Tripartite regulatory system 'simply hasn't worked'

The Northern Rock crisis has exposed confusion at the heart of banking regulation caused by the three-way split for financial stability between the Bank of England, the Financial Services Authority and the Treasury.

"It was a complete and utter disaster. No one wants to take responsibility," said a senior banker at a UK lender.

The Bank is responsible for monetary policy, oversees the money markets and can make money available to institutions to stop problems affecting the wider financial system. The FSA supervises financial institutions and markets. The Bank and the FSA keep the Treasury informed because it is accountable to Parliament for the management of problems in the financial system.

The transfer in 1998 of the Bank's powers of supervision to the FSA was meant to ensure accountability, avoid duplication and avoid perceived conflicts of interest. But the credit crunch and the near-collapse of Northern Rock have caused increasing disquiet in the banking industry about the lack of coordination in response to the crisis.

Critics point to lack of action by the different authorities as the credit crisis took hold and Northern Rock suffered, leading to the Treasury's intervention on Monday to guarantee the savings of not just Northern Rock depositors but in the whole banking system. They say the crisis has been one of confidence and that restoring confidence has to be the role of one regulator.

"The tripartite arrangement hasn't worked," said Willem Buiter, professor of economics at the LSE and a former member of the Bank of England's Monetary Policy Committee. "You end up chloroforming the entire banking system. What had to be done was ludicrous."

Opposition politicians were already questioning the split in responsibilities between the Bank and the FSA before the crisis at Northern Rock erupted. The Bank's Governor will face hard questions from the House of Commons Treasury Committee today about the joint response to the turmoil. The heads of the FSA are due to appear before the committee in October and will get a similar grilling.

"They will have to go back to the drawing board to find a different way of sharing responsibilities," Professor Buiter said.