–Says He Hopes Reforms Will Ease Contraction Of Credit

London (MNI) – UK Chancellor of the Exchequer George Osborne set
out Wednesday his broad plans to give the Bank of England regulatory
control of the financial sector, with the current tri-partite system
abolished and the Financial Services Authority becoming a BOE
subsidiary.

Osborne said his other major concern after the budget deficit
and the euro zone crisis was the “contraction of credit”. Osborne said
that the latter was leading to “excessive capital hoarding” instead of
more lending to business.

In his keynote Mansion House speech, Osborne said that the new
regulation reforms would help to dispell the sense of uncertainty which
is constraining bank lending.

Under the new regulation plans, the BOE will take responsibility
for both micro and macro-prudential regulation. Osborne said the
financial crisis had highlighted the failings of the UK’s three legged
regulatory system, which involved the FSA, the BOE and the Treasury.

Instead, the BOE will now have the reins of regulatory power with a
new prudential regulator as one of its arms.

This new BOE controlled regulator “will carry out the prudential
regulation of financial firms, including banks, investment banks,
building societies and insurance companies,” Osborne said.

The tri-partite regime was set up by the former Labour
administration soon after it came to power back in 1997 and the new
Conservative lead administration is now scrapping it.

Under the new system the BOE will be at the centre of power, with
FSA Chief Executive Hector Sants moving over to head up the BOE’s
prudential regulatory arm.

“Because central banks are the lenders of last resort, the
experience of the crisis has also shown that they need to be familiar
with every aspect of the institutions that they may have to support,”
Osborne said.

“They must also be responsible for day-to-day micro-prudential
regulation as well,” he said.

He said the case of the central bank to have micro-prudential
responsibility is “particularly strong where the banking system is
highly concentrated as it is in the UK, where the boundary between micro
and macro-prudential regulation is not easy to define.”

Treasury minister Mark Hoban will set out the details of the new
regulatory regime in Parliament Thursday.

The BOE will also have an independent Financial Policy Committee
“which will have the tools and the responsibility to look across the
economy at the macro issues that may threaten economic and financial
stability and the tools to take effective action in response,” Osborne
said.

The whole transformation of the regulatory system will not be
completed until 2012.

In his speech, Osborne also reaffirmed the government’s commitment
to introducing a bank levy, details of which are expected in the June 22
budget.

An independent commission is being set up, headed by former Bank of
England chief economist John Vickers, to look into the future of banking
regulation.

The commission will be looking into such vexed question as
separation of investment and retail banking and Osborne said it would
report next year.

In an earlier speech at the same Mansion House dinner, BOE Governor
Mervyn King welcomed the creation of the new regulatory system.

–London newsroom: 4420 7862 7491 email: drobinson@marketnews.com

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