Tuesday, 22 June 2010

Accounting for banks: a new broom

George Osborne, the new Conservative Chancellor of the Exchequer, has moved very rapidly to reform financial regulation in the UK.

There can be little doubt that the old system has failed. As he prepares to deliver his emergency budget George Osborne must be very aware of the vast sums of money the previous government sank into Northern Rock, HBoS and RBS. The chancellor is set to embark on emergency measures to ensure that he is able to borrow the money that his government needs without spiralling into a debt crisis so he must be determined to avoid additional borrowing just to prop up failed banks.

It is to be hoped, though, that Mr Osborne is not being too hasty. There are lessons to be learned not just from looking at the history of our own rather ineffectual FSA but from other countries as well. The new government's plan is to replace the FSA with a Prudential Regulation Authority as part of the Bank of England along with a Financial Policy Committee. This will give the UK exactly the same arrangement as Ireland where the Central Bank and Financial Services Authority failed even more disastrously than the British regulators. Even the CBFSAI's own report cannot hide from the fact that it was, in effect, useless.

Nevertheless there is some reason to be hopeful. A fresh start was needed by the FSA, after all. Since Gordon Brown gave the Bank of England's Monetary Policy Committee control over interest rates it has shown good sense and some independence from political control. We might hope that the FPC and PRA follow that precedent. The climate in which the Bank of England does its business, though, is still set by the Chancellor. We will see later on today whether he is willing to put the lid belatedly on Britain's property price inflation that is its own particular contribution to worldwide financial instability.

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