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Last Updated: Saturday, 26 January 2008, 00:03 GMT
MPs call for new banking authority
By Ian Pollock
Personal finance reporter, BBC News

John McFall MP
John McFall MP, chairman of the Treasury committee
A few months ago during its hearings on the Northern Rock saga, the Treasury select committee was very rude to the Governor of the Bank of England Mervyn King.

It was also equally hostile to various officials of the Financial Services Authority.

Now the committee's 179-page report has drawn some conclusions from the evidence it gathered, and there is no let-up in its criticisms.

And some of it may not be quite what the Chancellor Alistair Darling wants to hear.

The "reckless" Northern Rock directors are given most of the blame for their bank collapsing.

But the MPs have come to the conclusion that two of the three main financial authorities in the UK were inadequately prepared to keep the Northern Rock going in its hours of need.

The Financial Services Authority (FSA) "systematically failed in its duty as a regulator", say the MPs, and the Bank of England was also "found wanting".

To remedy this problem, the MPs recommend a wholesale change in the form of banking regulation in the UK.

Specifically, they want to see the establishment of a new authority or banking rescue organisation, under the leadership of a new deputy governor of the Bank of England.

He or she would be given new powers to monitor the health of individual banks, step in well before they went bust, and would also protect savers' money with the help of a new protection fund.

Not the FSA

The government is currently consulting on new legislation to speed up the way that insolvent banks can be rescued and to improve the way savers' money can be ring-fenced.

These powers and responsibilities should not be granted to the Financial Services Authority
Treasury committee report

With the dim view the MPs take of the way the FSA performed last year during the Northern Rock crisis, their recommendations are at odds with what Alistair Darling thinks, at least so far.

Earlier this month Mr Darling told the Financial Times that he thought that the FSA should be in charge of any new arrangements, being given the power to take over customers' cash if their bank were to get into difficulties, and being put in charge of keeping a bust bank in operation.

The MPs differ and give the FSA the thumbs down.

"These powers and responsibilities should not be granted to the Financial Services Authority," their report says.

Instead they want a new department of the Bank of England to be set up.

This would effectively return to the Bank much of the responsibility for monitoring the health of individual banks that was taken from it and given to the FSA in the 1990s in the wake of the Barings collapse.

This time though the new deputy governor would have additional special powers, to intervene and take over a bank if his staff thought it was heading for the rocks.

What about the savers?

The MPs make some big recommendations for protecting savers.

Northern Rock queue last summer
Current protection for savers failed to reassure customers

They think that the current system for protecting savers money, which hinges on the Financial Services Compensation Scheme (FSCS), is "discredited".

In line with the government's own outline plans, they call for a new legal regime to ensure the swift rescue of banks that are in danger of failing.

The existing FSCS has already been beefed up, to give savers 100% protection for the first 35,000 of their savings.

But the MPs reckon this limit should be updated in line with inflation, so that it continues to cover the vast majority of savers' holdings.

And they call for this money, at least for banks and building societies, to be paid for by a new Deposit Protection Fund, which would pay out much faster than under the present set up - in days rather than months.

Instead of being funded like the FSCS on a "pay as you go" basis by other financial institutions, as and when a bank goes bust, the new fund would be built up by regular contributions from banks and building societies, with the government making an initial contribution to get it going.

The MPs say it would need to be much more widely publicised so that bank customers were fully aware of the protection they have.

Bridge Bank

The MPs have looked at the way things are done in the USA to rescue insolvent banks and they like what they have seen.

Bank shareholders cannot be expected to have the sole final say over the direction of their company
Treasury committee report

There are many more, smaller, banks there than in the UK and they go bust much more frequently.

Thus the Federal Deposit Insurance Corporation (FDIC) has built up over the decades a huge fund to compensate savers, and a bureaucracy to take over banks.

The MPs want the new authority in the UK to be a similar set-up, effectively to nationalise bust banks, keep them going, sort out their problems, and then sell them on after a couple of years.

The concept is called the "bridge bank" in which savers funds are also ring-fenced.

The MPs say the authority should have the powers to do all this, and at a much earlier stage than when a stricken bank is just about to fall over.

To make sure the new authority can get on with the job quickly, every bank and building society should be required to produce, at a day's notice, a complete register of all its depositors so they can have their money back quickly.


The report will put many noses out of joint.

As well as accusing the Northern Rock directors, the FSA and the Bank of England of not being up to their jobs, the MPs are not afraid to offend others in the banking industry.

The British Bankers Association (BBA) has been keen to avoid a new USA-style deposit protection scheme as it would cost contributing banks a lot of money.

"It seems only right to us that that costs of bank failure should be borne by the industry rather than the taxpayer, as would currently be the case," the MPs say.

As for shareholders, they get a straight warning that they should expect to have their voting powers expropriated by the new banking authority if another lender went bust.

"At the moment, bank shareholders appear to be protected from the total collapse of their firm by the State's unwillingness to allow a bank to fail," says the committee's report.

"Because of the unique nature of banking, bank shareholders cannot be expected to have the sole final say over the direction of their company, if that company has become reliant on State support to continue trading," they add.

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