What is the point of a Regulator?

The government has encouraged the myth that banking was unregulated following the “Thatcher” reforms and this caused the problems of recent years. This begged the question of why the government left such a sorry state of affairs in being for more than a decade if it had been true, but like so much in the “explanations” of this crisis it was false.

The truth is simpler. They inherited a system of banking regulation which did control solvency and liquidity, demanding higher levels of share capital and cash than the present government required on its watch. This government transferred the successful banking regulation they inherited from the Bank of England to the tripartite structure they set up in 1997 under the control of the Chancellor.

We now learn that the FSA did its job and understood that the HBOS model was too risky. Why then under the new government’s structure did they not have the powers to require the bank to change its model? Why didn’t the Chancellor intervene or give them the powers to do the job? Or if he thinks they had the powers, why didn’t he enocurage them to use them?


  1. Not an Economist
    February 12, 2009

    “Why then under the new government’s structure did they not have the powers to require the bank to change its model? Why didn’t the Chancellor intervene or give them the powers to do the job? Or if he thinks they had the powers, why didn’t he encourage them to use them?”

    … because there was a boom in process that Brown didn’t want to interrupt because it was the source of the govt’s continued popularity which he wanted to continue for as long as possible so he could have a chance at being PM.

    Oh and because, as I think Cameron stated a short while ago, Brown does not understand the market economy and how it works.

  2. Doug
    February 12, 2009

    To me this looks like the FSA civil servants running a rearguard action. But even if I did believe them it seems contradictory that they make all these warnings and yet agree with the HBOS/KPMG investigation regarding the Moore allegations. Didn’t the FSA believe their own warnings or were their warnings simply wrong because it is Moore who has been vindicated in contrast to the FSA’s opinion?

  3. chris southern
    February 12, 2009

    It was purposely tampered with to create bubbles, creating more income for a goverment hell bent on spend money to keep it’s popularity.

    It’s sheer incompetance, especialy when part of the safety mechanism is ignored.

  4. Rare Breed
    February 12, 2009

    There should have been a recession around 2003/4 (or even earlier) but instead of accepting a smaller one at that time, Brown/Blair wanted to carry on with their vaunted “economic growth”. In reality they just allowed the banks to increase credit levels to give the impression of “growth” while putting off the inevitable correction for political reasons – incredible self interest.

    Real growth comes from savings and production. Maggie understood this (as adviced by Mr Redwood). Which is why in 1996 most of the british banks were only lending out the equivalent of their deposits – as Michael Fallon has pointed out.

    Raise interest rates to increase deposits (good businesses will still cope – they would rather have expensive credit rather than no credit).

    Cut public Spending

    Cut corporate taxes and incentivise UK production- this is a great time for tax competition. About time we sorted out our balance of payments.

    Watch out for flying pigs.

    1. figurewizard
      February 13, 2009

      Your point about the recession that never was in 2003/2004 is underlined by the fact that by the middle of 2003 the housing boom had slowed. At the same time however inflation had risen by 75% from, albeit a low level of 0.8%, in 2001 to 1.4%. Despite this in July 2003 the Bank of England chose to reduce its base rate from 3.75% to 3.5% and thus reassured the housing market boom recovered, leading to the disasters that have now overtaken both it and the rest of the economy.

      This one decision highlights the fact that the independence bestowed upon the Bank early in Gordon Brown’s chancellorship may well have been a myth – One that endures to this day.

  5. Bazman
    February 12, 2009

    Five of Britain’s largest banks went down under the watch of the FSA John. Remind us again what we are paying them for? My mortgage payments have not fallen as much as they should, due to the fact that my small and very cautious mutual building society has to pay into an insurance fund to help the larger bankrupt ones. What a scam!

  6. A man in the street
    February 12, 2009

    Surely a significant part of our banking regulation problem is driven by the need to comply with the various EU Directives on Financial Services, e.g. the Capital Requirements Directive (CRD) [2006/48/EC & Directive 2006/49/EC]. The FSA is really a creature of EU integration, implementing the single regulatory model as embraced by the EU for the “Europeanisation” of financial regulation following the Lamfalussy Report of 2000.

