Proposals put forward by the chancellor of the exchequer to help the UK better deal with another incident like the implosion of Northern Rock look to be a knee-jerk reaction by politicians wishing to be seen doing something to solve a problem.
Although some proposals, such as increasing the proportion of deposits safeguarded by the deposit guarantee scheme, are useful, others, such as the creation of an emergency committee of the Bank of England, Financial Services Authority and the Treasury, to be led by the chancellor and touted as an equivalent of the government’s Cobra committee, which coordinates responses to civil emergencies, look like pointless duplication.
Although the tripartite regulators’ handling of the crisis has left much to be desired, their failings arguably lie not so much in a lack of adequate powers, which the chancellor himself concedes, or in a lack of committees, or clear authority, as in a lack of awareness of existing powers and in a lack of contingency planning.
The Banking Act already gives the Bank of England draconian powers to seize control of troubled institutions and an existing tripartite committee is already chaired by the treasury.
Bank of England governor Mervyn King’s belief at the outset of the Northern Rock crisis that the central bank could not act as lender of last resort in secret has turned out to be mistaken, illustrating how a lack of awareness about existing powers and a lack of contingency planning, rather than a lack of powers, is the central issue.
Some of the chancellor’s proposals might also prove to be dangerous. The use of “triggers” including use of the lender of last resort facility to prompt intervention by regulators, for all its bureaucratic logic, will simply discourage banks from turning to the facility before it’s too late and so do little to prevent crises.
The British public would be better served by a more thoughtful evaluation of existing powers and the development of a robust contingency plan than by a swift headline-grabbing response.
