LEADING ARTICLE:Three strikes and you're out

After yesterday's report on the spectacular implosion of Barings Bank, "steady" Eddie George looks somewhat less stable on his regulatory feet. Unfortunately the Chancellor has failed to draw the necessary lessons from the Bank of England's rocky performance in an affair which has done serious damage to the reputation of the UK's important financial services industry.

The Board of Banking Supervision report places most of the blame on Nick Leeson, the rogue trader, Barings' managers and auditors. This is fair, so far as it goes, but it risks diverting attention from the problems of banking regulation, which are now too large to ignore. Even allowing for the inherent difficulty of regulating an industry which is complex, global and rapidly changing, the failures catalogued in yesterday's report are remarkable.

The Bank did not question Barings' data; it made no visits; it failed to review Barings' overseas operations. It allowed the bank to expose itself in Japan and Singapore far beyond what was prudent given the size of Barings' capital base. Then the Bank did little or nothing for almost two years, when Barings itself sought clarification of these ground rules. Given that all of this took place during a period when the biggest talking point among the world's bank regulators was the risk inherent in financial institutions overextending themselves through the trading of derivatives, this is all rather extraordinary. The Bank's own position in this debate was that there was and is not anything much to worry about.

It is evident from the report that the Bank's internal guidelines were inadequate and that its reliance on Barings itself and other informal contacts left it without a functioning alarm system against a sustained episode of reckless trading by an important British bank. Collaboration with regulators in other countries was and remains primitive.

Perhaps we should not be surprised at this. It is an obvious enough result of a casual culture of old-boy networks, coupled with a traditional public sector difficulty in recruiting and retaining staff of the necessary calibre. Barings was, after all, the third big error by the Bank in recent years, Johnson Matthey and BCCI being its forerunners.

The Chancellor argued unconvincingly in the Commons yesterday that there would be no point in creating a specialist bank supervisory commission, because the Bank's staff would simply be transferred to it. It is not obvious why this should follow. Nor can we have any confidence that by implementing the report's 17 recommendations, involving such things as new guidelines, reporting systems and external links, the fundamental problem will be addressed. The Bank of England needs the kind of shock that only a radical restructuring will provide.

What is required is a new commission to supervise all financial services, from deposit-taking to derivatives, from fund management to foreign exchange. Highly skilled investigators should have wide powers to require information and impose trading conditions and penalties. Most important, the commission's culture must be open, tough-minded, independent and responsive, building effective links with other national regulators. When necessary, its style must be that of the SAS, not the police community relations officer.

No framework of regulation can or should provide a cast-iron guarantee against banks collapsing. But the present gentlemanly muddling-through in the Square Mile has had its day. Three strikes and you're out.