Call to nationalise failing banks

The Treasury Select Committee said it was right that City watchdog the Financial Services Authority should have sole responsibility for "pulling the trigger" to make a firm subject to the new proposed Special Resolution Regime (SRR).

But it said the Bank of England should be given the power through primary legislation to recommend to the FSA that a financial institution be brought into the regime.

The controversial SRR proposals aim to make it easier for the authorities to take control of a failing institution, including nationalisation or the sale or break-up of the group.

The plans have proved unpopular with the industry, amid claims that they will increase the risk for creditors and investors and could also raise the cost of capital.

Chairman of the committee John McFall said: "As the regulator, the Financial Services Authority should have the sole authority to place firms in the Special Resolution Regime. However, the Bank of England must have the power to recommend that the FSA pull the trigger to bring an individual institution into that regime. The system we propose maintains a clear line of authority, while ensuring that the Bank of England has a reason to engage with individual institutions."

The committee also called for heightened supervision of a firm, known as the amber zone of regulation, to be considered as a distinct and separate state compared with normal supervision and the SRR. It added that the FSA should prepare and consult on a code of practice for heightened supervision.

But the Treasury Select Committee warned that the Government's proposals for a new Financial Stability Committee at the Bank of England were confused, as it was expected to operate as both an executive and an oversight body.

Instead it said the Financial Stability Committee should have a status comparable to that of the Monetary Policy Committee, giving it executive responsibility to discharge the Bank's financial stability functions across the market. It added that the Non-executive Directors Committee of the Court should be responsible for ensuring these functions were being carried out internally.

The cross-party group of MPs also warned that the Tripartite Standing Committee - made up of the Treasury, FSA and Bank of England - should not be allowed to become a "sleepy backwater" during normal times, only for it to have to begin its work from scratch in a time of crisis. Instead it said the tripartite should take on a central and continuing role in the financial stability work of the authorities at all times.