Bank of England to rescue banks

The Bank will be given added powers and responsibilities

The Bank of England will be given responsibility for rescuing failing banks in the future, Chancellor Alistair Darling has proposed.

In a letter to the Treasury Select Committee, he said the Bank should be put in charge of the forthcoming regime for rescuing banks.

The government is consulting on its plans, which will become law next year.

It decided to bring in a new system to help ailing banks in the wake of the Northern Rock near-collapse last year.

"The reforms to banking regulation, which I set out in my Mansion House speech, will strengthen the role of the Bank of England in relation to financial stability," the chancellor said in his letter.

"The new legislation will change the role of the Bank and, within that, the deputy governor for financial stability, including giving him a leading role in dealing with failing banks through the new special resolution regime," he added.

Changes at the top

Earlier this year, the Treasury committee lambasted the Financial Services Authority (FSA) and the Bank of England for not doing their jobs properly in the run-up to the collapse of Northern Rock.

At the time, the chancellor said he thought the FSA should be in charge of any new arrangements to rescue banks which were in danger of going bust.

However, the committee of MPs disagreed vigorously, saying the FSA had "systematically failed in its duty as a regulator".

Now Mr Darling has gone along with its recommendation that the new system should be led by the deputy governor of the Bank of England who has special responsibility for financial stability.

Promotion

In the first instance, that will be whoever replaces the Bank's current deputy governor for financial stability, Sir John Gieve, whose early departure from the Bank next spring was revealed on Wednesday.

In other changes at the Bank, its current chief economist Charles Bean has been promoted to replace the other departing deputy governor, Rachel Lomax, who has responsibility for monetary stability and who leaves her job at the end of this month.

"He is a world-class economist with a huge depth of experience in both academia and policy making environments," the chancellor said of Mr Bean.

Mr Bean will, in turn, be replaced as chief economist by Spencer Dale, currently a senior economist at the Bank who is on secondment to the US central bank, the Federal Reserve.

Reforms

The international credit crunch, and its knock-on effects on both the UK economy and its banking system, are regarded by the authorities as the worst problem the UK financial system has faced for at least the past two decades.

To improve financial stability, and to stop any more banks facing a run on their funds by their savers, like the Northern Rock, other changes will be made.

As the chancellor indicated in his Mansion House speech, new legislation will give the Bank formal responsibility for financial stability in the UK.

It has never had this as a legal objective, although it is one of its main purposes.

Further internal reform at the Bank will see a slimmed down Court - the Bank's board of directors - being given responsibility for monitoring its work in maintaining financial stability, helped by a new sub-committee.

This will oversee the way the Bank makes use of its new powers if it has to rescue any more banks in danger of going under.

The Bank will not, however, regain responsibility for regulating individual banks, which was transferred to the FSA in the 1990s, although it will be able to prod the FSA into action if it has worries about specific banks.