Summary:
David Lascelles (Centre for the Study of Financial innovation) wants Bank of England to be returned part of its supervisory role (now role of Treasury and the FSA). BoE needs to act as counterweight to both FSA and Treasury. Field of banking supervision currently open to the political and bureaucratic forces of the Treasury and the FSA. Need for an independent and trusted body in banking supervision. BoE is uniquely placed to understand banks and markets, and to provide guidance to both of these, as well as to advice to its official partners. A purely monetary role for the BoE would be a huge wasted opportunity. (Published: 15/06/08)
Notes:
- Northern Rock fiasco blamed on confusion over roles Treasury, Bank of England and FSA
- roles Treasury and FSA are clear:
- Treasury: makes decisions about the use of public resources to keep the financial services sector in order
- FSA: day to day supervision of the financial services sector
- role of Bank of England?
- aid and admonish banks? (Treasury's preference)
- watch over them with wise detachment while it gets on with job of running monetary policy? (Bank's preference)
- no clear answers
- strong case against banking supervision by BoE:
- always a potential conflict between the objectives of monetary and financial stability
- one may call for higher, the other for lower rates
- when BoE acted as supervisor, more often a cause of grief than congratulation
- e.g. Johnson Matthey, BCCI and Barings affairs: drained its reputation and morale
- BoE was relieved when that responsibility was transferred to the FSA in 1997
- argument that Bank's most suitable role in financial stability is simply as a purveyor of liquidity and emergency cash to the financial system, as and when required by the FSA or Treasury
- i.e. a purely mechanical function, cost and responsibility for which are borne by others
- however: such arrangement would probably not succeed
- would leave the field of banking supervision open to the political and bureaucratic forces of the Treasury and the FSA
- Bank's role of counterweight to both would be lost
- Bank's understanding and feel for the condition of the markets would be wasted
- probably superior to both the Treasury's and the FSA's
- need for an independent and trusted body in banking supervision
- one to which bankers can turn in times of trouble without being hit with a fine or a political stick
- one to which non-bankers can look for an informed but impartial view of what's going on
- need to restore some of the features of City management by the BoE that have been lost
- including giving the Bank a more explicit role
- Bank need not be in direct supervision, but is uniquely placed to understand banks and markets, and to provide guidance to both of these, as well as to advice to its official partners
- to retreat into a largely monetary role would be a huge wasted opportunity
