Vericool Finance

Ever since the fall of Northern Rock, a cold war has been waged between the Treasury and the Bank of England.  Last week we witnessed the equivalent of the Cuban Missile Crisis.  The setting was the gilded banqueting hall of mansion house, and the level of brinkmanship and tensions, as Alistair Darling and Mervyn King faced each other down, was palpable.

Darling delivered a lacklustre speech on regulation, setting things up nicely for the Governor’s putsch.  King is making a power grab:  not only does he want to put the Bank in charge of spotting squelching future threats to financial stability; given the chance, he’d break up Britain’s biggest banks, too.  The Treasury is opposed to both measures; the Tories broadly sympathetic.

The financial crisis has descended into a tedious soap opera.  Alistair and Mervyn have fallen out again.  The guv’nor is getting matier with David and George… It’s all so trivial.  Instead of arguing about who should be sheriff, we should begin with the broader question of what sort of financial system we actually want.

Yet the sheriff question is key.  The tripartite system of joint regulation (between the Bank, the FSA and the Treasury) which Darling defends in such lukewarm fashion clearly hasn’t worked.  The tatters of the British financial system are testament to its failures. Indeed, in continuing to champion it, Darling has cast himself outside consensus.

A key measure of President Obama’s regulatory blueprint is to put the US FED into the cockpit.  King’s wise proposal echoes that.  The FSA should be left to deal with consumer protection and the solvency of individual banks, leaving the Bank to safeguard against systemic risk.

There are regulatory battles everywhere.  This week’s tussle between Gordon Brown and Brussels over fiscal independence was a more significant encounter than the Darling-King scrap.  Who would you prefer to, make judgements about the UK banking system, Mervyn King or the European Central Bank? The PM, fortunately, secured an opt-out.

Clearly, the posse of global regulators is breaking up as national interests assert themselves, and, given the confusions, that’s all the more reasons why Darling is right not to rush reform.  The FSA chairman, Lord Turned, fears that the will to reform… could weaken as recovery takes hold.  Perhaps, but until you know what new levers you want to give the regulators, you can’t really decide who should pull them.  Darling is right to take his time.  We need to get this one right.