UK regulation: Independence is the missing element in the spat between the Bank of England and the UK Financial Services Authority. Both the BoE and the FSA want more power to fight future bubbles. But neither covered itself in glory fighting the last one. The new regime should include independent voices.
Mervyn King, the BoE’s governor, hasn’t actually said clearly in public what he thinks should happen, beyond that he needs more power. But the suspicion is that he would either like the FSA turned into a department of the BoE – or have an arrangement where the BoE decides the measures needed to prevent credit growing too rapidly and then tells the FSA to execute its commands. That would turn the FSA into the BoE’s lackey.
For his part, FSA chairman Lord Turner is calling for a joint BoE/FSA committee – albeit with the BoE in the senior position. The government hasn’t yet said what it thinks. But it is understood to be closer to the FSA’s position.
The problem with all these views is that they assume that bureaucrats sitting behind closed doors will be able to spot emerging problems and take the necessary evasive action. But history suggests the opposite. During the last bubble, the bureaucrats achieved very little. The FSA has acknowledged its errors in failing to monitor banks effectively. The BoE, which cut back on the size of the team responsible for financial stability, did little more than issue timid reports.
Both the BoE and the FSA need to be involved in stopping the system running out of control again. So a joint committee makes sense. But it should be spiced up with some maverick, independent voices. And minutes of its deliberations should be published, so that other outside commentators can also give their views. That model has worked quite well with the BoE’s monetary policy committee. The government should embrace it when it finally publishes its position.