to show mere negligence isn't good enough. As it is, Lord Bingham has plenty of criticism for the Bank's failure to spot the massive fraud, money laundering and terrorist activities going on right under its nose, but he never accuses it of outright negligence.

Indeed, the Bank feels almost vindicated by the report. Certainly Brian Quinn, who has headed supervision at the Bank since the early 1980s, doesn't look or behave like a man about to face the axe. Robin Leigh-Pemberton is equally determined not to fall on his sword - it is his final year as Governor anyway. Unsurprisingly, they prefer to concentrate on the positive aspects. Lord Justice Bingham finds that the present system of supervision has on the whole served the community well. Radical solutions, such as setting up a separate authority for banking regulation, are rejected in favour of minor tinkering at the edges.

It is the sad lot of a regulator that he is on something of a hiding to nothing. You only see the failures; the successes go unnoticed. But it is equally true that in almost any other walk of life, heads would have rolled long ago for such a debacle. If anything even remotely approaching this had happened in the private sector, you also would have been able to sue for compensation.

In the US, there is a federal insurance scheme that repays depositors 100 per cent of their money in the event of a banking failure. We have a compensation scheme too, but for larger depositors it pays out a pittance. In this country, it seems, you can't sue, there is no adequate compensation scheme, and you don't even get the satisfaction of seeing those responsible losing their jobs.

The Bank believes it is asking too much to expect regulators to guarantee the position of depositors. Indeed, it goes rather further than this to argue that it would actually be a bad thing. There will always be bank failures, it insists, however good the system of supervision.

If there is no risk for depositors, you might end up with something akin to the situation in the US where the taxpayer is having to fork out hundreds of billions of dollars to bail out savings and loans depositors. With the S&Ls, the Bank argues, managements were reckless and sometimes fraudulent with depositors' money because they knew it was all guaranteed by the federal government and no one would suffer if they lost the lot - nobody, that is, other than the taxpayer. Intellectually, the Bank might have a point, but try telling that to someone who has just seen pounds 50,000 disappear up the Swanee. To them, the Bank's insistence that the public only has itself to blame for placing money with an officially licensed institution looks pretty sick.