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The British Parliament’s Treasury Committee held a “Financial Stability and Transparency” hearing Jan. 10 to hear Chancellor of the Exchequer Alistair Darling’s new plans to increase the government’s power to regulate and oversee the British banking sector. The hearings and Darling’s proposals are designed to address the hit to London’s reputation as a financial center in the wake of the first British bank run in 140 years, when the Bank of England had to bail out the mortgage bank Northern Rock as it faced failure because of the U.S. subprime crisis.
While it could create a more burdensome regulatory environment, Darling’s plan probably will not fundamentally alter London’s light-touch approach to financial regulations in the near future. London does not want to forsake its competitive advantage.
The United Kingdom is tightening rules as a sensible operational precaution, but will continue to maintain the relative political freedom with which British financial markets operate. Meanwhile, U.S. financial markets will lobby Washington to free up U.S. markets and use political pressure to rein in their European rivals.
Darling will promote changes to the tripartite British system of financial regulations, under which the Financial Services Authority (FSA) monitors individual banks and the British Treasury holds the power to release funds from the Bank of England. Prime Minister Gordon Brown established this system in 1997, when he was chancellor of the exchequer. It was designed to give the Bank of England more independence. Now critics say the system prevented the three institutions from sharing information in time to prevent the Northern Rock failure.
The scope of these changes is limited; reform probably will come in the form of increased oversight powers for the FSA and the creation of a central coordinator responsible for averting such incidents the next time a credit crisis comes along. But increased scrutiny of London’s financial regulations could lead to more laws and regulations across the board.
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