This morning Mervyn King gave evidence to a Treasury Select Committee concerning his handling of the Northern Rock crisis and the credit crunch more generally. His view was that it would have been irresponsible to act earlier, as it would have undermined, rather than underpinned, confidence in the banking system. Of particular interest was his claim that "The bank would have preferred to have acted covertly as lender as last resort, to have lent to Northern Rock without publishing it", but was prevented from doing so by the EU's market abuses directive. He criticized the regulatory framework more generally:
"We're hemmed in by four pieces of legislation...The interaction between different pieces of unconnected legislation made it almost impossible for us to act as a lender of last resort in the way that I would prefer."
There is significant policy and political interest in this area - more perhaps than in matters related to the Bank of England for many years. Amongst the important issues are:
- Should Mervyn King be re-appointed by the Chancellor next June when his five-year term as Governor ends? This is an important political decision to which our Treasury team might legitimately contribute.
- Gordon Brown's widely-lauded monetary policy and financial regulation arrangements have, in this event, failed. He made large political gains when matters seemed to be going well and his system appeared strong. Will he be made to pay the price now that weaknesses in his system have been exposed?
- Is it sustainable for the FSA to have oversight of banking supervision whilst the Bank of England has responsibility over lending money to banks if needed? Won't the public naturally listen to FSA claims that a bank under pressure is solvent and all is well and respond, with Mandy Rice-Davies, "Well, they would say that, wouldn't they?"
- Given the natural public cynicism over the assurances given in these situations, are the transparency provisions of the EU directives really appropriate for the UK's situation? Transparency provisions that might be useful in many parts of Europe may not be appropriate here.
- There is growing pressure to introduce increased deposit insurance for retail savers - perhaps along the lines of the US system. But increased deposit insurance is naturally accompanied by (indeed must be accompanied by) a slew of additional regulation that is not currently necessary in the UK. Is a massive extension of UK banking regulation really the best response to political mishandling of a mini-crisis brought on by the excessive transparency inappropriately introduced by a combination of New Labour orthodoxy and European meddling?