From the Memorandum of Understanding between HM Treasury, the Bank of England and the Financial Services Authority – the Tripartite Authorities system agreed between Gordon Brown as chancellor, Mervyn King at the Bank of England and Sir Callum McCarthy, when he chaired the FSA:
Section 2, The Bank’s responsibilities
2. The Bank contributes to the maintenance of the stability of the financial system as a whole — one of its two core purposes. This involves:
i. ensuring the stability of the monetary system as part of its monetary policy functions. It acts in the markets to deal with fluctuations in liquidity;
ii. overseeing financial system infrastructure systemically significant to the UK, in particular payments systems whether based in the UK or abroad. As the bankers’ bank, the Bank stands at the heart of the payments system. It falls to the Bank to advise the Chancellor, and answer for its advice, on any major problem arising in these systems. The Bank is also closely involved in developing and improving the infrastructure and strengthening the system to help reduce systemic risk;
iii. maintaining a broad overview of the system as a whole. The Bank is uniquely placed to do this, being responsible for monetary stability and having representation on the FSA Board (through the Deputy Governor (financial stability)). Through its involvement in markets and payments systems it may be the first to spot potential problems. The Bank advises on the implications for UK financial stability of developments in the domestic and international markets and payments systems and assesses the impact on monetary conditions of events in the financial sector;
iv. undertaking, in exceptional circumstances, official financial operations, in accordance with the arrangements in paragraphs 13 and 14 of this Memorandum, in order to limit the risk of problems in or affecting particular institutions spreading to other parts of the financial system.
Alistair Darling, as Brown’s successor at HM Treasury, is largely tearing this section up. The chancellor wants to give the FSA a new statutory objective of maintaining financial stability, making it partly responsible for a function currently entrusted to the Bank.
This is an extraordinary smackdown – coming just over a week ago after Mervyn King declared in his Mansion House speech:
The Bank finds itself in a position rather like that of a church whose congregation attends weddings and burials but ignores the sermons in between…It is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials.
Mr Darling clearly doesn’t like being preached to.
On with the feud!
Related link:
King over the water – Lex