How streetwise is the Bank of England?

For a man with a reputation as a bruiser, Eddie George looked remarkably chastened during his appearance before the Treasury Select Committee this week. He was fine when it came to lecturing committee members on derivatives - an area where it was hardly going to be difficult to have the upper hand.

But once it got down to the nitty gritty of the committee questioning the Bank of England's supervisory role in the Barings fiasco, Mr George's voice dropped so low he was repeatedly asked to speak up. He exhibited all the traits of a man rattled. And so he should be. The more we learn about how many warning signals and expressons of concern there were within Barings and on the trading floors in Singapore and Japan over a period of many months, the more one has to wonder just how in tune the Bank is with the markets. Or to put it in the words of Brian Sedgemore, the Labour committee member, how streetwise is the Bank?

It is, of course, correct for Mr George to point out that the Bank cannot be expected to know of every day-to-day action of the 500 or so institutions within its supervisory ambit. None the less, clear supervisory failings have been exposed by the affair. Banking and securities trading is now a global business; in these circumstances local supervision becomes wholly inadequate as a preventative system. A much higher level of international co-operation between local regulators therefore needs to be introduced as a matter of urgency.

It is not certain, however, that this of itself would have prevented the Barings collapse. Though Simex, the Singapore futures exchange, appears to have had concerns, it failed to act on them so it hardly seems likely, even in a new spirit of international co-operation, that it would have reported them to the Bank of England.

Furthermore, Nick Leeson's ruinous trades became very much a local London affair, since the margin calls on his positions were financed out of London. In so doing, senior London executives appear to have broken Banking Act provisions which state that Bank of England approval should be sought for large-scale, high-risk exposures. The supervisory procedures that allowed this to happen could hardly be described as robust. Most people would also find any system that allows depositors' money to be used for high-risk proprietary trading, which is what seems to have happened in the Barings case, an inadequate one.

The select committee was absolutely right, therefore, to express scepticism about whether the supervisory failure - if that is what indeed occurred - will be properly exposed to public judgement as a result of the Bank of England's investigations. There is too much a sense of the police investigating themselves in this inquiry. There needs to be a realistic assessment of the Bank's shortcomings, and Mr George's chastened demeanour suggests that he too knows some tough questions will have to be answered.