The tripartite system ‘was responsible for the crisis’
By politics.co.uk staff
The tripartite system put in place by New Labour to regulate the economy was responsible for the financial crisis, according to a devastating new report by the House of Lords economic affairs committee.
The report, which fundamentally undermines the prime minister’s claims to be the best man to run the country, is expected to form a central part of Tory attacks on the prime minister today, although the opposition was refusing to comment on it yesterday.
It could not come at a worse time for Gordon Brown, who is facing annihilation at the polls on Thursday when the local and European elections take place.
“We need to acknowledge that the regulations and their application contributed to the crisis, and made it worse when it came, because among other things, they had a pro-cyclical bias, did not pay enough attention to liquidity, and were wide open to regulatory arbitrage,” Lord Vallance, chairman of the committee, said.
“It is also clear that in the UK the tripartite authorities of the Bank of England, FSA, and the Treasury failed to maintain financial stability, in part because it was not clear who was in charge in a crisis and because not enough attention was paid to macro-prudential supervision – oversight of the aggregate effect of the actions of individual banks – in the period when ‘boom and bust’ was mistakenly assigned to history.
“We recommend early action to improve focus on financial stability in future. One way to help achieve this would be to return responsibility for macro-economic supervision from the FSA to the Bank.”
The tripartite system was created when Mr Brown – then chancellor – made the Bank of England independent as soon as Labour came to power in 1997. It includes the Bank of England, the FSA and the Treasury.
The decision to make the Bank of England independent handed most regulatory supervision to the FSA, but the committee found there was an inadequate definition of roles and responsibilities at all three constituent parts of the system.
A separate report from Sir Martin Jacomb – former director of the Bank – for the Centre for Policy Studies – goes further in recommending the FSA become a subsidiary of the Bank of England.
“It is to be hoped that the government will accept that the tripartite arrangement was a mistake, and that responsibility for the stability of the financial system must be entrusted to an agency with no other role, an agency within the Bank of England which can use its powers to discharge the duty effectively and efficiently,” Sir Martin said.
“Only then can we be confident that the financial system will be better able to withstand the next financial crisis.”
Today’s report also suggests:
- Increases in regulatory capital requirements for assets on banks’ trading books
- Central reporting and clearing of credit default swaps
- Greater oversight by the British authorities of UK branches of multinational banks
And it also recommends the development of policies to:
- Counter pro-cyclicality in existing regulations
- Regulate and supervise liquidity
- Improve bank governance
- Remove agency ratings from capital regulations
