Alastair Darling Plans To Control Future Crises

ALISTAIR DARLING plans to make himself the key decision-maker in any future financial crisis, overruling the Bank of England and Financial Services Authority if necessary.

The chancellor is looking to reform the current “tripartite” system of regulating and supervising banks and financial markets in a way that will address the central criticism of this summer’s crisis – that nobody was in overall charge.

While final decisions will await the recommendations of the Commons Treasury committee, which has been investigating the Northern Rock affair and the turmoil in credit markets, work has been going on at the Treasury on toughening the regime.

Darling is understood to favour a system modelled on the “Cobra” committee for dealing with terrorist attacks and other civil emergencies. Under that system, the police, the armed forces and other experts give their advice – which can be conflicting – but the final decision is made by the prime minister or home secretary.

When the crisis broke in credit markets in August, the Bank was criticised in the markets for failing to provide liquidity quickly enough. Critics, including the Financial Services Authority, said speedier action could have prevented Northern Rock having to seek “lender of last resort” assistance from the Bank in September, a move that has so far required the Bank to provide it with at least £25 billion of funds.

The Bank governor, Mervyn King, refused to provide liquidity initially because he was concerned about the “moral hazard” or bailing out irresponsible banks. He has insisted that ear-lier action would not have saved Northern Rock but it remains a bone of contention.

But in a rerun of such a situation, if he follows the Cobra parallel, Darling could order the Bank to pump in liquidity, against its objections, if he was persuaded by the arguments of the FSA and his own officials.

The Treasury’s proposals to toughen up the tripartite system will come in the new year. King and his colleagues are set to give evidence to the Treasury committee on Tuesday while Darling has a session scheduled for January 10.

Financial markets remain nervous despite last week’s joint action by leading central banks to head off a severe liquidity squeeze over the coming weeks by providing £50 billion of short-term assistance to the banks.

The main economic focus this week will be on inflation figures on Tuesday, which are expected to edge up from October’s 2.1% rate, and how members of the Bank’s monetary policy committee voted recently on the cut in interest rates from 5.75% to 5.5%. Some analysts believe it was a unanimous 9-0 vote, but others think it was a knife-edge decision.

According to a survey of analysts by the data firm Ideaglobal. com, the median expectation is for a 6-3 vote in favour of the cut.

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