Mandelson tells Bank of England to share powers

Author: By Sean O’Grady, Economics Editor

In a speech to the British Bankers’ Association tonight, the Secretary of
State for Business will say: “While I think there is an argument for
the Bank taking a more direct role in financial stability issues, I do not
support a ‘twin peaks’ system. I believe the lesson of the last year is we
need a stronger regulator, not a weaker one.

Lord Mandelson will add: “We need to keep prudential and conduct of
business expertise in one place, in a regulator capable of seeing all parts
of the picture at once. That regulator has to be the FSA.”

Lord Mandelson will also warn that he has “never felt such a sense of
distrust and anger between the financial sector and the rest of the economy”.

The Business Secretary’s remarks will strain relations between the Bank and
the Government, which have grown acrimonious in recent weeks. The Governor
of the Bank of England, Mervyn King, has repeatedly asked for the necessary “toolkit”
for the Bank to implement the statutory duty it has been given under the new
Banking Act to “contribute to protecting and enhancing the stability of
the financial systems of the UK”.

In his testimony to the Commons Treasury Select Committee last week, Mr King
astonished MPs by saying he had not seen nor even been consulted about the
Government’s forthcoming White Paper on regulation. A spokesman for No 10
subsequently said Mr King would see the Financial Services Strategy, which
was originally scheduled to be issued this Wednesday but which will now be
published next week.

The Treasury apparently wants the Bank to share its statutory role with the
FSA, and indeed for the Treasury itself to be “at the table”, on
the grounds that it would have to pay the bills if things went wrong again.
Critics say this multilateral arrangement threatens to institutionalise the
confusions that led to the Northern Rock debacle and the first run on a
British bank in almost 150 years. But ministers seem worried about
concentrating too much power over economic decision-making in the hands of
the Bank’s unelected officials.

Governors of the Bank have in the past shown themselves to be jealous and
fearsome creatures if they fear the interests of the Bank and of the wider
economy are at risk from government actions ? though none have “gone
public” as Mr King has.

In 1997 Mr King’s predecessor, Eddie George, threatened to resign when the
then-Chancellor Gordon Brown decided to transfer the Bank’s supervisory
powers to the FSA, a decision that has parallels with today’s debates.
George Osborne, the shadow Chancellor makes little secret of his desire to
grant the Bank more powers, and to relegate the FSA to the role of consumer
watchdog ? statements that have added to the unwilling politicisation of the
Bank.

The latest survey of the financial services’ sector by the Confederation of
British Industry indicates that some companies “look like they may be
starting to come through the worst”. However, a net balance of 97 per
cent of banks and 98 per cent of building societies said they had seen an
increase in the number of bad debts in the second quarter of this year, with
a similar expectation for the next three months.

Today, Lord Mandelson will underline the dissatisfaction of many when he
cautions: “There are clear expectations that credit must be made
available ? and not just available, but reasonably priced.”

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