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?