Darling to give FSA more teeth

Alistair Darling thinks that handing more powers to the FSA is the best way to prevent any future Northern Rock-style disasters blotting his copybook.

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Last Updated: 31 Aug 2010

In an interview in today’s FT, the Chancellor of the Exchequer said that he wants to shake up the current system, allowing the FSA to intervene directly if a bank gets into difficulty. The idea is that in the event of certain triggers – like a request for an emergency loan from the Bank of England – the FSA will step in and seize customer deposits, protecting people’s savings and hopefully preventing a run on the bank. As Darling will know from recent months, big long queues outside banks are not really good for public confidence – let alone the Treasury’s credibility.

This sounds good in theory - it makes a lot more sense to have one authority in charge of proceedings when a bank hits the buffers, rather than the Bank, the Treasury and the FSA scrapping over who's supposed to be doing what. But will the Treasury really be able to resist sticking its oar in? After all, they're the ones who'll take the flak politically. And it also seems possible this will discourage struggling banks from asking for help - after all, if the FSA moves in and takes charge, it's tantamount to boarding up the windows and hanging up the 'For Sale' signs.  

The model the Chancellor has in mind will be very similar to the one used in North America, though in the UK the power will lie with an existing body (the FSA) rather than a newly-created one (like the US Federal Deposit Insurance Corporation). As well as securing the deposits, the FSA would also manage the restructuring or wind-up of the ailing bank, leaving the Bank of England to concentrate on maintaining confidence in the overall system – which tallies well with governor Mervyn King’s well-known stance on 'moral hazard'.

Admittedly, the FSA hasn’t exactly covered itself in glory during the Northern Rock fiasco. But to be fair, that’s true of pretty much all concerned – the previously much-lauded tripartite agreement seemed to creak at the seams when the heat was on, with nobody quite sure who was supposed to be making decisions. Darling accepts that the situation needs some work – he told the FT that he favours the kind of model used by COBRA, the government’s emergency response committee, with the FSA and the Bank providing input but the final decision resting with the Treasury. That way everyone knows who to blame...

There was also some good news for savers – Darling plans to safeguard more of our savings. Currently, the government only guarantees the first £35,000, but in future this figure is likely to be nearer £50,000.

So if any more of our banks fall victim to the global credit squeeze, it looks as though we won’t need to be banging on their doors first thing the next morning. Then again, there wasn't really any need for that last time round - but if your life savings are on the line, we can see why you might beg to differ...

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