Good news for Osborne on Northern Rock and regulation

The Chancellor intends to flog Northern Rock back to the private sector - while his regulatory plans get a timely boost from Mervyn King.

by James Taylor
Last Updated: 19 Aug 2013
George Osborne's Mansion House speech last night contained two major announcements (though neither exactly came as a big surprise, given how widely they'd been trailed in advance). The Chancellor revealed that he intends to sell state-owned Northern Rock to a private sector buyer, possibly by the end of this year. And he also confirmed his support for the idea of ring-fencing banks' retail operations and forcing them to hold bigger capital buffers. Speaking afterwards, Bank of England Governor Mervyn King backed this plan, and the Government's approach to the deficit-cutting - a timely vote of confidence at a time when the Opposition is again calling for a change of tack...

Osborne plans to try and sell the 'good' bit of Northern Rock to a private buyer, on the grounds that this will generate the most money for the Exchequer (although he's not ruling out other options if that doesn't happen). The City reckons he's likely to make about £1bn from the deal, i.e. less than the £1.4bn we spent rescuing the Rock in the first place. So there are some contradictions here. Selling to a single buyer might generate the biggest return, but it will miss the opportunity to boost competition in the sector - supposedly one of the Government's key priorities. And if is he keen to raise the most money possible, it would arguably make sense to wait a while longer.

Still, the principle is surely correct: the Government shouldn't be in the business of running banks, and a sale will send out a strong signal that things are getting back to normal. Besides, the Government has more important things to worry about: i.e. trying to make the system as a whole safer, to prevent such a crisis from recurring, and getting the economy growing again.

At least Mervyn King's speech will have gone down well with the Chancellor: the Governor criticised the failures of the previous Government to correct the imbalances in the UK economy, rejected the need for a Plan B on the deficit, and backed Osborne's view on the importance bigger capital cushions. In fact, the latter will supposedly be one of the tools open to the Financial Policy Committee, the new regulatory body chaired by King that will meet for the first time today (although there's some debate about whether it will actually be able to enforce ratios higher than the 7% currently planned under the European Union Capital Requirements Directive).

King had some interesting stuff to say last night abut how the FPC will differ from the old regime. He said that the committee would focus on systemic risk; the previous 'obsession with detail was in fact a hindrance to seeing the big picture', he suggested. And he promised that the committee would not end up introducing heavy-handed micro-regulation. 'Process – more reporting, more regulators, more committees – does not lead to a safer banking system,' he said. Too true - although the light touch regime clearly didn’t work too well either. Let's hope the FPC can find a middle ground.

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