Are the Tories right to say they will scrap the Financial Services Authority and pass the supervisory role back to the Bank of England?
I can see the politics of it. The present tripartite arrangement, with the Bank, the FSA and the Treasury yoked together and each blaming the other for the failures, led to catastrophe. This structure was Gordon Brown's creation and therefore to abolish it highlights his culpability. The pitch is that Brown not only messed up the economy, contrary to his intention never to return to "Tory boom and bust"; he messed up bank supervision too.
But good politics do not necessarily make for good economics and there seem to me to be two powerful reasons for holding back before ripping up present arrangements. One is that all institutional change is hard to manage well, and this would create another period of instability. The other is that the Bank's record on supervision is not exemplary. There was the spectacular failure of BCCI, which made many people ponder whether it was in the Bank's self-interest to have to deal with that sort of thing. And the Bank did not cover itself with glory in the run-up to the present crisis. Still, the fact is that the FSA will be abolished – that must be a 90 per cent odds-on bet. The Tories want to rub Brown's nose in the dirt, and this is another way of so doing. So the question then will be how to make the new system work better than the present one. Some thoughts.
The first is that the new body, within the Bank, needs a degree of autonomy. For practical reasons there is a case for retaining its location in Canary Wharf, but it also needs autonomy so that it can maintain its career structure. The second is that it will stand or fall on the detail of supervision. So we need to work out what has worked and what has not. My own feeling is that there was far too much box-ticking, an emphasis on process, not result. Third, the body needs teeth. It is only useful to the banking industry (and us) if it is truly credible, because faith in banking needs to be rebuilt if the economy is to flourish.Reuse content