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 unforgettable anthology of contemporary reportage
Life and Style
Angel Di Maria is shown the red card
Roger Federer after his win over Tomas Berdych
Life and Style
News in briefs: big pants in 'Bridget Jones's Diary'
fashionBig knickers are back
James Milner is set to sign for Liverpool this week despite rival interest from Arsenal
sportReds baulk at Benteke £32.5m release clause
The controversial Motor Neurone Disease Association poster, featuring sufferer Michael Smith, has drawn a series of angry complaints
newsThis one has been criticised for its 'threatening tone'
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: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Guru Careers: Communications Exec / PR Exec

£25 - £30K: Guru Careers: We are seeking a highly-motivated and ambitious Comm...

Day In a Page

On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific
In this the person to restore our trust in the banks?

In this the person to restore our trust in the banks?

Dame Colette Bowe - interview
When do the creative juices dry up?

When do the creative juices dry up?

David Lodge thinks he knows
The 'Cher moment' happening across fashion just now

Fashion's Cher moment

Ageing beauty will always be more classy than all that booty
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

Health fears over school cancer jab

Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

'I forgive everyone, but I don't forget'

Fifa president Sepp Blatter issues defiant warning to opponents
Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

Weather warning

Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

High hopes for LSD

Meet the volunteer users helping to see if it cures depression and addiction
German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

Saving Private Brandt

A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral