BOE AND FSA

Recent discussions between Conservatives and the Chancellor of the Exchequer on moving powers between Financial Services Authority (FSA) & Bank of England (BOE) have been dominating the agenda.

Conservatives insist on moving regulatory power from FSA to Bank of England whereas the Chancellor is planning a new Banking Act to strengthen the role of FSA.

FSA and Bank of England - two very prestigious organizations - are blamed for the crisis in the banking sector. A few points should be born in mind before targeting those two institutions as scapegoats:

1) Banking crisis is GLOBAL,
2) Every country and industry was hit,
3) FSA has set up the rules very clearly for a well functioning banking system. The problem lies with its application, which is not easy to control,
4) Bank of England is the model on which most modern, large central banks have been based.

Main functions of Bank of England as for all other Central Banks in the world are to provide monetary and financial stability.

Monetary stability's two main criteria are stable prices and confidence in the currency, which are controlled through inflation target and adjustments in base interest rate.

Financial stability is the crucial function, which these discussions are based on. It involves protecting against threats to the whole financial system and Bank's acting as "lender of last resort" in exceptional circumstances.

The Bank works with several organisations to serve these functions including HM Treasury, FSA, other central banks and international organisations.

Bank of England did a good job in managing the crisis so far. The base rate was lowered very successfully from 5% to 0.5% since March 2008; confidence was managed well by intervening the troubled banks such as Northern Rock and Royal Bank of Scotland on time.

FSA is an independent body that regulates the financial services industry. It is kind of a branch of Bank of England, which has already made significant changes in regulations, and managing risks.

In a nutshell, these discussions are not bringing any benefit. Focusing on finding constructive solutions would be ideal in these exceptional days, in which CONFIDENCE is the most important variable to manage.