Britain’s top bank gains additional powers in overhaul

Treasury aims to avoid a repeat of credit crisis

Treasury chief George Osborne said the Bank of England will also soon be keeping an eye on lenders and insurers. Treasury chief George Osborne said the Bank of England will also soon be keeping an eye on lenders and insurers.
By Raphael G. Satter
Associated Press / June 17, 2010

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LONDON — Britain’s Treasury chief announced an overhaul of his country’s financial regulatory system yesterday, one which dissolves the country’s finance watchdog and hands broad new powers to its central bank.

George Osborne said the Bank of England would soon be responsible for keeping an eye on lenders, insurers, and investment banks in addition to supervising the health of the economy overall, something he said would help avoid a repeat of the credit crisis that nearly brought the British economy to its knees.

“Because central banks are the lenders of last resort, the experience of the crisis has also shown that they need to be familiar with every aspect of the institutions that they may have to support,’’ Osborne told a gathering of financiers at Mansion House in central London.

Osborne said his reforms would dismantle the three-point regulation system — comprising the central bank, the Financial Services Authority, and the Treasury — set up by former British Prime Minister Gordon Brown while the latter was Treasury chief in 1997.

The authority has long been criticized by Osborne and others for failing to foresee the near collapse of Britain’s banking system in the wake of the credit crunch. The treasurer said the authority would be broken into three smaller units — one which retained responsibility for consumer protection, another responsible for fighting economic crime, and a third unit that would be folded into the Bank of England.

Hector Sants, the Financial Services Authority’s chief executive, will remain at the organization’s helm before moving to the Bank of England, where he will become the chief executive of its bank oversight unit, Osborne said. Osborne said more details of the reorganization would be made public by Financial Secretary Mark Hoban today. The changes would have to be ratified by Britain’s parliament, and could take until 2012 to come into effect.

Mervyn King, the Bank of England’s governor, welcomed the change, saying in his Mansion House speech that the new regime would focus on setting capital requirements for financial institutions individually and imposing systemwide capital requirements that would aim to avoid situations like the one in the early 2000s in which British banks saw their balance sheets triple in size.

For his part, Osborne said that British banks would have to conform to tougher international standards being worked out by the Group of 20 economies. But he seemed to reject a European push to have national budgets vetted by Brussels, saying: “We must have safeguards in place to ensure that supervisory decisions that have an impact on national budgets remain at the national level.’’

Osborne also promised a banking levy and more restrictions on bankers’ bonuses, but did not go into details.

Osborne said that a former Bank of England chief economist, John Vickers, will lead a new commission on the future of the banking industry. Vickers will consider proposals for the breakup of Britain’s largest banks, which could see deposit-taking institutions separated from investment banks.

“Should we restrict or split the activities of banks?’’ Osborne said. “Has our banking industry become too concentrated and uncompetitive? I know there are some who are frustrated that these questions are even asked. But how can they not be when so many millions of people are paying the price for what went wrong?’’