Credibility test for the Bank

A week after the sensational collapse of Barings, bankers to the Queen and symbol of the country's financial establishment, the initial shock waves of the event may seem to be receding. The fugitive trader Nick Leeson, fingered by the Bank of England and Barings itself as the architect of the crisis, has at last been arrested and charged.

The Serious Fraud Office has been invited to investigate whether Barings was brought down by fraud, as the bank's chairman appears to believe. Barings itself is on the point of being knocked down to a foreign buyer who will, if all goes well, be able to repay the depositors and keep most of the staff in work.

But it would be unwise to think that, with Mr Leeson safely in custody, the pound steady, and Inspector Plod on the case, the reverberations of this remarkable tale are somehow over. From the outset, it has suited the Governor of the Bank of England and the Chancellor of the Exchequer to make out that the Barings crisis is a self-contained event without wider repercussions.

The notion that a single "rogue trader", to use Mr Clarke's phrase, should be able to bring down the most pukka of Britain's City merchant banks is the stuff from which paperback thrillers are (and presumably now will be) made.

Yet to describe the Barings crash as a simple tale of individual wrongdoing is wholly to miss the wider implications of the affair. Although we do not yet know the detailed chain of events that brought the bank to its knees, it is already clear that there are resounding lessons here for the way British financial institutions are managed and the way they are regulated. Given the financial industry's shiftiness in mis-selling personal pensions, the chronic shortcomings of the high street banks and the dbcle at Lloyds, these are not matters remote from the lives of ordinary people.

So what are the lessons? Most obviously, it is plain that Barings' management systems were woefully inadequate for the task of controlling its newly created derivatives trading operation in Singapore. Barings appears to have blundered into a business whose risks it did not understand, whose consequences it signally failed to guard against and whose dynamics it proved unable to handle. The collapse should provoke serious self-examination by the City's institutions, many of which have still to adapt to the more harshly competitive climate inaugurated by necessary deregulation of the 1980s.

But the most important questions still to be answered concern the Bank of England. While the external impact of the crisis has so far been successfully contained, vindicating the decision not to rescue Barings, the Bank remains deeply implicated in the failure to avert the crisis in the first place.

It is too soon to demand that heads must roll, although the position of the Governor and senior colleagues on the supervisory side of the Bank are, or should be, in question. This makes it all the more unacceptable that it is the Governor himself, aided by a team of the great and the good from other parts of the City, who is heading the investigation.

The Bank of England, like many of Britain's older institutions, faces great challenges, from the globalisation of money and from a growing distaste for the opaqueness of quangos. At the same time, more responsibility is being thrust upon it in the fight against inflation.

We need a Bank of England which is properly focused and which commands confidence. That means it should hand over the task of supervising banks to a separate body. It also requires that the investigation into the collapse of Barings be carried out by someone with more credibility than the Governor of the Bank.