    Given that our financial and economic regulation is driven by EU Directives, it is not within the gift of any British Chancellor to change unilaterally chnage the banking regulation regime.

    But as ever Whithall does not want to admit that it is not master of its own destiny and the debates in the House will continue to focus on the behaviour of bankers rather than addressing the fundamental issue of the UK taking back control of its own financial regulation.

    Reply: Not quite so. The EU would not prevent us having tighter regs in many instances, and there is some freedom within the EU frameworks.

  7. Michael
    February 12, 2009

    If the FSA were required to publicise risk ratings (and to justify their ratings) on each licensed bank once a year, the market would force the banks to behave responsibly, and there would be no need for government to intervene.

  8. Brian Tomkinson
    February 12, 2009

    Brown has stated today that when the FSA was warning HBOS and looking at 28 other banks it did not see fit to discuss it with the Treasury nor was it mentioned at the tripartite meetings. What is the purpose of those meetings if not to discuss such matters? Are there any minutes from these meetings to verify Brown’s statement? I feel there is a lot more to uncover but sense that Brown is trying desperately to close down further investigations.

  9. Roger Hird
    February 12, 2009

    Failing a real inquiry (enquiry?) into what has happened, I guess we will have to depend on carefully drafted and targetted Freedom of Information requests to the FSA and the Treasury . . .

  10. Johnny Norfolk
    February 12, 2009

    Browns FSA and BoE changes have been pathetic.

    The reason Brown gave for making the BOE so called independent was so it could work independently of government.

    What he actually wanted was that labour could work independently of the BOE. as this is what has happened.

    He did not want the BOE looking over his shoulder he wanted to distance himself from it.

    He then made sure that his place men would be in the majority on the monetary committee, so he could pull any strings from a distance.

    He made his banking friend the Deputy at the FSA.

    If you think this is not true then just look at the facts of what has happened.

    He has been a law unto himself as I am sure Blair kept away from him.

    He must carry the can for Britain being less prepared than any country for the current recession.

  11. Lola
    February 12, 2009

    Mr Redwood, I work in an FS business and I have been saying for years that this was the case. Please will you do your very best to get these facts out to the general public. They are being consistently lied / spun to about ‘light touch’ regulation, when in fact it was – is – the complete opposite. The public are having a colossal deceit practiced upon them.

    1. Adrian Peirson
      February 13, 2009

      Lola could you post info on guido fawkes blog about what is going on

      it’s at :-


      Also you might find this interesting

      Congressman Ron Paul’s Campaign for liberty

      1. Lola
        February 13, 2009

        Right let’s start your ‘education’ on this bureaucratic nightmare. Go to:


        Have read through that and when you are happy you know enough about it come and have chat with me. You can go to


        and post a response to my latest posting.

  12. TCD
    February 12, 2009

    Dear John,
    Perhaps you would like to comment on the recurring suggestions of ‘quantitative easing’, a euphemism if ever I heard one. Mr. King seems to be intent on reducing the interest further to absolute zero, after which it is said the only option left is the above. But surely, the reality is that the current debt due to all the billions given to the banks is already so large that this can never realistically be paid back? In other words, quantitative easing is unavoidable. The Government simply hope that they can delay it until their time is up. If my analysis is right, Cameron should be much clearer about this; otherwise he will be saddled with the blame.

    Reply: yes I expect they will go for quantitative easing.

  13. Ian Jones
    February 12, 2009


    Surely the bigger issue besides Brown pretending anyone believes what he says any more is the fact that Mr King has announced the BoE will be printing money to buy Govt debt!!! The currency markets have noticed as the pound has dropped again.

    If we print money to fund Govt spending, how do we reduce liquidity when the economy recovers?!!!! Its the policy of a madman.

  14. Adrian Peirson
    February 13, 2009

    It’s starting to Unwind in the US.

  15. Adrian Peirson
    February 13, 2009

    Gordon Brown’s Job Is to collapse the system so the Global Bankers can come back in and Buy everyting up at rock bottom Prices, that is how they work.

