Give Bank more power, says King

The Chancellor said in yesterday's Pre-Budget Review that he will make a full statement to the Commons on Northern Rock and the current international financial turmoil and he is likely to get a rough ride from MPs.

While that review may indicate embryonic plans to improve the tripartite - Treasury, Bank and Financial Services Authority - oversight of the City, Mervyn King has broken ranks and called on the Chancellor to bring in legislation on at least three issues.

Speaking in Belfast last night, King said the Bank needs to be able to act covertly in instances like Northern Rock. "Central banks operate as lenders of last resort. We need to be able to lend against good, albeit liquid, collateral and at a penalty rate without destabilising any bank to which we lend," he said.

"But in an age of instant communications, where the news of a facility for Northern Rock was leaked even before it was officially announced, it may be difficult to adopt the quiet methods used by central banks in the past.

"We will explore ways to restore the use of discretion in central bank operations."

King has previously argued over Rock that his hands had been tied by the anti-intervention terms of the European Union Market Abuse Directive.

The Governor also called on new legislation to reform bankruptcy rules for banks to protect depositors and not treat them as unsecured creditors.

"One tool, currently unavailable in the UK, is a special insolvency law for banks," said King. "Legislation to create the powers to deal with a bank in this way seems to me the single most important necessary reform."

Further protection for retail depositors through insurance schemes should also be part of Darling's review, said the Governor.

A third issue, he said, concerned demands for smaller banks to put in place insurance should they, like Northern Rock, come up against a liquidity crunch in which they cannot borrow money on the wholesale market despite being adequately capitalised.

"Banks need to face the right incentives to manage their funding positions," said King. "Smaller banks with reliance on wholesale funding should be encouraged to put in place insurance."

King told his audience of Belfast bankers and businessmen: "I hope that the three lessons I have identified will be incorporated in future legislation."

His call for tighter banking regulations came as Northern Rock's regulator, the FSA, admitted it was at fault in the affair.

Under aggressive questioning before the Treasury Select Committee of MPs, the FSA's new chief executive Hector Sants admitted the watchdog had been caught napping.