Page last updated at 14:56 GMT, Wednesday, 24 June 2009 15:56 UK

Tories eye bank regulation reform

Shadow chancellor George Osborne
Mr Osborne thinks change will tighten bank regulation

The Bank of England would regain primary responsibility for regulating big banks under plans drawn up by the Conservatives, the BBC has learnt.

The current system of regulation by the Bank, the Financial Services Authority (FSA) and the Treasury is "blurred and inefficient", the Tories believe.

If elected, a Tory overhaul would give the Bank much of the power which Gordon Brown removed from it when chancellor.

BBC business editor Robert Peston says the plans resemble the new US policy.

Last week, President Obama said he intended to give the lead role in regulation to the US central bank, the Federal Reserve, to ensure that all systemically important financial institutions remained solid.

Robert Peston
Bankers tell me that what they most want is an end to the bickering between the Bank of England, the FSA and the Treasury about who does what
Robert Peston, BBC business editor

In the UK, shadow chancellor George Osborne believes the distribution of responsibilities between the three financial institutions - known as the tripartite system - does not work, the BBC understands.

Role clash

In the aftermath of the financial crisis, the Bank has been given a role to analyse threats to financial stability.

But it cannot instruct a financial institution to act if it is perceived to have been behaving too riskily, or growing too fast.

Last week, the Chancellor, Alistair Darling, and the Bank of England governor, Mervyn King, clashed on what needs to be done to control banks and prevent a repeat of the financial crisis.

HOW THE SYSTEM WORKS NOW
The tripartite authorities
FSA spots that a bank is failing
Bank of England decides what to do about it
Treasury provides public money and nationalises if necessary

In his annual Mansion House speech to the City, Mr Darling said he had no plans to fundamentally change the system of regulation.

But Mr King called for the Bank to have more authority to intervene in the actions of banks seen to be behaving riskily.

He implied that he wanted to share this responsibility with the FSA, rather than to have the lead or primary role.

Our business editor said that the Tory proposal may not thrill the governor, "because supervising banks has the potential to do more damage to the reputation of his venerable institution than anything else a central bank can conceivably engage itself in".

The Tories are not expected to confirm their proposals for some days, though a spokesman for Mr Osborne said the Tories had "consistently said that the current system needs urgent reform."

FROM THE WORLD AT ONE

And it is unclear is whether the Bank of England would be given responsibility for the health only of big banks, or whether it would also be charged with monitoring and supervising substantial insurers such as Aviva, the Prudential and Legal & General - whose health is important to the wider economy.

The chief executive of the British Bankers' Association, Angela Knight, told the BBC that the most important outcome was "high quality supervision", irrespective of how responsibilities were carved up.

"We have certainly been expecting that some of the political parties would come forward with proposals in the run-up to the general election," she said.

"How any changes are brought about is important."



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