FSA chief Hector Sants demands powers to fund bank rescues

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The chief executive of the Financial Services Authority proposed yesterday that the Bank of England should not be the only source of emergency funding if a bank was in danger of going bust in future.

Hector Sants told MPs: "There is a question about whether the only route to providing finance should be through the Bank of England ... You could argue it is difficult if the FSA has no locus with regard to funding."

Under rules introduced by Gordon Brown when he was Chancellor, the FSA is responsible for trying to find a buyer for a troubled bank, but the Bank of England holds the purse strings for providing finance. Before the FSA took over supervising banks, the Bank of England was the industry's sole regulator.

Mr Sants said he was not asking for the watchdog to be given a big balance sheet but he said there could be other ways to make funding available if necessary. One option could be for the FSA to ask the Treasury directly for funding in seeking a short-term fix or a takeover for a specific lender if the measure conflicted with the Bank of England's general principles on not bailing out reckless institutions.

The FSA took the lead in trying to find a "private-sector solution" to Northern Rock's funding crisis and came close to arranging a takeover by Lloyds TSB. The Bank of England has since revealed that Lloyds TSB had asked for 30bn of financing at a non-penalty rate to buy Northern Rock and that the Treasury agreed it was not the Bank's role to provide massive loans to public companies.

As the Northern Rock crisis unfolded, regulators found themselves hamstrung by legal restrictions and the untested division of responsibility between the Bank of England, the FSA and the Treasury.

It is not clear that the FSA going to the Treasury could have stopped the Northern Rock crisis. But the authorities are reviewing banking regulations to make sure it works better in future and are seeking greater flexibility.

The Bank has since lent Northern Rock 25bn. Mr Sants and Sir Callum McCarthy, the FSA chairman, told MPs the mortgage lender was solvent but that this was only because of the Bank of England's support. Mr Sants and Sir Callum appeared before the Commons Treasury Select Committee yesterday for the second time since October as part of the committee's inquiry into the recent financial turmoil and the Northern Rock affair. The two-hour session was less heated than the previous session, when MPs tried to pin the blame for the crisis on Sir Callum.

The FSA will publish a paper later this month assessing the effectiveness of its liquidity checks. Sir Callum and Mr Sants admitted that the FSA's supervisory team had not been tough enough in checking Northern Rock's liquidity position even though the watchdog had warned the industry that liquidity was an issue.

They rejected a suggestion by Michael Fallon, the committee's deputy chairman, that supervision of banks should go back to the Bank of England.