How the Governor lost his eyebrows

‘Bank of England denies NatWest rescue move,’ screamed an Evening Standard headline in December 1974 as the credit squeeze strangled the clearer most exposed to the secondary banks that were falling like dominos. This month the Bank has been denying it has just rescued Barclays: the £1.6 billion lent at short notice was not an emergency loan, it insists, simply the use of a strategic safety valve.

Just as well, because it is no longer the Bank of England’s job to go round rescuing banks that run out of money. When Gordon Brown put the Bank in charge of setting interest rates a decade ago he took away its role as the supervisor of the banking system. The Governor at the time, Eddie George, did not think much of the idea, but having allowed the secondary banks to boom until they bust and let Johnson Matthey and BCCI slip through its hands, the Bank might well have thought supervision an impossible task best handed over to the clever-clogs at the new Financial Services Authority.

The rumours circling Barclays, with its ‘SIV-lite’ hedge funds, and Northern Rock, with its sub-prime lending, are thus the first test of the FSA’s handling of a potential banking crisis. Unfortunately, unlike the Bank, the FSA has no money. It could not rescue a bank even if it wanted to.

Brown’s changes after the 1997 election trimmed the three legs of the Bank of England to two. It lost banking supervision, but retained responsibility for financial stability and the use of interest rates to maintain monetary stability. The Brown regime means if an individual bank gets into trouble, it is a matter for the FSA at Canary Wharf, but if all banks get into difficulties, it is for the Old Lady of Threadneedle Street to sort out the mess.