8 Responsibilities in times of crisis?
173. The Government intends to make the regulatory
system more robust. However, no system can eliminate all risks,
and the new arrangements need to be clear about responsibility
in a time of crisis. As the previous Treasury Committee explored
in its report on The Run on the Rock, the previous arrangements
resulted in regulatory 'underlap' and lack of clarity about who
was in charge in crisis. There is a consensus that, in normal
circumstances, regulation is best conducted independently of government,
within a framework set up by government and Parliament. In times
of crisis, however, when decisions have to be taken quickly, and
public money may need to be spent, democratic legitimacy is vital.
174. The Government has developed a new crisis management
framework which assigns particular responsibility to the Treasury
and the Bank of England from 'peacetime', to 'emerging risks'
and finally 'crisis management' mode. The split in responsibility
is described in figure 2 below.
175. The consultation notes:
Currently, the Chancellor of the Exchequer is accountable
to Parliament for decisions involving the use of public funds,
for compliance with the UK's international obligations, and for
the exercise of certain powers, including the power to transfer
a bank or a bank holding company into temporary public ownership
and the power to amend the law to enable a power under the regime
to be used effectively. The Bank is the lead resolution authority,
responsible for the bridge bank and private sector purchaser stabilisation
options.
6.23 It is important to ensure that appropriate safeguards
are in place to ensure that conflicts do not arise between the
Bank's role as lead resolution authority and the Bank's new responsibilities
in relation to the PRA, which will be responsible for pulling
the trigger to put a failed institution into the SRR [Special
Resolution Regime]. The Government will therefore put in place
arrangements to ensure that contingency planning and resolutions
are managed distinctly from the Bank's functions in relation to
the PRA. Specifically, resolution will be managed by the Deputy
Governor for financial stability, and not the Deputy Governor
for prudential regulation (the CEO of the PRA).[157]
176. In his speech on 13 December, Mr Sants suggested
that the authorities involved will co-operate closely:
There will need to be a strong underlying cooperation
between the PRA, the FPC, the Special Resolution Unit and the
rest of the Bank.
When supervising firms, in order to decrease the
probability of failure and ensure orderly resolution, our goal
is to introduce a formal, proactive intervention framework for
the PRA and the Special Resolution Unit so that concerns about
individual firms are elevated and remedial actions taken at an
early stage. The framework will have two purposes—firstly,
it will require firms to take appropriate remedial action to reduce
the probability of failure. Secondly, it will flag the need for
actions to be taken by the authorities so that the failure or
resolution of a firm can occur in an orderly manner with minimum
disruption and cost to the financial system and to individual
customers.[158]
177. Insofar as functions can be divided, the Bank
of England will be responsible for the design and execution of
most regulatory policies and the resolution regime, the PRA will
decide whether to put an institution into resolution, while the
Treasury will have the control of any use of public funds. The
Governor will report to the Chancellor on financial stability
every six months as a matter of routine. As soon as taxpayers'
money may be required, the Governor will be under an obligation
to notify the Chancellor to give him/her sufficient time to consider
and discuss all options. The Chancellor will have the final say
on whether public funds should be deployed to maintain financial
stability. The Financial Secretary told us:
I think we have moved from a situation where there's
lack of clarity about who is responsible under the previous architecture
to one, I think, where there is much greater clarity because it
is the PRA that will be responsible for prudential supervision
of an institution. It will be responsible for pulling the trigger
for the special resolution regime. The Bank of England is responsible
for determining which of those tools is appropriate-whether it
is a bridge bank, or whether there is a sale to the private sector-but
where public money is used in the resolution, ultimately the Chancellor
will have to decide whether or not to use public money to do that.[159]
178. The Governor told us that this new arrangement
would keep the Chancellor informed on financial stability issues
and the risks of using public funds:
Part of the new framework is a very clear statutory
obligation on the Governor to keep the Chancellor informed about
any developments that might have implications for the use of public
funds precisely so that we should avoid the position, which I
gather distant memories can recall, but none of us can, when there
were situations when a chancellor felt he was asked to commit
public funds, but had no opportunity to influence the course of
events that led to that.[160]
179. No one can predict what form the next crisis
will take. It is therefore essential that a well-defined crisis
management plan is in place to minimise the disruptions caused
by financial instability, and ultimately the pain suffered by
the public purse.
