Alistair Darling outlines plans for regulatory bank shake-up

04 January 2008 / by Rachael Stiles
The Chancellor Alistair Darling has outlined proposals which will give the Financial Services Authority greater power in regulating the performance and difficulties of banks in order to avoid a repetition of the Northern Rock debacle.

In a regulatory shake-up of the way banks are monitored, Mr Darling has introduced plans which echo the structure in the US, which will allow the FSA to detect when a bank is in trouble and seize depositors' cash, protecting it and preventing a potential run on the bank in the event that it gets into serious difficulty.

The Chancellor has also said that to avoid further confusion and passing of the buck – such as what happened with Northern Rock when decisive action was not taken quickly enough to prevent the first run on a British bank for 140 years – he will be putting himself firmly in charge of dealing with future crises.

The changes to the current tripartite system will prevent delays in action as a result of disagreements between the three parties – the Treasury, the FSA and the Bank of England. The FSA and the Bank will still be able to give their views, but he will have the ultimate power to make decisions.

The new changes will also see depositors' cash immediately guaranteed at the first sign of trouble, when the FSA detects that a bank is at risk. The FSA will be granted easier access to the information required in assessing a bank's liquidity situation, and an alarm bell will sound if a bank requests a loan from the Bank of England.

Mr Darling sees that "there are huge uncertainties across the world" in the current financial climate, but that "we start from a very strong place", he told the Financial Times in an interview this week. It is thought that these changes to the regulatory system are hoped to reverse some of the damage done to the Chancellor's reputation by the initial handling of the credit crisis and his surprise changes to capital gains tax. He is "determined to ensure that nothing like this happens again".

BBA Chief Executive Angela Knight said that "

The British Bankers' Association is pleased the Chancellor seems to have taken on board much of what the banking industry recommended. We have been urging the government to bring a speedy resolution to the issues highlighted by Northern Rock."

Northern Rock is said to have borrowed a further £500 million from the Bank of England over the last week, bringing its total debt to a approximately £26 billion. However, while its fate hangs in the balance until a decision is made regarding its future, the struggling bank has managed to stem the flow of withdrawals from £200 million a day at its worst, to £5 - £10 million a day.

A shareholder meeting on January 15 is hoped to determine a solution for the bank.

While his old company awaits its sentence, ex-chairman of Northern Rock Matt Ridley is forging ahead with plans for Northern 2, a venture capital trust which buys out small companies valued at about £5 million. The trust has £43 million of assets under management and is currently valued at about £35.5 million.

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