View from City Road: The Bank may have to bow to its break-up

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The Independent Online
Like most nationalised institutions, the Bank of England is not too keen on being broken up. It fought off Treasury proposals in 1985 to take away its banking supervision functions in the wake of the collapse of Johnson Matthey Bankers, a battle more closely fought than generally realised at the time. Lord Lawson, who was Chancellor, still thinks it a mistake to have backed off.

After the BCCI fiasco, the Bank again fought its corner successfully, by persuading Lord Justice Bingham that it should keep the supervision department, whose job is to make sure banks behave themselves. It conceded a strengthening of the Board of Banking Supervision, a body with outsider members that oversees the department. The board was set up as a sop to the Treasury after the 1985 row.

A report by the Roll Committee for the Centre for Economic Policy Research last month leaned towards a break-up. The committee also favoured switching gilt sales to the Treasury and ending the Bank's role as banker to the government. Today, the Commons Treasury Committee is expected to toy with, but back away from, ending the supervision role.

There have been several arguments for a break-up. One is the potential conflict of interest between anti-inflation policy and the pressure - however rare - to cut rates to stabilise the banking system in a crisis. A more persuasive case is that the boundaries between banking, securities and insurance supervision are becoming so blurred that we may soon need a single financial regulator.

Against that, the Bank has a pivotal role in the payment system, where a collapse of a large player could be devastating. And if a bank is rescued, it is the central bank that acts as lender of last resort. To limit the risks, it is argued, the front-line organisation should supervise the banks it deals with.

But independence would be a new factor. Failure and fraud are bound to recur in banking. Sooner or later, the problems of grappling with disasters would compromise the Bank's reputation with the public and damage its standing as the arbiter of interest rates. The Roll report was right to say a move to independence would shift the balance of the argument, towards separating the 'poisoned chalice' of supervision from the Bank.

That is not the sort of message the Bank wants to hear as it approaches its 300th anniversary next year. But if independence becomes a political reality, a streamlined, highly accountable body concentrating on monetary policy and the markets might be an easier concept to sell than an organisation trying to be all things at once. Giving up supervision would be a small price to pay.

The Bank, meanwhile, is to reorganise itself into two broad functions: monetary policy and markets; and supervision and payment systems. Far from smoothing the way to a break-up, this will make change harder.