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.

peopleFrankie Boyle responds to referendum result in characteristically offensive style
Life and Style
Couples have been having sex less in 2014, according to a new survey
New Articles
i100... with this review
Holly's review of Peterborough's Pizza Express quickly went viral on social media
footballTim Sherwood: This might be th match to wake up Manchester City
Arts and Entertainment
musicHow female vocalists are now writing their own hits
New Articles
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
musicBiographer Hunter Davies has collected nearly a hundred original manuscripts
Blahnik says: 'I think I understand the English more than they do themselves'
Arts and Entertainment
Michelle Dockery as Lady Mary Crawley in Downton Abbey
TVInside Downton Abbey series 5
Life and Style
The term 'normcore' was given the oxygen of publicity by New York magazine during the autumn/winter shows in Paris in February
fashionWhen is a trend a non-trend? When it's Normcore, since you ask
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

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam