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
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Guru Careers: Tax Manager / Accountant

£35 - £50k DOE: Guru Careers: A Tax Manager / Accountant (ACA / CA / CTA) is n...

Ashdown Group: Contracts Executive - City of London

£35000 - £37000 per annum + benefits: Ashdown Group: Contracts Executive - Cit...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree Group have been well esta...

Recruitment Genius: Call Centre Debt Collector - Multiple Roles

£21000 per annum: Recruitment Genius: This is an exciting opportunity to join ...

Day In a Page

Giants Club: After wholesale butchery of Idi Amin's regime, Uganda’s giants flourish once again

Uganda's giants are flourishing once again

After the wholesale butchery of Idi Amin's regime, elephant populations are finally recovering
The London: After 350 years, the riddle of Britain's exploding fleet is finally solved

After 350 years, the riddle of Britain's exploding fleet is finally solved

Archaeologists will recover a crucial item from the wreck of the London which could help shed more light on what happened in the vessel's final seconds
Airbus has patented a jet that could fly from London to New York in one hour

Airbus has patented a jet that could fly from London to New York in one hour

The invention involves turbojets and ramjets - a type of jet engine - and a rocket motor
10 best sun creams for kids

10 best sun creams for kids

Protect delicate and sensitive skin with products specially formulated for little ones
Tate Sensorium: New exhibition at Tate Britain invites art lovers to taste, smell and hear art

Tate Sensorium

New exhibition at Tate Britain invites art lovers to taste, smell and hear art
Ashes 2015: Nice guy Steven Finn is making up for lost time – and quickly

Nice guy Finn is making up for lost time – and quickly

He was man-of-the-match in the third Test following his recall to the England side
Ashes 2015: Remember Ashton Agar? The No 11 that nearly toppled England

Remember Ashton Agar?

The No 11 that nearly toppled England
Turkey-Kurdish conflict: Obama's deal with Ankara is a betrayal of Syrian Kurds and may not even weaken Isis

US betrayal of old ally brings limited reward

Since the accord, the Turks have only waged war on Kurds while no US bomber has used Incirlik airbase, says Patrick Cockburn
VIPs gather for opening of second Suez Canal - but doubts linger over security

'A gift from Egypt to the rest of the world'

VIPs gather for opening of second Suez Canal - but is it really needed?
Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Jeremy Corbyn dresses abysmally. That's a great thing because it's genuine

Fashion editor, Alexander Fury, applauds a man who clearly has more important things on his mind
The male menopause and intimations of mortality

Aches, pains and an inkling of mortality

So the male menopause is real, they say, but what would the Victorians, 'old' at 30, think of that, asks DJ Taylor
Man Booker Prize 2015: Anna Smaill - How can I possibly be on the list with these writers I have idolised?

'How can I possibly be on the list with these writers I have idolised?'

Man Booker Prize nominee Anna Smaill on the rise of Kiwi lit
Bettany Hughes interview: The historian on how Socrates would have solved Greece's problems

Bettany Hughes interview

The historian on how Socrates would have solved Greece's problems
Art of the state: Pyongyang propaganda posters to be exhibited in China

Art of the state

Pyongyang propaganda posters to be exhibited in China
Mildreds and Vanilla Black have given vegetarian food a makeover in new cookbooks

Vegetarian food gets a makeover

Long-time vegetarian Holly Williams tries to recreate some of the inventive recipes in Mildreds and Vanilla Black's new cookbooks