James Moore: We must be deluded to think that the Bank of England has too much power

 

Outlook 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.

Banks hold more capital now. They have been told to ring-fence their retail operations. A few limits have even been placed on the casino. But it doesn't alter the underlying issue. As Larry Kotlikoff (one of Sir Mervyn's favourite economists) has pointed out, it might only take a relatively small adjustment to gilt yields to tip the whole sector over the precipice again.

Given these facts, 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. No wonder the board was criticised as being "in denial" yesterday. Barclays governance structures have been exposed as deeply deficient.

But nor should Lord Turner escape criticism. He clearly wanted Mr Diamond gone but despite the fact that he knew Barclays board wasn't hearing what he wanted them to hear, he wasn't willing to say what he needed to in terms they couldn't help but understand.

It is hard to escape the conclusion that he lacked the guts. Instead, he relied upon hints – broad ones, it's true – but hints nonetheless, calling for a change in culture but explicitly leaving it to the board to decide how that change should be effected. Their decision was to leave it in the hands of Mr Diamond, while Mr Agius (whom the FSA would have preferred to remain in place) felt that the implication was that he should resign. Such miscommunication is more appropriate to the West End stage and its farces than it is to the serious business of regulating an enormous bank.

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 once again assuming real (rather than informal) regulatory powers. If it doesn't, London's tattered reputation as a financial centre may end up frayed beyond repair.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18000 per annum: Recruitment Genius: A position has arisen within th...

Ashdown Group: Development Manager - Rickmansworth - £55k +15% bonus

£50000 - £63000 per annum + excellent benefits : Ashdown Group: IT Manager / D...

Recruitment Genius: Security Officer

£16500 per annum: Recruitment Genius: Applicants must hold a valid SIA Door Su...

Ashdown Group: Business Analyst - City, London

£50000 per annum: Ashdown Group: Business Analyst - Financial Services - The C...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss