Ex-Chancellor Alistair Darling says the Bank of England had an inadequate understanding of the banking crisis and is calling for its governance structure to be overhauled before it is given more regulatory powers.
Speaking on the BBC Andrew Marr programme yesterday, Darling said disagreements between him and Governor Mervyn King undermined efforts to deal with the crisis.
Under Government proposals the Bank is to be given responsibility for regulating banks as well as more powers to spot and take action against risks to the stability of the financial system through the Financial Policy Committee.
Darling said: “That is an awful lot of things to invest in one person. Now I think the governance of the Bank of England needs to change. I think it needs to be constructed so the Governor has to be first among equals. You need to have a board of directors, not an advisory committee.”
He described the Bank’s Court, its current accountability mechanism, as an “adornment in every sense”. The Court has been criticised by Treasury select committee member Chuka Umunna as being “under the thumb” of the Governor.
Darling added: “If you are going to do this reform, for goodness sake do it properly.”
Darling said during the crisis, the Bank did not have “anywhere near an adequate understanding of what was going on in the banking system”. The disagreement on how to deal with the crisis in 2007 centred around the fact that Darling wanted to get money into the system to stop it freezing, while King was focused on the solvency of banks.
He said: “Now of course the two are related, but throughout the autumn of 2007 we did not deal with this as effectively as we could because of this disagreement.”
The Independent Commission on Banking is currently finalising a report due next week which is expected to make recommendations on structural reform of the banks. Its interim report, published in April suggested ringfencing retail banks and making them hold more capital.
Darling says the reforms would be a “useful tool” in dealing with banks which run into trouble but that it will not stop investment banks collapsing and that the idea an investment bank can be allowed to fail is a “nonsense”.
He said: “I think the whole basis on which this argument is being conducted is false. The idea that you could let an investment bank collapse and walk away from it in times of crisis is nonsense. That is what the American Government did with Lehman Brothers and the precipitated the worst crisis the banking system has ever seen.”
He also said that ringfencing would reduce banks’ ability to lend and that because the reforms would only be implemented in the UK that in the longer term it could lead to banks avoiding London as a base.
He said: “I do think we need to be terribly careful about doing something which does not actually solve the problem.”
However, he added that if there was to be a separation of banking functions the Government should “get on with it” rather than delaying the reforms.