Darling wants secret bail-outs

Next time a UK bank gets into hot water, the Chancellor wants to ride to its rescue in secret.

Last Updated: 31 Aug 2010

Alistair Darling will today put forward his proposed reforms of the much-vaunted tripartite regulatory system, which singularly failed to save Northern Rock from sliding into disaster. Under the new system, the Treasury, the FSA and the Bank of England will be given extra powers to intervene in the event of a bank failure – possibly in secret. The new rules allow for a ‘period of non-disclosure’ as long as it doesn’t affect consumer confidence.

The plan is for the Chancellor to head a body modelled on the emergency response committee COBRA, with the FSA and the Bank both offering their thoughts but leaving the final decisions to him (so next time round, he won’t be able to pin the blame on anyone else). The FSA would then appoint a restructuring officer to steer the stricken bank back into calmer waters.

The problem is, it seems a bit hard to believe that any or all of these steps could happen without the news leaking out. As the BBC's Robert Peston likes to point out, he broke the Northern Rock story well before the government had got round to announcing it. What chance do they have of keeping an entire rescue package quiet? Rumours are bound to get out, and that could do just as much damage as the news itself - probably more so.

There’ll now be a 12-week consultation period on the proposed legislation, which should give the Tories plenty of opportunity to stick their oar in. Unlike Darling, Shadow Chancellor George Osborne wants the Bank of England (not the FSA) to be given pre-emptive powers of intervention. The Tories also disagree with Darling’s plans to force the banks to pre-fund a deposit protection scheme – the idea is that this will be a rainy day fund that will only be drawn upon in the event of a crisis, but it hasn’t gone done well with the banks who’ll have to cough up the money in advance.

Since it could conceivably be Osborne heading up this new committee by the time it next meets, this argument is likely to be a hard-fought one.

One of the people who definitely will be round the table (at least if it happens before 2013) is Bank of England governor Mervyn King, who’s just had his contract extended for another five years. Merv’s impeccable reputation has taken a bit of a battering from the Northern Rock debacle, with some critics suggesting that his initial hard-line response only made things worse. But the political wind seems to have changed in recent weeks – these days the FSA seems to be the generally-accepted whipping boy.

Most of the City will presumably be glad to know that King will retain a sizeable involvement – after all, the Governor is an experienced and well-respected market professional. Unlike the Chancellor, who according to the proposed reforms will be the one actually running the show...

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