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Chancellor to tighten bank rule

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Thursday, September 18, 2008 17:17:26

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His comments came in a BBC interview as the world digested the fate of two of Wall Street's historic banks - Lehman Brothers and Merrill Lynch.

He called the resulting turmoil in global shares "inevitable", but added that regulators were taking action.

"We'll do everything we can to maintain stability", he added.

Speaking on BBC Radio 4's Today programme Mr Darling continued: "That means we need to take action internationally and we are.

"It means central banks need to help and yesterday you saw right across the world the American Fed, the ECB, our own Bank of England and Japan all intervening."

On Monday, the Bank of England, the European Central Bank (ECB) and the US Federal Reserve all made billions of dollars of additional funds available to help out the money markets.

"Harmful speculation"

Commenting on the part played by hedge funds in driving down markets, Mr Darling said there were people who were involved in harmful speculation rather than legitimate hedging.

"I am extremely anxious that we avoid a situation where people can manipulate markets causing huge harm, and that is totally unjustified and that is a job for the Financial Services Authority and they will have our full backing in doing that," he said.

BBC's Business Editor, Robert Peston said the FSA would have a tough job.

The practice of selling shares that have been borrowed with a view to buying them back at a lower price and pocketing the difference, also known as speculative short selling, can cause shares to fall dramatically.

Writing in his blog he said: "First, short-selling (as I've said many times) is not evil in itself.

"In fact, short-sellers perform a public service when they take a risk to puncture the over-valuation of assets, as they routinely do.

"Second, in global markets it's hard for any single national regulator to take a stand against a practice like short-selling, when investors can simply move their activities offshore."

Northern Rock-style crisis

The chancellor first started to look at ways to tighten the regulation of the UK banking system immediately after the collapse of the lender Northern Rock.

In June, he announced in his annual Mansion House speech that he planned to strengthen the Bank of England's role in the event of another Northern Rock-style crisis.

Mr Darling aims to create a financial stability committee along the lines of the monetary policy committee, which sets interest rates.

The government aims to to push the changes through in the banking bill later this year.

But the House of Commons' Treasury Select Committee said it was not convinced.

"The Government's proposals for the new Financial Stability Committee of the Bank of England are confused - the Northern Rock fiasco taught us that clear lines of responsibility are important," said John McFall, the committee's chairman.

"How can this new Committee both oversee the work of the Executive, and be chaired by the Governor?"

The cross-party group of MPs also warned that the Tripartite Standing Committee - made up of the Treasury, FSA and Bank of England - should not be allowed to become a "sleepy backwater" during normal times, only for it to have to begin its work from scratch in a time of crisis.

Speaking on BBC Radio 5live, John McFall said "regulation in the United Kingdom has been described as light touch - some would interpret it as being a bit soft touch in a number of areas.

"I would agree with that - we need to get that right."