King’s the top dog now

When Sir Howard Davis, founding member of the Financial Services Authority was top dog at the regulator he liked to describe his role as Gordon Brown’s representative here on earth.

It was a tongue in cheek observation but one symptomatic of the man’s self-confidence and the moral authority of the chancellor.

I don’t think John Tiner or his successor Hector Sants have ever joked in the same way about their relationship with Alistair Darling. I wonder if that can be put down to a sad case of humour deficiency syndrome on their part, or an inferiority complex following the fall of the Rock, or is there an underlying problem with the chancellor?

I suspect it’s down to a cocktail of all three because the other component of the Tripartite Authorities now seems to have assumed the role of top dog – I’m of course referring to Mervyn King, governor of the Bank of England.

Witness his recent performance at a Treasury Select Committee hearing. The chancellor may desperately want an extension of the Special Liquidity Scheme but King won’t be moved. He insisted that the SLS, introduced in April, would close on October 21.

As a sap to its disappearance the Bank is proposing the introduction of a liquidity insurance scheme. King told the committee: “We intend to consult on reforms to our Red Book, including, as I announced in June, plans for a permanent liquidity insurance facility, and to publish a consultation paper by the end of next week.

“At the same time, we will also set out arrangements to ensure the banking system as a whole will continue to be able to access liquidity insurance from the Bank of England from October 22. The objective of the new facility will be to provide short-term liquidity insurance to smooth the adjustment of financial institutions hit by unexpected shocks.”

This of course won’t solve the mortgage funding problem but King doesn’t seem to see this as his headache and he was scathing of the idea that the Bank should follow the US Treasury’s example of buying mortgage scecurities from the market.

He seems to see the mortgage funding crisis as a symptom of a deeper malaise within the banking system – namely that it is undercapitalised and for those hoping for some sort of fix for the mortgage securities market he offered no hope at all.

In his view raising mortgage funding in this way was relatively new and lenders should simply return to raising mortgage funds through retail deposits.

When Labour came to power Gordon Brown said he wanted to give more independence to the Bank of England and at the beginning of the credit crisis Alistair Darling said he wanted to see a return to good old fashioned banking.

It seems that King is delivering on both counts but not in quite the way that the politicians had imagined.