FSA To Have More Power To Deal With Failing Banks
The Financial Services Authority (FSA) is to be given more powers to deal with failing banks by Chancellor Alistair Darling.
In an attempt to avoid another crisis like the one that hit Northern Rock, Mr Darling proposes to allow the FSA to seize and protect customers' cash should the bank get into trouble. The regulator would also have enough power to ensure that any such bank would have enough cash flow to keep afloat.
The legislation is planned for May after three months of consultation with various relevant parties.
When Northern Rock was plunged into crisis in September and went cap in hand to the Bank of England for emergency funding, savers queued round the block to withdraw their money. The panic came about because no one knew if their savings were safe. It was the first run on a UK bank in more than a century.
Mr Darling does not want to have a special institution in place to take over banks if they get into trouble, as is set up in the US. However, he does want a new Cobra-style response unit - based on the civil emergencies committee - to be introduced to deal with any similar problems in the future.
Mr Darling said he wanted to give the FSA the power it needs. This might include the separation of parts of the business and movement of deposits to another bank. He also indicated that he would like to make sure there was no doubt about how much money was guaranteed and that people can get at their money fairly quickly. Currently £35,000 is guaranteed by the Treasury, but it is thought the Chancellor may increase this amount.
Although saying there was nothing fundamentally wrong with the current tripartite arrangement whereby the FSA, the Bank of England and the Chancellor deal with bank problems, he is planning to make changes there too. Bank of England Governor Mervyn King has commented that the current system arrangement was unsatisfactory in dealing with situations like Northern Rock.
Angela Knight, of the British Bankers' Association, felt closer consultation was needed with the banking industry, and said: "Early intervention has to be right when a financial institution gets into difficulty. These are technical areas and we have to get them right."
The Chancellor appeared to be very unhappy with the situation at Northern Rock and the fact that the board of Northern Rock, and to an extent its shareholders, had retained too much power in influencing the destiny of the bank, while the Government had lent the bank £57bn. If a bank is aided to such a huge degree then the power of the board and the influence of the shareholders would disappear at a stroke if the Chancellor gets his way. Power would then be in the hands of the Chancellor, the FSA and the Bank of England, and they would be in control of the failing bank’s destiny.
The current situation at Northern Rock certainly appears odd, with £57bn of taxpayers' money having been piled into the bank, yet the power still lies with the board and shareholders.
Published on January 8, 2008
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