Andrew Sawers

It was a time when the Bank knew the character of a man and didn’t need an inspector’s risk assessment report to know a bad ’un.

Maybe I exaggerate. Maybe those days never really existed. The legend persists, however, and, despite the crisis of the past two years and despite the shameful way that regulatory powers were stripped away from the Bank by Chancellor Brown in 1997 to create a new super-regulator, I think there is still an enormous amount of inherent goodwill in the Bank.

All of which makes the behaviour of our Treasury towards our central bank look petty, vindictive and, ultimately, counter-productive. According to Governor Mervyn King, the Treasury’s review of banking regulation has not, so far, seen fit to ask the Bank of England what it thinks. Alistair Darling’s white paper is apparently imminent. The best King seems able to hope for at the moment is that the Treasury will show him a copy before it’s published.

Relations between Whitehall and the Bank have often been frosty and King’s recent warning to Darling to rein in the cataclysmically large budget deficit will not have helped.

Well, tough. Frankly, the Bank needs to be playing a bigger role in economic and financial regulation. Independence for the setting of interest rates is all well and good ­ in fact, it’s probably the single best thing Gordon Brown ever did. But control over monetary policy is about as useful as a wine cork in a broken dike when fiscal policy has performed reverse alchemy, turning the Golden Rule into base metals.

Moreover, while the FSA positioned itself as a regulator of all players who muck about with other people’s money ­ – banks, investments, mortgages ­ – it lacked the skills that enabled it to do that effectively at the individual level and certainly not at the macro level.

Look at older issues of the Bank’s financial stability reports and it’s clear there was an unease developing before the financial storm broke. True, a sense of unease doesn’t add up to much if you don’t do anything about it and the strained relationships within the tripartite regulatory regime wouldn’t have helped turn thought into action.

But the linkages between a fast-growing economy, a low-interest rate environment, booming house prices, a hugely well-paid, creative, rampant banking sector and a regulatory regime that struggled to supervise individual banks ­ – never mind banks as a whole ­ – mean that an overseer who actually understands all these connections is needed to take a leading role in what we must now call ‘macro-prudential supervision’. A strengthened Bank of England, endowed with new-found respect by the Treasury, is what we’re going to need.

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