Leading Article: The Eagle in Steady Eddie

Phew! Thank goodness! Just when you thought that the Barings collapse meant the end of the world, through the fog of incomprehensible stock market jargon emerges the reassuring figure of Eddie George - Steady Eddie - Governor of the Bank of England. If the latest conventional wisdom is to be believed, Eddie will go down in history as the man who held his nerve, took a gamble and won.

The gamble was the decision, late on Sunday night, not to ask for Treasury money to bail out Barings, after an attempt to put together a rescue package had failed. Mr George's calculation, apparently, was that having failed to secure a lifeboat crewed by the other banks, the situation could still be contained. In the first place, the collapse of Barings was not big enough to cause outright panic. In the second, might it not be a good thing, to paraphrase Voltaire, to let one smallish bank go under pour encourager les autres?

This argument has some real virtues. Discipline is always likely to be slacker when it is believed that someone else will pick up the tab. The sight of a bank as eminent as Barings going under may well have the effect of getting other institutions to keep a beadier eye on their Leesons. Ultimately this internal policing is many times more effective than the improved external regulation which is also required.

And so, as Harold Wilson used to say, it may prove. Whatever the governor's calculations, the real outcome of the George gamble may not be known for some time. Not, in fact, till the next occasion on which a major institution finds itself in trouble. Until now most players in the markets have assumed that a central bank would act promptly to rescue the stricken firm. Next time no one will confidently make that assumption. If the threatened player is large enough, just the rumour of trouble could be enough to set off a nervous chain reaction around the world.

The trouble with placing too much faith in Steady Eddie is that the Bank's record as a regulator and a predictor of banking upsets in the last few years has not been terrific. From the BCCI fiasco to Barings, there has been evidence that the Bank is too complacent, too unwilling to act, too much part of the system that it is called upon to police.

One option is to do what most other countries do. Abroad, central banks are not charged with the prime role of overseeing the banking system. That job tends to be done by ministries and banking commissions. In these places, the central bank's main function is to control interest rates and monetary policy in such a way as to maintain low inflation. A lot of people believe that the Bank of England should assume the same powerful role here in Britain and that the Bank should also become independent from the government, as it will need to be under the terms of European monetary union. The Ken and Eddie show already seems to be inching us in that direction. It is time for the Chancellor to take up the other half of this agenda and give someone else the job of supervising bankers.

The Bank will, of course, argue against such a diminution of its role. But there are real reasons for believing that when it comes to the next crash, Steady Eddie will turn out to have been Eddie the Eagle all the time.