Alistair Darling’s White Paper – The Hits And Misses

There’s been bickering between grown men, there’s been political point-scoring, there’s been glimpses into a world so bureaucratically labyrinthine that it’s no wonder the world’s gone tits up. But all the fighting about who’s going to be the daddy of financial regulation in our new supposedly wiser and better post-recession UK has been decided by Alistair Darling in his much-awaited white paper. Its proposals: like before, but good this time.

First, the bad – structurally, the new order is as open, if not more so, to the kind of infighting and barriers to progress that it was before. The tripartite system, with responsibility being shared between the Treasury, the Bank of England, and the Financial Services Authority (FSA), managed to ignore each others recommendations throughout the period of rampant overleverage and negative equity lending and the like, but it’s being kept. There’s a new Council for Financial Stability, where the heads of the three bodies will meet to discuss crucial issues, though they actually already do that in a standing committee in the Commons, so how much that can be relied upon to effect change is pretty debatable. The hope is that the increased transparency of the Council will prevent ideas being dismissed without proper debate – the danger here is obviously the opportunity for electioneering and political point-scoring, as well as interminable squabbling.

Surely it would be better to beef up the FSA, and have it solely responsible for carrying out regulation, leaving the Bank to its historic role and the Treasury to form policy? As it is, the system is open to the kind of spats we’ve seen between the bodies recently; indeed, it could be said that Mervyn King has been kicking up a fuss merely to highlight these weaknesses of the tripartite system, and thus staking his claim for the Bank to wield much of the power. Though Darling claimed yesterday that the Bank didn’t want to become a banking regulator: “That is not a power that the Bank is seeking at the moment”.

But while the balance of power looks set to continue see-sawing, the actual proposals in the white paper look sober and sound. There was more faith in maintaining high capital levels in banks, though again the actual levels were not set in stone; there are also heartening (yet equally vague) gestures towards preventing boom and bust cycles in the economy.

Banks themselves will be pleased with the decision not to split investment and retail branches of major banks, though the current bubble, with a handful of banks holding much of the assets and generating huge profits from them, looks set to burst and the government demands more competition in the sector (the doling out of Northern Rock assets will be one of the first steps in this process). The banks will not be happy with the proposal that they maintain a pool of cash for paying back depositors who stand to lose money if their bank fails – they argue that having this pool, rather than allotting government funds when the time comes, is expensive, inefficient, and that governments would need to spend bailout money anyway. They may have a point – this can be seen as a bit of a votes-winning exercise, to show how in thrall Labour is to its people rather than to bankers, rather than a truly effective way of dealing with times of crisis. Nevertheless, it at least toes Labour’s prudential line.

The opposition parties have been quick to attack –  George Osbourne going after the tripartite system, saying that a Tory government would hand powers over to the Bank, and create a consumer watchdog in place of the FSA; Vince Cable going after the lack of a proper pay cap in the City – “There will be champagne corks popping all over the City this afternoon – the Chancellor’s statement proves that it really is business as usual.”

This kind of beef is inevitable, and the point of a white paper is to have the details filled in over the forthcoming weeks. The proposals are sound – let’s hope they can find a path through the system into being.

Posted by Ben Beaumont-Thomas in Hot Money | July 9, 2009 11:42AM |