Yes, I\’ll Sign on to That

The Bank of England needs to beef up its role in supervising banks in trouble to prevent another Northern Rock-style crisis, a powerful committee of MPs recommended yesterday. A report from the Commons treasury select committee suggested a new crack team of supervisors should be based at the BoE to take charge when any bank or building society is found to be in financial difficulty.

In other words, bankers should regulate banks. Precisely the opposite of the structure that Gordon Brwon set up. Ooopsie!

5 comments on “Yes, I\’ll Sign on to That

  1. For an independent confirmation of GB’s misguided role in this a decade ago:

    “The tripartite system [the Bank of England, the Financial Services Authority and HM Treasury] is Gordon Brown’s baby. It was the other half of his decision in 1997 to make the Bank independent. The governor at the time, Eddie George, considered resigning over the removal of the Bank’s powers of bank supervision. His fears have proved well grounded. Communication between the FSA and the Bank now appears to have been poor.”
    http://www.guardian.co.uk/business/2007/sep/21/viewpointcolumn

  2. Whenever this subject comes up, we’re always informed that Eddie George “considered” resigning. Well, he didn’t and Brown’s “reforms” went ahead unchanged with, I assume, Eddie’s approval (after a quiet word with the genius at No 11). Accordingly, Eddie shares equally with Brown the responsibility for the dysfunctional supervisory system now in place. “Considering” resigning is not the same as “resigning”.

  3. I get the point but there were other pressing issues at stake at the time and Eddie George was probably thinking one step ahead as to whom his replacement might be.

    One notable issues was whether Britain should aim to join the Eurozone when the Euro was launched at the end of 1999. Blair, you’ll perhaps recall, was very enthusiastic in 1997 about Britain signing up to join the Euro – prepare and join, was the fashionable government guideline.

    OTOH by several reports, Eddie, as Governor of the Bank of England, was (very sensibly) cautious and sceptical about the prospective benefits for Britain from joining the Euro.

    Gordon Brown, as we now know, was (sensibly) keeping his powder dry – hence the “five tests” announced in November 1997 [1] – but what sort of replacement for Eddie George would have been likely when most cabinet ministers at the time were paying homage to their great leader, Tony Blair?

    [1] http://en.wikipedia.org/wiki/Five_economic_tests

  4. So Eddie is effectively blameless because we might have got a (totally hypothetical) euro fan as governor. Who? Mervyn King a year or two early? MK is not a noted cheerleader for the euro. I would say though that the sole sensible thing Brown has ever done is keep us out of the eurozone. Even so, I doubt that we owe this completely to Eddie’s sage advice to Gordon. Moreover, I suspect that, had Gordon opted to join, Eddie would have “considered resignation” but, in the end, declined to sign the resignation letter and taken his place on the ECB board.

  5. Mervyn King was promoted to become Deputy Governor of the Bank of England in 1998 from his previous post as Chief Economist. It would have been by no means inevitable that he would have been made up to Governor had Eddie George resigned in 1997 over the issue of whether banking supervision and regulation was transferred from the Bank of England to a revamped Financial Services Authority.

    If GB was determined on the transfer of responsibilities and to refocus the BoE on mostly managing monetary policy to maintain a steady rate of inflation, there were several other senior economists around at the time who could have taken on the role of Governor, albeit without King’s inside experience but possibly more enthusiastic about the Euro. I doubt that anyone at the time anticipated that the FSA might fall down on the job of banking supervisory although the debate at the time was over whether a revamped FSA might have enough of the relevant repository of experience to satisfactorily fulfil its new supervisory and regulatory functions.

    The political answer was that the staff at the BoE, relevant to its previous supervisory and regulatory functions, were moving to the FSA. A consideration that likely weighed in the government’s collective consciousness in 1997 was whether the BoE would have become “too powerful” had it been entrenched with strengthened responsibilities for both monetary policy and banking supervision. Separation of powers was a fashionable notion and there is a long history in British politics of bipartisan concerns about the de facto powers of the BoE – Churchill as Chancellor of the Exchequer in the mid 1920s complained about having to read of the Bank’s decisions to hike interest rates in the press as the BoE was then, indeed, truly “independent”. Hugh Dalton comments in his autobiography that Churchill, as leader of HM’s Opposition in 1946, absented himself from the HoC debate over legislation to nationalise the BoE because he personally departed from the Conservative opposition to the bill.

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