–Adds BBA Comments On Need For EU Harmonisation To Earlier Version

LONDON (MNI) – A memorandum of understanding (MoU) published Friday
shows the Bank of England agreeing that the Treasury should have the
power to take control over the central bank’s actions during a financial
crisis.

Draft financial services legislation presented in parliament
Thursday has been followed by the publication of MOUs which spell out
the new roles of the BOE and the Treasury in trying to ensure financial
stability. While the BOE is being given legal power to take the lead
financial role over financial stability, the Treasury is getting the
power to take over the reins in a crisis.

The BOE is making clear it is firmly in favour of the new
agreement.

“The MoU on crisis management was developed personally between the
Chancellor and the Governor and both sides are in total agreement on
it,” the BOE said.

The MoU spells out the roles of the Treasury and central bank.

“The Bank has primary operational responsibility for financial
crisis management. The Chancellor and the Treasury have sole
responsibility for any decision involving public funds,” the
BOE/Treasury MoU says.

However, things change during a crisis. The new draft legislation
and agreements between the central bank and the Treasury are an attempt
to learn the lessons of the financial crisis that started in 2007, and
which saw the UK’s authorities struggling over bank rescues and
liquidity issues.

“When the Bank has formally notified the Treasury of a material
risk to public funds, and either there is a serious threat to financial
stability, or public funds are already committed by the Treasury to
resolve or reduce such a serious threat and it would be in the public
interest to do so, the Chancellor may use powers to direct the Bank,”
the MoU says.

The draft legislation sets out the detailed working of the BOE’s
newly created Financial Policy Committee. Under the previous, Labour,
administration regulatory power was taken away from the BOE and handed
to the Financial Services Authority but now the central bank is taking
key powers in-house.

The new court of the BOE is set to comprise the Governor and three
deputy governors, with the monetary policy deputy being joined by one
responsible for financial stability and another responsible for
prudential regulation, along with up nine other directors.

The UK banking industry gave a cautious welcome to the new regime,
but urged the authorities to dovetail UK regulations with those of the
European Union.

This echoes work published by the BOE Friday warning of leakage if
cross-border banking regulatory co-operation is not assured.

The British Bankers’ Association said the Chancellor should be
involved in crisis management even earlier than the draft bill suggests.

“It is vital to bring the Chancellor into crisis management
decisions at an early stage – and sooner than the current proposals
suggest,” BBA chief executive Angela Knight said.

“The way the financial system copes with crisis also needs to
dovetail across the EU so that what happens in the UK is in step with
everyone else. Unless we operate the systems in parallel we will end up
with two regimes per bank,” the BBA added.

–London newsroom 0044 20 7862 7491; email: drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$]