Adrian Hamilton: The question remains: is King up to the job?

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The Independent Online

On Tuesday, Gordon Brown appeared with his fellow European Union leaders to declare they were committed to bringing greater transparency to banks. The following day, Chancellor Alistair Darling said he was changing the rules to allow the Bank of England to launch rescue missions in secret.

Transparency is a wonderful thing. If only we had more of it in politics. Yesterday's Winograd Commission report, examining Israel's invasion of Lebanon last year, was a model for the examination that should have taken place in Britain over our invasion of Iraq. But transparency of itself doesn't make better decisions, although it may help prevent bad ones. Take the action to rescue Northern Rock, which has caused so much angst within government and led to such agonising over the decision to re-appoint the Bank of England's Governor, Mervyn King. The fact is we still don't know – and may not know for years – just what were the debates that led to the belated and dramatic decision to guarantee depositor funds after the scenes of investors queuing up to withdraw their money.

Mr King said the Bank was caught out by the crisis, as was the Treasury, because the law did not give the kind of depositor protection and insolvency rules which would have allowed Northern Rock to fail. Even efforts to prop up Northern Rock before its problems became public were stymied by a rule that insisted the Bank declare any support, while any state-aided takeover could have left the Government open to lawsuits from rival banks citing unfair competition.

All that may be true. But it is also true that Mr King, from what we know, was terribly slow to realise the scale of the Rock's problems, refused to pump liquidity into the market on the grounds that this would merely protect Northern Rock and others from the consequences of their own bad actions, that he was reluctant to make the Bank of England leader in any rescue, and he was notoriously unwilling to accept any responsibility for the fiasco after the event.

The result in human terms is that we now have a Governor who no longer has the confidence of the Chancellor and the Prime Minister, who were nonetheless forced to re-appoint him for fear of the signals it might send to the financial community. Mr King, meanwhile, feels deeply resentful at the political attacks on him and, to all appearances, still does not believe he could have done anything different in the Northern Rock crisis, let alone the general credit squeeze brought on by the sub-prime mortgage dealings of the international banks. Indeed, it is not at all clear that Mr King has any appetite yet for acting as umpire, should another crisis like this occur.

Changing the rules along the lines outlined by Mr Darling is not going to solve this. The new powers he proposes should make it easier for a forceful Bank Governor, like Mr King's predecessor Eddie George, to act to rescue a failing bank or minimise the effects of letting it fail. But then a figure like Mr George would never have let Northern Rock's troubles get to this point in the first place. Nor does Mr Darling's statement really clarify the central issue of regulatory responsibility be tween the Bank and the Financial Services Authority, which so bedevilled an early appreciation of the Northern Rock disaster.

The problem for Britain is that it is now a global financial centre – perhaps the financial centre – with a vulnerable reliance on the banking industry as the major source of its employment, growth and investment. Yet it has a regulatory system constructed, and staffed, as if we were a middling European state on the fringes of world financial markets.

Talking to an audience of West Country businessmen at the height of the crisis last week, Mr King gave a bravura speech about the monetary pressures facing the Bank today. It was an address with all the lucidity one might expect from one of the finest intellects in economics. But the picture he gave was of Britain as a solitary little barque buffeted by the winds from west and east. Nowhere did he suggest that, as a global centre, we were part and source of those tempests.

His only reference to his interest in the troubles in Britain's biggest industry was a self-justifying declaration that he had, two years ago, warned that "risk premia have become unusually compressed and the expansion of money and credit may have encouraged investors to take on more risk than hitherto without demanding a higher return. It is questionable whether such behaviour can persist".

To which one can only ask: what did you about it then and what are you going to do to control it now you have been given a second term?