Secret aid to avoid another bank run
Jan 31 2008 by William Green, The Journal
THE Bank of England could be handed powers to offer secret financial help to failing banks to avoid another Northern Rock-style crisis.
Chancellor Alistair Darling yesterday said that disclosure of emergency funding should be delayed to stop any future bank run by panicked savers, an idea that comes amid fierce debate about whether such a move could have helped the Rock.
The Government has also suggested a special resolution regime to take control of a failed bank under the proposals, including part-nationalisation, which are now subject to a three-month consultation.
Savers could get greater protection over their deposits in a potentially pre-funded deposit guarantee scheme, which could see banks having to cough up billions of pounds in upfront levies.
The Treasury, Financial Services Authority (FSA) and the Bank of England may also get more freedom to help stop and tackle future bank failings – a move which comes after they were blasted by MPs over failings in the Northern Rock crisis.
A report from the Treasury Select Committee at the weekend criticised the FSA for a systematic failure of duty over the beleaguered mortgage lender because it failed to spot its “reckless” business model.
Bank of England Governor Mervyn King, who has been reappointed for a second five-year term, also came under attack for failing to act when the credit crunch first began to bite in August.
It is also proposed that the Bank would have a more formal role in maintaining financial stability, with a renewed focus on co-operating internationally with fellow central banks.
Newcastle Central MP Jim Cousins, a member of the Treasury committee, said: “I broadly agreed with the Government that the FSA is the right base for regulation of banks.
“I think some of the Government’s proposals may not be right, for example I am a bit concerned of the idea, in the present climate, of a levy on banks to build up a huge protection fund for the future.”
The Labour MP also stressed the need for Parliamentary debate on the planned overhaul, but expressed regret that Mr King had been reappointed to his post.
Mr Cousins said the head of the FSA was retiring and it was right for the slate to be wiped clean with the Bank of England Governor being replaced.
He also expressed concern about Mr King’s “hawkish” line on inflation and pay, warning it could contribute to an economic downturn that would affect the North-East.
Liberal Democrat Treasury spokesman Vince Cable said the FSA’s chairman should be fired and claimed Mr King was undermined as powers were being shifted elsewhere.
