THE Bank of England is to lose its responsibility for banking supervision under a radical overhaul of financial services regulation launched this week.
Mr Gordon Brown, the chancellor, is to transfer supervision from the Bank to the Securities and Investments Board, the umbrella organisation which currently oversees a variety of other regulators. In a second, phase those self regulatory organisations would also be merged into the new SIB, which would be a single statutory authority with sweeping powers over banks, financial services, companies and markets.
It is clear that the distinctions between different types of financial institutions - banks, securities firms and insurance companies - are becoming increasingly blurred . . . So there is a strong case in principle for bringing the regulation of banking, securities and insurance under one roof," according to the chancellor.
Mr Howard Davies, deputy governor of the Bank of England, will take over as chairman of the new and expanded SIB when Sir Andrew Large, the present chairman, steps down in two months. Mr Eddie George, Governor of the Bank of England, has repeatedly argued against removing supervision from the bank.
In a hurriedly called meeting with bank staff after the chancellor's announcement, he made it clear he had not been consulted about the decision to strip the bank of its traditional supervisory powers.
The new government's plans to roll regulators such as the Securities and Futures Authority and the Investment Management Regulatory Organisation into the SIB had been widely aired, but the decision on banking supervision was less expected. It comes two weeks after the chancellor gave the Bank operational independence for monetary policy, while at the same time taking away its traditional responsibility for the gilts market.
If Britain was eventually to join the European economic and monetary union, the bank would be left with an even more restricted role, roughly equivalent to that of one of the regional federal reserve banks in the US.
Mr Alistair Darling, Chief Secretary at the Treasury, said legislation to move supervision from the bank to the SIB would be introduced this summer and could be law by the autumn. The overhaul of the 1986 Financial Services Act, which will roll the SFA and other regulators into the SIB, will not take place until late next year.
Mr George said the bank's position in the regulatory structure was less important than the preservation of stability in the financial system.
"We have never argued that banking supervision for the purpose of depositor protection must necessarily be undertaken in the central bank. We have recognised that changes in financial markets are blurring traditional distinctions between banks and other financial intermediaries," he said. But in recent speeches he has argued that "there are limits to what one can expect, simply by putting regulatory activities under the same roof".
Britain is not the first country to move responsibility for banking supervision away from its central bank. Over recent years the boundaries between different categories of financial institution have been breaking down.
Banks have become increasingly involved in the securities business, as well as in areas such as insurance and fund management. Yet the approach of traditional bank supervisors has often varied considerably from that of securities regulators, adding bureaucratic burdens for banks and also creating the risk of loopholes.
In one recent example, the Securities and Futures Authority came out with proposals for the treatment of credit derivatives, a new type of financial instrument allowing banks to trade the credit risk on their balance sheets, which contrasted sharply with the more conservative rules adopted by the Bank of England.
Other countries' experience, however, presents a mixed picture of whether the links between central banking and supervision can be broken so easily.
In the US, banking supervision presents an impossibly complicated structure besides state banking regulators, the Office of the Comptroller of the Currency, a department of the Treasury, oversees nationally chartered banks, while the Federal Deposit Insurance Commission also carries out some supervisory functions.
Above all, the Federal Reserve combines supervisory responsibility for bank holding - companies and state chartered banks which belong to the Federal Reserve system - in other words, most of the largest groups - and foreign banks with its monetary policy duties.
The turf battle between the Fed and the Comptroller has been one of the many factors behind the failure of repeated attempts to overhaul the US's outdated regulatory structure.
Mr Alan Greenspan, chairman of the Fed's board of governors, has repeatedly argued that the central bank needs to play an important role in banking supervision in order to carry out its broader responsibility for the stability of the financial system.
In continental Europe, supervisory and monetary policy responsibilities are often split. Countries such as Germany, France and Denmark all have separate banking supervisory commissions. The Commission Bancaire in France retains, nevertheless, close institutional ties to the Banque de France.
The clearest separation is perhaps in Germany, where the Bundesaufsichtsamt is based in Berlin, physically removed from the Bundesbank in Frankfurt. However, much of the inspection work on individual banks is carried out by the Bundesbank's regional member banks, and the Bundesbank maintains a large department looking at supervisory issues.
Some other European countries complain, in fact, that Germany ends up occupying two seats at European Union meetings on banking supervision, since representatives from the Bundesaufsichtsamt and the Bundesbank must be accommodated.
Yet the general trend now appears to be towards a deeper separation between central banks and financial supervision. Australia, for example, is moving towards the creation of a single financial services regulator, greatly reducing the supervisory role of the Reserve Bank.
