With the credit crunch entering its toughest week yet, concerns are growing about the division of UK banking regulation between the Bank of England and the Financial Services Authority.
Amid worldwide panic, the UK money markets have frozen up, with banks hoarding cash to avoid losses and meet potential obligations and about £70bn of short-term debt due to expire in the next 10 days. The liquidity squeeze is the first major test of the split in banking regulation between the Bank andthe FSA.
Before 1998 the Bank of England had sole responsibility for banking regulation, but in that year the Government handed the Bank's power to supervise institutions and promote orderly markets to the fledgling FSA, leaving the Bank with responsibility for the money markets and detecting and acting on threats to the wider financial system.
At the time, the Bank's then governor, Sir Edward George, was said to have considered resigning over the division of powers.
The Treasury Select Committee is already set to grill the Bank and the FSA about how the crisis has happened and where responsibility lies for ensuring the stability of the financial system.
Philip Dunne, a Conservative member of thecommittee, said the Treasury needed to answer questions about the split between the Bank andthe FSA.
"By not having the regulatory function over participants, the Bank is not going to be close enough to what they are up to. Did the Treasury foresee the impact of separation of regulatory activity from the Bank of England to the FSA?" Mr Dunne said.
The Bank has come in for criticism for its aloof stance and reluctance to inject money into the market for three-month debt, in which prices have rocketed as the crisis took hold.
Last week the Bank made limited moves to free the overnight lending market, but said bailing out financial institutions was not its job. But concerns are increasing that the FSA and the Bank have not been acting in unison on the crisis, which is showing up problems with their twin roles.
Geoffrey Wood, professor of economics at Cass Business School, said that when the Bank was the sole regulator it could ease fears caused by lack of information. "The FSA could do it, but the information isn't being gathered by experienced bankers," he said, adding that the FSA's role as consumer protector overshadowed its responsibility for monitoring wholesale markets.
Others have said that in today's global markets the Bank would not be able to shepherd market participants in the way it used to, and the FSA has said throughout the crisis that it had already alerted banks to the need to monitor the riskiness of their books.
Credit markets have been left relatively unsupervised, with ratings agencies grading debt and professionals at financial institutions deciding whether to buy. FSA officials are now said to be visiting all the major banks to get as much information as possible about their credit operations.
The British Bankers Association has complained about multiple regulators, though its comments are aimed mainly at consumer issues. But if the crisisdeepens and moves further into public consciousness, political pressure could build for better co-ordination of regulation of wholesale markets.Reuse content