World Crisis Online

Bank of England Governor Mervyn King may not get the chance to exercise new powers over banks under legislation to be introduced later this year by Chancellor of the Exchequer George Osborne.

Osborne’s bill abolishing the U.K.’s financial regulator and handing most of its authority to the central bank in London is due to take effect in 2013 as King’s second five-year term as governor expires.

The almost three-year-long process stems from the need to consult industry and lawmakers, Treasury spokesman said. The timetable reflects differing views between King and the government on issues including the amount of capital banks should hold, said three people familiar with the matter who declined to be identified because the issue hasn’t been made public. The Bank of England declined to comment.

“For something the government said was so important, they are not treating as if it is. It seems very strange,” said Steven Fielding, a professor at the Center for British Politics at Nottingham University. “Unless there is some kind of other reason, it’s very surprising.”

King is due speak on the outlook for inflation and economic growth at 10:30 a.m. in London, when the central bank publishes its quarterly Inflation Report. Data yesterday showed consumer- price growth accelerated to 4 percent in January, twice the bank’s 2 percent target.

Independence

Osborne begins the second stage of consultations on the Financial Regulation Bill this week, and it’s due to be submitted to lawmakers after the summer recess following another round of scrutiny. Final passage would come in late 2012.

By taking more than twice as long to become law as the bill that gave the Bank of England its independence more than a decade ago, the political wrangling would deprive King of the mantle of being the only one of the world’s major central bankers with control of both monetary policy and financial regulation.

In 1997, former Prime Minister Gordon Brown, who was chancellor at the time, proposed handing the bank powers to set interest rates and stripping it of supervisory and some financial stability powers it is now due to regain.

‘Flawed’ King and Osborne began working in June, a month after the coalition government took office, on the overhaul of financial regulation that would give the Bank of England more power than it has ever had in its 317-year history.

In the May 2010 coalition agreement, the Conservatives and Liberal Democrats listed banking as their top priority after the budget and taxes, saying the existing regulatory system is “fundamentally flawed and needs to be replaced.”

Under their plan, the governor will preside over two panels: one that sets interest rates and another that will supervise banks, insurers and investment firms.

In its current schedule, the government would introduce the bill in the House of Commons in the second half of 2011 and be enacted by late 2012. The new set-up would be in place by early 2013, months before King’s term ends June 30, 2013.

While the legislation makes its way through parliament, King will preside over a shadow committee for financial- stability policy — whose members yet haven’t been appointed — while the Financial Services Authority will continue to regulate individual institutions. The central bank already has resolution powers to take action when a bank fails.

Capital Clash

King was the first senior British policy maker to conclude in 2008 that the financial system was facing potential insolvency, not merely a crisis of liquidity, and resisted calls to flood the markets with cash. That stance at the time rankled government officials, the people say, and his insistence on going further now continues to cause consternation.

More recently, King argued in a speech in October that proposed global standards for the amount of capital banks should hold are “insufficient to prevent another crisis” and that they should use profits “to rebuild capital rather than pay out higher dividends and compensation.”

A paper whose authors include Monetary Policy Committee member David Miles and released on the central bank’s website last month calculated that doubling the amount of capital banks hold would have a “small long-run impact on the cost faced by bank customers.”

Political Comments Beyond the realm of policy, King’s private comments about Osborne and Prime Minister David Cameron during the 2010 election campaign were disclosed in a cable from the U.S. ambassador in London published by Wikileaks.org in December.

U.S. Ambassador Louis Susman wrote to Secretary of State Hillary Clinton citing a Feb. 16 meeting with the governor, according to the cable. During the discussions, King, 62, “expressed great concern about Conservative leaders’ lack of experience.”

By 2013, the new governor will gain more combined power over domestic financial regulation and monetary policy than any other central banker.

European Central Bank President Jean-Claude Trichet’s attempts to navigate the euro zone out of a sovereign-debt crisis are constrained by the need to defer to domestic regulators on bank oversight.

While U.S. Federal Reserve Chairman Ben S. Bernanke gets increased power over non-bank financial firms under the Dodd- Frank law, he will have to coordinate with other agencies that regulate securities firms and the insurance industry.

Regulatory Change The FSA, set up in 1997 to oversee the financial industry, will split in two under the new law. Most of its regulatory powers will move to the bank under Hector Sants, the FSA’s current chief executive officer. He’ll become one of the bank’s deputy governors and chief executive of a new Prudential Regulatory Authority, which will regulate all deposit-taking institutions, insurers, investment banks and clearing houses. The PRA will operate under a board chaired by King’s successor.

A separate Consumer Protection and Markets Authority will be created to look after customers, regulate exchanges and take over the FSA’s authority to impose penalties for market abuse.

The government plan will also create a new Financial Policy Committee with the governor as chairman that would address risks to market stability. Bank of England executives will make up the majority of the committee, with other members coming from other regulatory bodies and the markets.