Darling calls for more bank rules

The chancellor defended the role of the authorities

Chancellor Alistair Darling has admitted that the UK's system of banking regulation needs to be changed after the run on the Northern Rock.

Answering questions from MPs on the Treasury select committee, he said banks should be stopped from hiding debts "off-balance sheet".

Mr Darling defended the role of the authorities in the recent bank crisis.

He also agreed with the Northern Rock's management that the causes of its recent crisis had been unprecedented.

Answering questions, Mr Darling repeated his view that there were important lessons to be learned.

He pointed out that the government was already consulting on a better system of rescuing banks in danger of going bust.

And he added: "There needs to be better regulation to stop banks hiding things off-balance sheet."

However he disagreed with the suggestion that the Financial Services Authority (FSA) and the Bank of England should be merged in order to combine the responsibility for supervising banks with that for overseeing the financial system.

Tripartite system

MPs on the Treasury committee repeatedly questioned the chancellor about the role of the Bank of England, the FSA and himself - the so-called tripartite authorities - once they had become aware that the Northern Rock was in trouble.

It was by no means certain that all was up with the bank Alistair Darling

Mr Darling said he had been told on 15 August that the Northern Rock might be in trouble, four weeks before it eventually asked the Bank of England for an emergency loan.

"They [the FSA] said, 'We think Northern Rock might have a problem,'" he said.

However, he denied that the authorities had been dithering and had failed to keep each other in the picture because of their separate responsibilities.

The chancellor said the FSA had spent two weeks trying to help the Northern Rock raise extra money in the financial markets.

"It was by no means certain that all was up with the bank," he said.

"Extensive efforts were made to resolve the problems at the Northern Rock. It was not for want of trying," he added.

Asked if he agreed that the tripartite system had failed, Mr Darling declined to give a direct answer.

But he did say, "I accept responsibility for the tripartite system."

Solution

The chancellor explained that the ideal solution would have been if Northern Rock had been bought by, or been merged with, another institution.

"But as the days went by it became increasingly obvious that no-one wanted to know," said Mr Darling.

The chancellor backed up the Bank of England's view that pumping extra money into the whole of the UK banking system would not have rescued the Northern Rock, as it would not have been possible to ensure that all the money actually went to the bank.

And he supported the view of the Northern Rock's management that they had been caught out by extraordinary events, even though Mr Darling described the bank as having been "hopelessly exposed" due to an "extreme" business model.

"No-one anticipated a complete freezing of liquidity, which was unprecedented in modern times," he told the MPs.