LETTERS
. Indulging the Old Lady
Sir: Though I share his nostalgia for the waning power of the raised gubernatorial, eyebrow, I think Christopher Fildes (`Tumbling the Old Lady' 27 July) is too generous to the Bank of England. It is a bit cheeky of the Governor to argue that the supervisory legislation under which the Bank operates is defective. After all, he chaired the Review Committee on Banking Supervision set up after the collapse of Johnson Matthey Bankers and its 34 re- commendations formed the basis of the 1987 Banking Act.
The Supervision Department of the Bank was foremost amongst those pressing the Review Committee to recommend the abolition of the distinction between recog- nised banks and licensed deposit takers. This may or may not have persuaded the likes of the Western Isles Council that all the banks monitored by the Bank of England were equally credit-worthy, but it was argued by Bank officials at the time that it would allow the Supervision Depart- ment to apply the same supervisory stan- dards to recognised banks (like Johnson Matthey Bankers) as it did to licensed deposit takers (like BCCI). It was in fact a relatively unimportant change intended mainly to excuse the supervisory lapses which led to the Johnson Matthey debacle and to bolster the Supervision Depart- ment's claim for additional staff, training and money.
The most important change which fol- lowed the 1987 Act was not the abolition of the two-tier system but the dissolution of the duties of confidentiality which pre- vented bank auditors alerting the Supervis- ion Department to malpractice by a client. It was this which allowed the Bank of England to see the Price Waterhouse reports which prompted it to act in the case of BCCI. A second important change was the institution of a Board of Banking Supervision, also chaired by the Governor but consisting of independent experts drawn from outside the Bank. Interesting- ly, next to nothing has been heard of its activities in the case of BCCI.
The Bank was opposed to the Board, and accepted its imposition only to avoid the loss of its supervisory powers altogether. The preference of the then Prime Minister was to transfer supervisory authority to an independent agency akin to the Bundesaufsichtsamt far das Kredit- wesen in Berlin, which regulates the Ger- man banks. The Bank of England might have been wiser to follow that advice. As Christopher Fildes says, 'that would not stop the next Bank failing, but its fall would not rock the Bank of England.'
Dominic Hobson
23 Dulka Road, London SW11
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