Putting the Bank back in charge is all old hat

Anthony Hilton
2 Apr 2008

It's perhaps a bit early for politicians and regulators to be talking about how to prevent the next banking crisis when they and the wider banking community are still nowhere near getting their arms around the current one, but that seems to be the way things work these days.

In particular, it is worth paying attention to the increasing support for the idea that responsibility for all banking supervision and regulation should be returned to the Bank of England. As an idea it is seductive, logical, simple - and dangerous. Nostalgia for the good old days is not the way to plan for the future.

First, when the Bank was in charge, the City was a different place. All the key institutions were British-owned, and the Bank had huge powers of patronage which could directly affect a firm's ability to do business. The mailed fist inside the velvet glove meant that when it said jump, City firms said "how high?". But those days have gone. The banks in the City are international now, and when told to jump, foreign firms will say "show me the law which says I have to".

Second, the old system actually did not work that well. There were regular banking failures. The Barings collapse in 1995 was every bit as embarrassing as Northern Rock in the context of the time, as indeed was BCCI seven years before that, and both happened on the Bank of England's watch. Specifically, as was made obvious by the judicial inquiry into Barings, the collapse could have been foreseen and prevented. There were warning signs galore in the official returns submitted to the supervisor. A Barings insider had actually contacted the Bank with his concerns. They were ignored. The Bank screwed up.

Too much is made of the supposed differences in operation between the FSA and the Bank. The FSA's banking supervisors and their expertise were transferred to it from the Bank, and as they arrived before other regulatory bodies like the Securities Association and the insurance people from the DTI, they got their feet under the desks first and shaped the FSA's early culture. The first head of the banking division was Michael Foot, a former Bank of England man, as was Clive Briault, the man who has just resigned and is seen as the official fall guy for Northern Rock.

We have to question too whether the Bank has more authority than the FSA and would be better at reining in the banks next time. The Bank never lost its responsibility for systemic risk, which is why Sir John Gieve, the Deputy Governor, was given such a hard time by the Treasury Select Committee. Governor Mervyn King and adviser Alistair Clark made speeches warning explicitly of the dangers of the mispricing of risk, most recently at June's Mansion House dinner days before the crisis broke. The City banks took not a blind bit of notice. In the immortal words of Citigroup's Chuck Prince, they just carried on dancing. Having all the regulators under one roof is a strength for the City not to be casually thrown away. The world has moved on and needs to be regulated as it is, not as we fondly remember it was.

Spat that may damage M&S

No one is quite sure why its comment was so intemperate, given that corporate governance at Schroders itself does not always tick all of the boxes - some of its most senior executives not being without their own touch of arrogance. But someone did point out that, back in 2004, Schroders was the only fund manager of any substance to indicate support for the takeover approach for M& S from Sir Philip Green - an approach which was effectively sunk by the recruitment of Rose to lead the M & S recovery.

Perhaps its the fund manager's revenge for the fact that the shares, after adjustments, are now virtually back at the pre-bid levels. Or perhaps they had noticed that the good news for Rose fans in the plan for him to become chairman is that he will stay with the group for two years longer than the original five years he promised Paul Myners back in 2004.

Mischief-making aside, the serious point is that the row becomes much harder to resolve now it is in the public domain. Neither side will find it easy to back down; both will dig in around a matter of principle. However, the longer it goes on the greater the likely damage to the company.

Both sides need urgently to seek a new beginning, and that might well be a task for senior non-executive director David Michels rather than chairman Lord Burns, given that the former is held in higher regard by most institutional fund managers.