One piece of news in the Financial Times today reads “Tories would give Bank sweeping powers”. Sounds familiar, doesn’t it? Just a couple of weeks back, the Obama administration came out with its plan to expand the Fed’s powers to oversee banks that might pose a risk in the financial and the whole economic system. I suppose with this news coming out, the valid and necessary debate whether the Fed or in this case central banks are the right entity to perform such a role intensifies. Of course, that doesn’t even consider the differences between these banks. Another echoing from the US plan:
A Conservative government would give a “strong and powerful” Bank the job of supervising banks, building societies and other big financial institutions – a role that Mervyn King, Bank governor, has insisted he does not want. The Bank would be given a remit to stop dangerous imbalances and risky behaviour from threatening the whole financial system.
[Shadow chancellor] Mr. Osborne would reform the Bank, including creating a financial policy committee with outside experts. It would be given tools to protect the financial system, including the power to set a “backstop” leverage ratio, new liquidity requirements and counter-cyclical capital ratios.
Big banks with retail and investment arms would not be broken up – Mr Osborne admits that Britain could only act if other countries did the same – but they would have to hold more capital to reflect the fact that they benefit from an implicit taxpayer guarantee.
The rump of the FSA would be turned into a consumer protection agency.
And look at that. Plans of abolishing the FSA, just as the Office of the Thrift of Supervision will be effectively dissolved when it is merged with the Office of the Comptroller of the Currency. Having said that, the similarity need not be striking. Both cases could only point to the following facts:
- Central banks and governments have failed to prepare in a similar manner
- Banks in the US or Europe were both lacking the capital requirement while having huge exposures to sub-prime mortgages
- The Fed/BoE did not have the prescience of what was about to come
(There’s a more lengthy discussion on some facts of the Fed’s performance and role made by Willem Buiter in his blog over the weekend HERE).
I suppose the only discussion when considering both central banks performing the same roles is whether each are as competent as the other, or more appropriately if the BoE is as capable as the Fed (although Bernanke’s army cannot be said to have had a stellar performance prior and leading up to the crisis- having suffered the same disappointing failure as the BoE and just about any other central banks out there to foresee the coming crisis – again a great reference would be Dr. Buiter’s blog about what to do with the Fed – scroll up for the link).
Now, I would be very much interested to see a discussion on whether Bank of England or at least if Mervyn King (if he is a fairly-labeled Ben Bernanke counterpart) can perform the same role. While I’m inclined to think that the type of economy or political system would play a big role in answering the question, it might be wise to simply look at the differences between the Fed and the BoE as well as their heads. I hope Dr. Buiter can do a similar analytical post.