The UK Chancellor is planning to give more power to the FSA in the wake of the Northern Rock fiasco
Posted by markharrison on January 4, 2008
[This blog post is also available as a video – click here to watch.]
Alistair Darling, the UK Chancellor, is intending to give more power to the Financial Services Authority (FSA), to help prevent a repeat of the Northern Rock fiasco.
The plans aren’t finalised yet, because Mr. Darling has promised three months of consultation with the financial services industry, but the headlines seem likely to be that:
- He will create an “emergency-response” committee that will form in the event of any NR-style problem.
- The FSA will get the power to seize bank’s cash, and ring-fence it so that depositors have even more confidence that their savings are safe.
- It’s possible that he’ll create new powers allowing the FSA to split up troubled banks into two sections, and give one of them the deposits and the “safe debts”, and the other the dodgy debts. (OK, that’s an oversimplifaction, and we’ll have to see what happens.)
The reason behind this is basically that the NR issue exposed the fact that a large bank could make lots of loans, and if some of them went pear-shaped, could ask the taxpayer to bail them out… BUT, and this is important, not give the taxpayer / government any rights to demand changes, but leave in place the Directors who got the bank into problems in the first place.
What Mr. Darling wants to do is set up a system whereby, if the taxpayers bail out a bank, the government (or its agency) can take control for a while, in exchange for stumping up the bailout cash.
So far, so good.
The BBC’s business editor, Robert Peston, raises some very good points:
1) What would constitute the kind of “emergency” that would put the Chancellor in the hot seat in this way?
2) How would the authorities distinguish between banks that run out of money due to their own ineptitude and banks that suffer in a general liquidity crisis?
3) Would shareholders in a troubled bank lose all rights when that bank is given emergency support?
I would hope that the answer to the first is as simple as “the bank needs government help”, but time will tell.