Britain's three-way system of financial regulation has failed, according to a damning report by a powerful House of Lords committee.
Oversight of the financial system has been divided between the Treasury, the Bank of England and the Financial Services Authority for more than a decade under reforms introduced soon after Gordon Brown became Chancellor in 1997. But Lord Vallance, the chairman of the Lords economic affairs committee, criticised the Prime Minister for adding – with one of his most famous soundbites – to the confusion running through officialdom.
"It is clear that in the UK, the tripartite authorities of the Bank of England, the FSA and the Treasury failed to maintain financial stability, in part because it was not clear who was in charge in a crisis and because not enough attention was paid to macro-prudential supervision – oversight of the aggregate effect of the actions of individual banks – in the period when 'boom and bust' was mistakenly assigned to history," said the peer, a former chairman and chief executive of BT.
The committee rounded on the FSA because it "focused on its consumer protection role and failed to take sufficient steps to alleviate risks to the financial system caused by excessive debt and banks' ventures into complex and opaque financial instruments".
The three-way split of responsibility has already faced near-universal censure because it failed to prevent the financial crisis that engulfed the banks during the credit crunch, beginning with the Northern Rock collapse and then spreading to much larger and more systemically important institutions such as the Royal Bank of Scotland, Lloyds and the former Halifax Bank of Scotkand, all of which are now entirely nationalised or majority state-owned.
The International Monetary Fund recently estimated the cost to taxpayers of supporting Britain's banks at £140bn, quite apart from the value of lost output stemming from the most severe recession since the Second World War. The committee says the authorities' failure to take a wider view of the risks to the economy – so-called "macroprudential" supervision – contributed to the crisis.
Macroprudential tools are used by officials to manage the credit cycle: to control the growth of credit in a boom and encouraging banks to lend during a slump. A consensus in favour of these has recently grown up, but with less agreement on precisely how they can be administered and who should be in charge. The Lords' report recommends that the Bank of England is now given "executive responsibility" for this, rather than the FSA.
Under the Banking Act passed earlier this year, the Bank has been given a statutory responsibility for financial stability. The Lords' criticism of the system echoes that offered by the conservative-leaning Centre for Policy Studies think-tank in a pamphlet by Sir Martin Jacomb, an investment banker and external director of the Bank of England for 10 years.
Sir Martin has called for the creation of a "systemic policy and risk committee" and for the FSA to be made a subsidiary of the Bank of England.Reuse content