Page last updated at 09:02 GMT, Thursday, 18 June 2009 10:02 UK

Q&A: UK banking regulation

The tripartite authorities

Chancellor Alistair Darling has outlined his plans for reforming the regulatory system for the UK's financial system.

Some people have blamed the existing system for making the credit crunch worse, but Mr Darling says the blame lies in the boardrooms of financial institutions.

He plans to make sure that the people running banks understand the risks they are taking.

What is being proposed?

Banks are going to come under closer scrutiny from regulators and will also have to keep more cash in reserve in case they make losses.

The chancellor says that the regulator will be more intrusive and banks will have to answer harder questions.

The regulators will also be able to take over banks that are in danger of failing.

But the big question now is what will happen to the central idea of the tripartite system: the combination of Treasury, Bank of England and Financial Services Authority (FSA) that is at the centre of the regulatory system.

There have been some changes, with the Bank of England getting formal responsibility for the stability of the financial system.

Also, if the FSA decides that a bank is failing, the Bank of England will be the body that takes control of its assets.

But essentially, the tripartite system will stay in place.

How does the current system work?

At the moment, the Bank of England is responsible for keeping an eye on the money markets and being the lender of last resort.

The FSA supervises the individual banks and looks after the interests of consumers.

The Treasury provides the public money for all this and also sets up the regulatory structures.

In a crisis, it is the FSA that is supposed to spot that a bank is failing.

The Bank of England then decides what to do about it, such as transferring its assets to another bank, setting up a temporary bridge bank run by regulators to own the assets or recommending nationalisation.

The Treasury takes decisions to do with public funds and is the body that nationalises banks if necessary.

In practice, the three institutions are supposed to work closely together and share information between themselves, while taking a lead in their own specialised areas.

Is keeping the current system controversial?

There have been a number of reports that blamed the tripartite system for making the situation worse when banks were in trouble. The reports also criticised the actions of the FSA and the Bank of England.

The House of Lords Economic Affairs Committee said the problem with the system was that it was not clear who would be in charge in a crisis.

It said the Bank of England should get a clear executive role and recommended taking the responsibility for supervising the banking system as a whole away from the FSA and giving it to the Bank of England.

The House of Commons Treasury Committee made many of the same objections to the system and said that the tripartite financial authorities needed to communicate better with each other, and pointed to major failings by the FSA.

The Conservative Party also supports a more radical shake-up of the system and is in favour of giving more power to the Bank of England.

Haven't I heard all this before?

There is a process of investigations, reports and recommendations before any new regulations are enacted.

So the head of the FSA has made his suggestions, parliamentary committees have reached conclusions and there has already been a Banking Bill, which, among other things, enacted some of the emergency powers that had been brought in by the government during the banking crisis.

It is now the turn of the government to respond with further proposals of its own, which it promised at the G20 summit in April.

What is new is the chancellor's decision that the current tripartite system is fundamentally sound and does not need a complete overhaul.

He reckons that the system can work if there are better qualified regulators in place and if the banks themselves make sure they understand the risks they are taking.

Broadly speaking, Mr Darling is accepting the proposals put forward by the head of the FSA, Lord Turner, but he is treading cautiously.

There will be full proposals in about two weeks, but already the British Bankers' Association has said that some of the suggestions could stifle the UK's recovery.

What is happening elsewhere?

In the aftermath of the banking crisis, there was a great deal of discussion between countries about how they could work together to prevent a repeat of the problems.

There was general agreement at the G20 summit that co-ordinated regulation was necessary.

President Barack Obama has announced sweeping changes to the US financial system, although he is struggling to create a single regulator in the way that the UK did in 1997, when it created the Financial Services Authority.

Mr Obama is giving the US central bank, the Federal Reserve, the authority to monitor major financial institutions.

A new Consumer Financial Protection Agency will be created. There will also be new powers for the Federal Trade Commission and the Securities and Exchange Commission.

The European Union is discussing financial regulation as well and is holding a summit in Brussels on the subject this week, with the UK having some reservations about a more EU-wide approach.

It is likely that national regulators will retain quite a bit of power in the new system.

How UK banking regulation works



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