We have some doubts about a system in which one authority decides
whether or not to put an institution into resolution, another
related institution decides what form that such a resolution arrangement
should take and a third is responsible for the decision to use
public funds. We also note that the decision to allow an individual
firm to fail might contribute to a systemic loss in confidence.
180. One aim of the reforms should be to increase
the likelihood that individual companies can be resolved without
recourse to public money, and without threatening the stability
of the wider system. Firm collapse should not be conflated with
financial crisis, and the resolution of individual firms should
not normally be a matter for the Government. It may be there are
occasions when the Government is approached with a request to
provide funds to help resolve an individual institution where
the decision is relatively straightforward. The problems come
when public funds may be required to secure system stability—and
in identifying the cases in which systemic risk is involved.
181. We accept
that the Governor will keep the Chancellor up-to-date with developments
in the markets which may have an impact on financial stability.
However, if a systemic crisis occurs which the Bank considers
public money is required to resolve, it is hard to see how the
Government could assess such a request while remaining at arm's
length from the process. As we have seen recently, rescuing the
financial system may have significant effects on public finances.
Only a democratically elected Government should make such decisions.
It will bear the responsibility for any errors; it must have the
information and freedom it needs to choose its position. In times
of crisis, it has to be the Government that is in charge. Once
it appears likely that intervention beyond a single firm is necessary,
and where public funds are put at risk the authorities should
take decisions together, led by Treasury Ministers, and where
appropriate, the Chancellor, chairing any crisis management meetings.
VETO POWER?
182. When the Bank of England was given independent
control of monetary policy in 1997, the Treasury retained the
power to take over monetary policy by giving the Bank directions
if it was deemed to be in the public interest to do so, mainly
because of extreme economic circumstances. The Bank of England
Act 1998 gave the Treasury the following Reserve Power:
(1) The Treasury, after consultation with the Governor
of the Bank, may by order give the Bank directions with respect
to monetary policy if they are satisfied that the directions are
required in the public interest and by extreme economic circumstances.
(2) An order under this section may include such
consequential modifications of the provisions of this Part relating
to the Monetary Policy Committee as the Treasury think fit.
(3) A statutory instrument containing an order under
this section shall be laid before Parliament after being made.
(4) Unless an order under this section is approved
by resolution of each House of Parliament before the end of the
period of 28 days beginning with the day on which it is made,
it shall cease to have effect at the end of that period.
(5) In reckoning the period of 28 days for the purposes
of subsection (4), no account shall be taken of any time during
which Parliament is dissolved or prorogued or during which either
House is adjourned for more than 4 days.
(6) An order under this section which does not cease
to have effect before the end of the period of 3 months beginning
with the day on which it is made shall cease to have effect at
the end of that period.[161]
183. The
boundary between 'emerging risks' and 'crisis mode' is often unclear.
As we saw in the banking crisis, major financial institutions,
such as RBS and HBOS, had to be rescued over a short time frame,
such as a weekend. There has to be some mechanism that will allow
the Government to intervene if, in its view, a crisis is developing,
and other authorities are unwilling to act.
184. Despite
granting the Bank of England independence in monetary policy,
the Treasury retains an emergency power to give the Bank directions
in setting monetary policies, when it considers it is in the public
interest to do so and under extreme economic circumstances. A
similar 'reserve power' should be given in the new legislation.
It is important that the Government retains the power to take
control over actions for which it will ultimately be held responsible
whilst recognising that the use of such draconian powers would
be an extreme step and would prejudice the perceived independence
of the regulatory institutions.
157 Cm 7874, paras 6.22-6.23 Back
158
Reforming regulatory practice: progress to date Back
159
Q 835 Back
160
Q 1 Back
161
Bank of England Act 1998 S.19 Back
| 
