It was a time when the Bank knew the character of a man and didn’t need an
inspector’s risk assessment report to know a bad ’un.
Maybe I exaggerate. Maybe those days never really existed. The legend
persists, however, and, despite the crisis of the past two years and despite the
shameful way that regulatory powers were stripped away from the Bank by
Chancellor Brown in 1997 to create a new super-regulator, I think there is still
an enormous amount of inherent goodwill in the Bank.
All of which makes the behaviour of our Treasury towards our central bank
look petty, vindictive and, ultimately, counter-productive. According to
Governor Mervyn King, the Treasury’s review of banking regulation has not, so
far, seen fit to ask the Bank of England what it thinks. Alistair Darling’s
white paper is apparently imminent. The best King seems able to hope for at the
moment is that the Treasury will show him a copy before it’s published.
Relations between Whitehall and the Bank have often been frosty and King’s
recent warning to Darling to rein in the cataclysmically large budget deficit
will not have helped.
Well, tough. Frankly, the Bank needs to be playing a bigger role in economic
and financial regulation. Independence for the setting of interest rates is all
well and good in fact, it’s probably the single best thing Gordon Brown ever
did. But control over monetary policy is about as useful as a wine cork in a
broken dike when fiscal policy has performed reverse alchemy, turning the Golden
Rule into base metals.
Moreover, while the FSA positioned itself as a regulator of all players who
muck about with other people’s money – banks, investments, mortgages – it
lacked the skills that enabled it to do that effectively at the individual level
and certainly not at the macro level.
Look at older issues of the Bank’s financial stability reports and it’s clear
there was an unease developing before the financial storm broke. True, a sense
of unease doesn’t add up to much if you don’t do anything about it and the
strained relationships within the tripartite regulatory regime wouldn’t have
helped turn thought into action.
But the linkages between a fast-growing economy, a low-interest rate
environment, booming house prices, a hugely well-paid, creative, rampant banking
sector and a regulatory regime that struggled to supervise individual banks –
never mind banks as a whole – mean that an overseer who actually understands
all these connections is needed to take a leading role in what we must now call
‘macro-prudential supervision’. A strengthened Bank of England, endowed with
new-found respect by the Treasury, is what we’re going to need.