Rules versus discretion

Today’s White Paper on financial regulation avoids introducing some unnecessary regulatory changes at the expense of failing to introduce some necessary ones.  In particular, it fails to recognise the abject failure of Gordon Brown’s “tripartite” framework, in which prudential supervision of the banks was taken from the Bank of England and given to the FSA.

Prudential supervision is the proper task of the central bank, for only if it has oversight of banks can the central bank decide whether they should receive last resort lending when they need it.  Without prudential oversight, the Northern Rock debacle is the likely result, and the fact that we are still debating this the best part of two years into the credit crunch is a sorry indictment of UK policymaking in this period.  Also, if the central bank does not have prudential oversight of the banks, but is expected to maintain financial stability, it is necessary to enter into all kinds of strange contortions about “macroprudential tools” and “counter-cyclical capital controls”.