Darling's Bank reforms dismissed as vague

Sean Farrell,Financial Editor
Thursday 31 January 2008 01:00

The chairman of the Treasury Select Committee described the Treasury's proposals for ensuring financial stability as "vague" yesterday as the Chancellor launched a 12-week consultation period on his proposed reforms.

John McFall, whose committee published its own recommendations for strengthening banking regulation at the weekend, said the system needed "grit applied to it" so that potential crises were spotted and prevented where possible.

"The financial stability links between the Bank of England and the Financial Services Authority didn't work, so we need that to be strengthened," Mr McFall said. "I am looking for a mechanism to increase the financial stability area and that is vague at the moment."

The Government's proposals rejected the Treasury Committee's call for the Bank of England to play a greater role in monitoring individual institutions. The Treasury is wary of potential conflicts of interest if the authority that checks on specific banks is responsible for overall financial stability. The FSA, which bore the brunt of Treasury Committee criticisms, will get extra supervisory powers.

But the Government plans to legislate to make the Bank of England's role in financial stability more formal. It also wants to revamp the Bank's 19-member Court to make it more like a private sector board of directors. Changes would probably include reducing the number of members and ensuring those remaining were suited to the financial stability remit.

Mr McFall welcomed most of the report, which he said drew heavily on his committee's recommendations, and hoped stronger measures would be added during the consultation period.

Alistair Darling, the Chancellor, published heavily trailed proposals yesterday to beef up regulation and deposit protection to try to prevent a repeat of the run on Northern Rock that almost caused the bank to collapse.

The main feature of the Chancellor's proposals was a plan to allow the authorities to give a bank covert support if an announcement would hit consumer confidence. Secret assistance would only be for a short time "until the temporary problems have passed" and therefore might not have been enough to shore up Northern Rock.

There are also plans for a "special resolution regime" that would give the authorities greater powers to take control of a failing bank. The plans acknowledge the special position of lenders compared with other companies because a loss of confidence in the banking sector would undermine the whole financial system.

The Treasury also wants to speed up payment to depositors so that they would get their money more quickly than under the current arrangements. Banks have warned that "ring-fencing" depositors over other creditors could be legally tricky and increase the cost of inter-bank lending.

The banking sector has warned against over-zealous measures to protect depositors, either through a large increase in the sum covered by the depositor protection plan or a switch to banks funding the scheme upfront. Banks are concerned that upfront funding would put further strain on their funds when many are already strapped for cash.

The British Bankers' Association said: "We consider that the focus should be on simpler rules and faster payouts rather than other changes. It is essential to reflect the fact that banking problems are extremely rare in the UK, that these proposals are designed to make the system even safer, and that there would be considerable costs in setting up any new arrangement which would be unlikely ever to be needed."

The Treasury likes the idea of a pre-funded scheme because it would reassure consumers that the money was there. But it also acknowledges that tying up billions of pounds for an unlikely event might not be the best solution.

Banks have warned that the scheme – which UBS analysts have said could cost UK lenders nearly £3bn a year – would lead to lower interest on savings.

The depositor protection scheme now covers all of the first £35,000 of savings with any institution. The Treasury said yesterday that the current sum protects 97 per cent of deposits. Banks have argued that the level does not need to be raised but many expect the sum to be increased to £50,000, roughly in line with the US scheme at today's currency prices.

The consultation would keep responsibility for banking regulation shared between the Treasury, the Bank of England and the Financial Services Authority. The system was introduced in 1997 by the Prime Minister when, as Chancellor, he gave the Bank of England independence on monetary policy. But flaws in the process were exposed by the Northern Rock crisis.

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