UK Chancellor of the Exchequer Alistair Darling will say that sharpening the judgment of bank regulators is the way to prevent future banking crises, suggesting an overhaul of UK rules governing the industry will be limited.
In a speech to the nation’s top bank executives this evening, Darling will emphasise the need to improve the calibre of officials overseeing the financial services industry and the quality of executives on bank boards.
“Institutions are important, so are the tools for them to do the job,” Darling will say in his annual address at Mansion House, the official residence of London’s Lord Mayor, according to excerpts released by his office. “To concentrate only on institutions is to miss the point.”
The comments are the strongest signal yet that Darling, now finishing work on proposals to tighten regulation of banks, will keep the so-called tripartite framework introduced by Prime Minister Gordon Brown when he was chancellor a decade ago. The system splits supervision between the Treasury, central bank and Financial Services Authority.
The chancellor defended the system in an interview today, saying it was the model for proposals to be announced today by President Barack Obama to broaden the Federal Reserve’s mandate and create an agency monitoring consumer-financial products. Darling told BBC Radio 4 the US plan was “extremely welcome.”
European clash
Before a European Union summit starting tomorrow, Darling will highlight UK opposition to EU plans to give a pan-European regulator power over national bodies. Britain wants national governments who shoulder the costs of bailouts to have the final say on whether banks should be rescued.
“We need to ensure that progress at a European and international level does not allow national regulators off the hook,” Darling will say. Regulators, he says, “must retain the vital link between home regulators and national governments.”
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In Britain, lawmakers from all parties have called on Darling to hand the Bank of England powers to monitor lenders after the FSA failed to prevent the run on Northern Rock in 2007. The Newcastle-based mortgage bank was Britain’s first victim of the credit crunch that has resulted in $1.47 trillion in losses and writedowns worldwide.
Darling will argue that the sound judgment of the regulators themselves and not the institutional arrangements mapping out the authorities of the FSA and Bank of England will head off problems in the future.
‘This is about judgments’
“At its heart, this is about judgments — making the right call at the right time,” Darling will say today. “Whatever the system is, judgments will always matter.”
Critics of Brown say that the system contributed to the crisis and failed to spot danger. David Cameron’s Conservatives sparked the debate last year, saying when they would give the Bank of England powers to blow the whistle if a bank runs into trouble.
The most recent attack on the government’s framework came from a cross-party panel in the House of Lords that earlier this month echoed the Conservative position. The FSA showed a “lack of rigor” during the crisis that started in 2007, the economic affairs committee in the upper chamber of Parliament said.
On May 15, a report from the House of Commons Treasury Committee said that feeble oversight allowed executives at Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc to bring the banking system close to collapse in October.
‘More intrusive’
Darling acknowledged in his BBC interview that bank supervision “needs to be more intrusive, needs to ask far tougher questions,” going on to say the Treasury was interested in “making sure boards are up to the mark” and able to spot problems at the financial institutions they govern.
The government has already handed some power to the central bank with a new Banking Act introduced earlier this year. It orders the Bank of England to keep a closer eye on lending.
In a rebuke to bankers in the audience, Darling will say bank boardrooms need to be staffed by the right people after mismanagement triggered bank failures and the worst economic slump in the UK since World War II.
Non-executive directors of banks need to stay on top of the latest financial innovations so that they can have proper oversight of institutions, Darling will say. He will also pledge steps to make sure that bank staff give complex information to directors.
“Bank boards must have the right people, skills and experience to manage themselves effectively,” Darling will say. “Their focus must be long-term wealth creation, not short-term profits.”