Reform too important for bickering

Jul 28 2009 by Sarah Green, The Journal

RECENT proposals for reforms to the Bank of England from shadow chancellor George Osborne have potential to affect businesses in the North East. He suggests there needs to be fundamental structural reform of the Bank of England.

Currently there is a tripartite system whereby the Treasury, the Bank of England and the Financial Services Authority (FSA) share responsibility for banking regulation. To date there has been a broad consensus on the best approach following the banking crisis. Everyone agreed it’s necessary to increase the quality and quantity of bank capital, that there needs to be a much greater focus on liquidity and that regulators should pay more attention to risks to the whole system rather than concentrating on individual institutions.

The Conservative proposals are far more radical. Under Mr Osborne’s plan, the FSA would be abolished and responsibility for regulating all significant financial institutions be handed to the Bank of England.

This would create the most powerful central bank in the world, as the Bank would remain in charge of monetary policy and get a wider range of regulatory responsibilities including watching insurers and building societies as well as banks.

His plan is that this would ensure there is one organisation with responsibility for spotting warning signs in the future, so the same mistakes won’t be made again.

But this proposal throws up areas of uncertainty.

First, there is the transition phase. We are in a critical period for financial regulation and if the Conservatives win power, they need to ensure there is a transition plan, to be able to offer support to the FSA. Another difficulty is that of changing the culture of the Bank of England.

Finally, the Conservative proposals leave a lot of loose ends. They all but ignore regulation of the securities markets. It’s hard to think you wouldn’t need some statutory agency to deal with market manipulation or insider dealing.

Serious debate is required on where to draw the regulatory lines to make these reforms meet their objectives and it is important this debate doesn’t become politically or ideologically charged. But already Gordon Brown has leapt to the defence of the FSA, which he invented, and Mr Osborne has stated that if the public “want to change the way their banks are regulated, they need to change their Government”.

Bank regulation is important and it is crucial for local business that the debate is conducted in a manner conducive to finding the best solution.

Sarah Green is CBI North East director