  16. mike stallard
    February 13, 2009

    From 1997 until today, Mr Brown and his Labour colleagues have been constsntly repeating that his greatest achievement was “freeing up the banks”.
    It now turns out that the very opposite was the case.
    Here in Australia, today, there was one mention in the paper of the financial “crisis” – a building company went bust. There are 700 building companies in this area, apparently, and just four of them have recently gone out of business.
    So much for the “global Crisis”. It now turns out that the very opposite is the case.

  17. TomTom
    February 13, 2009

    Several German public sector banks have cratered in the past 18 months even though politicians sat on their boards and the regulator BaFin must have simply gone to sleep – or have an EU-induced narcolepsy which would suggest the FSA did not see itself as anything other than an EU branch office with no real responsibilities.

    On the other hand my personal view is that Northern Rock was a protected bank with political allies funded by it largesse which is why it grew like topsy. Bradford & Bingley was bungling with no real internal control system, and RBS was a protected bank with CEO hotline to Downing Street.

    HBOS was a City darling. Looking at the share price it zoomed after 2002 so Efficient Market Theory took a beating if FSA letters have meaning. The fact is the banking system went on a speculative boom to bust cycle which will cripple the British and perhaps European economy for decades.

    Hopes of building businesses are over as Britain will slump into protracted stagflation with rising prices from devaluation and excessive monetary growth. It looks as if the banking cartel will eradicate all competition and sluggish growth over coming decades will be concomitant with social unrest due to a very high birth rate

  18. Michael Taylor
    February 13, 2009

    In all the subsequent arguments over regulation (how much? by whom? etc) remember this: the choice is always and only between regulation and transparency. With maximum transparency, there should be minimal (if any) regulation. Only when transparency is impossible for the end user (ie, how can depositors know what commercial banks are doing with their money) should the question of regulation even arise.

    So here’s a suggestion. Rather than put huge amounts of effort into constructing inevitably expensive, unwieldy and ineffective new layers of regulation, the next Conservative government should put its legislative energy into encouraging the growth of a transparent financial system. For example, setting up a legal framework in which money market mutuals can flourish?

    And, crucially, it must be arranged that none of the costs of regulating the non-transparent portion of the financial sector falls on the new transparent sector. Ie, if you want non-transparency, you bear the costs of regulation. That way, the market mechanism works to grow the transparent sector, and diminish the non-transparent sector.

    Always remember: it’s regulation vs transparency.

  19. APL
    February 13, 2009

    JR: “What is the point of a Regulator?”

    What is the point of the Tory party?

    If it won’t even stand up for free speech?

    What of all the rhetoric? Standing on your hind legs and mouthing a lot of verbage means nothing, absolutely nothing, if you are not prepared to stand up and face down intimidation.

    (Words left out)

    Geert Wilders is a democratically elected politician of another West European country.

  20. Ron Fallows
    February 13, 2009

    If my memory serves me right the economic focus in the early Thatcher years was on control of the money supply. If Labour had adopted a similar approach and not chosen to exclude house prices and council tax from it’s CPI inflation measure, we wouldn’t be in this mess now. And we wouldn’t be paying for their profligance through higher taxes and a devalued pound.

  21. Hugh
    February 13, 2009


    Brown’s neutering and then abolition of the “Board of Banking Supervision” (1997 – 2004) really says it all.

    I looked at this some months ago after I picked up comments by Lord Lawson of Blaby. It appeared that informed Conservatives Nick St Aubyn and David Heathcote Amery spoke knowledgeably against at that time. (Hansard)

    The comment from Man in the Street about the involvement of Brussels looks very pertinent, am I right in thinking that the Tier One capital ratio was reduced as a result on EU wide decision or just because ‘”Boom and Bust”‘ had been abolished.

    Certainly it appears that monetary loosening over the period may be connected with this. Is there any simple source of history of these ratios?

    Am I right in thinking that it was this loosening as well as the off balance sheet nature of so much of the CDS that has probably contributed more to the current problems than anything else.

    All the Best

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