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Let the Bank take the lead

The MPs of the Treasury select committee suggest the Bank of England should take responsibility for financial stability of banks from the FSA.

The call comes in a report which criticises the FSA for its role on Northern Rock.

Money Marketing believes the tripartite system of Treasury, FSA and Bank of England failed in this instance to limit the damage once the crisis broke. We believe a new look is needed at deposit-taking institutions and the funding models they use for mortgages.

If Northern Rock had been an institution without deposits, it could probably have been allowed to fold.

We now have an example of another European bank – admittedly a much bigger concern – hitting trouble. Although one should be wary of easy comparisons, this bank has been able to unwind its positions quietly to minimise any threat of a run. We are told that in the case of SocGen, the French regulator was aware of what was happening although French politicians were not.

There are a lot of things that Money Marketing would like to leave politicians out of in the UK but we are not sure that is an option. We are also wary of easy solutions. Would the Bank of England want to get involved in deciding if a firm had been lending imprudently?Would the bank be well placed to understand the difference between lending which made business sense and lending which might not be in the best interests of the consumer? Some of these functions should stay with the FSA.We think there will always need to be communication at times of crisis, particularly as the FSA may well be best placed to understand what is going on in the country outside of the City.

We also remain unconvinced the bank performed particularly well over BCCI, for example, but if it had been able to take a clear lead on Northern Rock, this particular drama might not have become a crisis. If the FSA or others involved in banking disagree with the select committee then they should make their case. Otherwise, we agree that Threadneedle Street, not Canary Wharf, should be given the lead role.

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