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The Bank of England was seething today after it emerged that the Government is planning to strengthen the role of the Financial Services Authority in banking supervision - an area currently entrusted to Threadneedle Street.
Chancellor Alistair Darling wants to make the FSA legally responsible for maintaining financial stability in a new Banking Act, depriving the Bank of some of its authority.
The move is thought to be a response to the perception that, although the Bank did warn of the impending financial disaster, it did not shout loudly enough.
It underlines the extent of the damaging rift between the tripartite authorities - the Bank, the FSA and the Treasury - which culminated this week when Bank Governor Mervyn King attacked the Government's failure to hatch a plan to reduce its ballooning debts and complained he has not been consulted over new legislation.
The comments infuriated the Treasury and an unnamed Cabinet minister today accused King of forging an "unholy alliance" with the Tories who favour scaling back the role of the FSA and transferring power to the Bank.
Peter Hahn, a fellow at Cass Business School, said: "The politicians are taking sides. One party is for the FSA and the other is for the Bank."
The Bank was given responsibility for financial stability when the tripartite system was launched by Gordon Brown in 1997.
King wants new powers to enable it to carry out its responsibilities, such as being able to go over the head of the FSA and force banks to increase capital.
But Darling believes that as City watchdog the FSA should not only regulate individual banks but also ensure that the combined impact of their business models is not dangerous to the financial system.
Legislation to be introduced in the autumn would give the FSA power to question how banks operate and order banks to change their business models if they appeared to be destabilising the system.
Reader views (4)
This is not about effective regulation - it's about politics. Everyone knows that the regulatory system designed by Brown and Balls failed utterly (but obviously Labour cannot acknowledge this). The FSA has sucked up to the government so gets rewarded with more power; the BoE pointed out the flaws in Brown's system so gets punished.
Hopefully the Conservatives will throw out Brown's mess and put in place a new regulatory system which is designed to protect the economy not to protect Gordon Brown's reputation. Maybe they can also cut some costs and red tape while they're at it.
- Ian, London
It seems to me that Labour's aim is to muck things up so royally ahead of the election that the Tories won't be able to sort it out in one term and therefore might lose the election after next. Labour has clearly given up trying to win the coming election, and that's why they've left Brown in charge to tale all the flack.
- Paul, London
Probably the most positive move the goverment has made during the whole crisis
- Brian, Wiltshire
The FSA was set up by G Brown to supervise the banking
structure in place of the BoE and the FSA failed totally in exercising their responsibilties becausae they did not have the expertise to do the job. G Brown's failed to ensure they were qualified to do the job. Now the BoE
have been forced to make public the UKs severe debt problems G Brown now want to silence the BoE by giving more power to the illiterates including Darling. Totally shammeful!
- Ralph, London, England
