Bank defies the Treasury again as it seeks new powers

Financial Stability Report set to challenge Chancellor as Bank of England insists banks should be smaller

The Bank of England today launched its play for increased powers over the banking system, just days before the Government publishes its own White Paper on banking regulation.

The latest Financial Stability Report from the Bank is likely to heighten the tensions between Mervyn King and the Chancellor, Alistair Darling, who yesterday said the Governor's views on banking regulation had been considered, despite his claims earlier this week that he had not been consulted on the content of the White Paper, which is published next week.

The Bank's report, meanwhile, said that "banks should not be too big or too complex" – a view rejected by the Chancellor in his Mansion House speech last Thursday – as well as warning that the UK's financial system is still "vulnerable to high leverage" and that the "funding gap" between retail deposits and loans was currently being filled to a large degree with taxpayers' money.

The Deputy Governor for Financial Stability, Paul Tucker, said: "The policy debate now underway matters enormously if we are to achieve a more stable financial system in the future."

The Financial Stability Report sets out in detail some of the powers the Bank deems necessary to manage systemic risk, including:

*Greater disclosure of the risks that institutions run, possibly including public disclosure of their regulatory capital positions;

*A "credible threat of closure/wind down for financial institutions";

*A pre-funded deposit insurance scheme;

*Higher capital and liquidity buffers to "self-insure" against stress;

*Enhanced capital requirements for banks that pose a systemic risk to the system;

*A debate on whether banks that are "too big to fail" should be broken up.

The Bank said that the larger banks should be forced to become smaller and simpler in their legal structures, warning that it may be impossible to regulate groups that comprise as many as 2,000 separate legal identities.

The report marks another stage in the Bank's campaign to establish the philosophy of "moral hazard" to the centre of banking oversight. "If banks, shareholders or creditors are protected from losses, banks are more likely to take excessive risks and their incentives to monitor and discipline management are weakened," it said. "A credible threat of closure is inherently more difficult for firms which are large, complex or which have international reach."

The Bank also persisted in its preference for "narrow" or "utility banking", which has been ruled out by the Treasury. "Possible measures could include limiting the scope of banks' businesses to a narrower range of relatively low-risk activities, or imposing higher capital and liquidity charges." The Treasury is thought to view these ideas as unrealistic.

Many of the report's proposals are relatively uncontentious, but the desire of the Bank to intervene to vary the capital requirements of banks both to manage systemic risk and to tame the credit cycle is proving an increasingly bitter point of contention between Threadneedle Street and Downing Street, which is suspicious of it.

Some believe that the Bank's proposals would simply mean that commercial banks would be faced with two possibly conflicting sets of regulatory demands.

There is also the belief in some quarters that granting the Bank its wish to manage the credit cycle, on top of its existing control of interest rates, would mean turning over the management of the British economy to an unelected figure in Threadneedle Street – politically impossible. And while the Conservative Opposition appears more sympathetic to Mr King's wishes, the Government does not.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Day In a Page

John Palmer: 'Goldfinger' of British crime was murdered, say police

Murder of the Brink’s-MAT mastermind

'Goldfinger' of British crime's life ended in a blaze of bullets, say police
Bodyworlds museum: Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy

Dying dream of Doctor Death

Dr Gunther von Hagens has battled legal threats, Parkinson's disease, and the threat of bankruptcy
UK heatwave: Temperature reaches 39.8 degrees on Central Line - the sweatiest place in London

39.8 degrees recorded on Tube

There's hot (London) and too damn hot (the Underground). Simon Usborne braved the Central line to discover what its passengers suffer
Kitchens go hi-tech: From robot chefs to recipe-shopping apps, computerised cooking is coming

Computerised cooking is coming

From apps that automatically make shopping lists from your recipe books to smart ovens and robot chefs, Kevin Maney rounds up innovations to make your mouth water
Jessie Cave interview: The Harry Potter star has published a feminist collection of cartoons

Jessie Cave's feminist cartoons

The Harry Potter star tells Alice Jones how a one-night stand changed her life
10 best barbecue books

Fire up the barbie: 10 best barbecue books

We've got Bibles to get you grilling and smoking like a true south American pro
Seifeddine Rezgui: What motivated a shy student to kill 38 holidaymakers in Tunisia?

Making of a killer

What motivated a shy student to kill 38 holidaymakers in Tunisia?
UK Heatwave: Temperatures on the tube are going to exceed the legal limit for transporting cattle

Just when you thought your commute couldn't get any worse...

Heatwave will see temperatures on the Tube exceed legal limit for transporting cattle
Exclusive - The Real Stories of Migrant Britain: Swapping Bucharest for London

The Real Stories of Migrant Britain

Meet the man who swapped Romania for the UK in a bid to provide for his family, only to discover that the home he left behind wasn't quite what it seemed
Cheaper energy on the way, but it's not all sunshine and rainbows

Cheaper energy on the way, but it's not all sunshine and rainbows

Solar power will help bring down electricity prices over the next five years, according to a new report. But it’s cheap imports of ‘dirty power’ that will lower them the most
Katy Perry prevented from buying California convent for $14.5m after nuns sell to local businesswoman instead

No grace of God for Katy Perry as sisters act to stop her buying convent

Archdiocese sues nuns who turned down star’s $14.5m because they don’t approve of her
Ajmer: The ancient Indian metropolis chosen to be a 'smart city' where residents would just be happy to have power and running water

Residents just want water and power in a city chosen to be a ‘smart’ metropolis

The Indian Government has launched an ambitious plan to transform 100 of its crumbling cities
Michael Fassbender in 'Macbeth': The Scottish play on film, from Welles to Cheggers

Something wicked?

Films of Macbeth don’t always end well - just ask Orson Welles... and Keith Chegwin
10 best sun creams for body

10 best sun creams for body

Make sure you’re protected from head to toe in the heatwave
Wimbledon 2015: Nick Bollettieri - Milos Raonic has ability to get to the top but he must learn to handle pressure in big games

Nick Bollettieri's Wimbledon files

Milos Raonic has ability to get to the top but he must learn to handle pressure in big games