The Bank of England should be given greater powers after the 'tripartite' system of financial governance failed to spot the financial storm that brought several banks to their knees, peers have said.
The House of Lords Economic Committee says the central bank should take executive responsibility for supervising the banking system as a whole. In a report, it states: "Without a clear executive role, the Bank of England can do no more than talk about financial stability. This exposes it to reputational risk without generating any clear benefit."
The report also notes that it is not clear who was in charge in the current triparite set-up, with the Treasury, Bank of England and Financial Services Authority (FSA) all working together. This led to a “collective failure”, as highlighted by the downfall of Northern Rock.
"A key role of regulation is to prevent crises or to mitigate their effects. The present system failed to do so," it said. It recommends the Bank of England's Financial Stability Committee (FSC), which was created by the Banking Act 2009, should now take the lead in preventing systematic risk.
In turn, the FSA came in for particular criticism for focusing too much on its consumer complaints remit at the expense of its supervision duties. “[The FSA] failed to take sufficient steps to alleviate risks to the financial system caused by excessive debt and banks' ventures into complex and opaque financial instruments," the report said.
It added the FSA, which took over the monitoring of financial stability from the Bank of England in 1997, had an "inadequate understanding" of the complex risk assessment models used by banks. However, if the proposed changes were to go through, the FSA would only be charged with "conduct-of-business" regulation over areas such as protecting consumers and tackling insider trading.
Sir Martin Jacomb, a former director of the Bank of England, argues in a paper for the Centre for Policy Studies that the FSA should become a subsidiary of the Bank of England and a new committee set up to oversee financial stability.
The Treasury is now considering the findings of the report and will formally respond later in the summer. It is publishing a paper on the future of financial services in the UK later this month.