Darling Promises Increased Powers for Bank of England, FSA

By Svenja O’Donnell

July 6 (Bloomberg) -- Chancellor of the Exchequer AlistairDarling promised more powers for the Bank of England and the Financial Services Authority to prevent a repeat of the crisis that plunged Britain into its worst recession in a generation.

“You’ll see a significant toughening up of the regulatory system,” Darling said in an interview with Sky News yesterday. “The regulators need to learn the lessons of what went wrong and we need to toughen up the regime to make sure that we reduce these risks.”

Darling will this week publish proposals on the future of banking regulation after a drying up of credit forced the government to spend more than a trillion pounds bailing out lenders and sent the economy into a tailspin. Prime Minister Gordon Brown has faced mounting criticism of his 1997 decision to strip the central bank of its supervisory role and hand it to a newly created FSA.

“We’ve got to toughen up the regulatory regime, both the Financial Services Authority and the Bank of England,” Darling said. “We’ve got to make sure we’ve got the right tools to do the job. But we’ve also got to make sure we go back to responsible behavior.”

The proposals “will leave no stone unturned to reform the financial sector and ensure the largest banks are regulated effectively,” according to a briefing note sent by Brown’s office yesterday.

Currently, the FSA regulates banks while the central bank oversees interest rates and assesses threats to the economy. Darling has said he wants to maintain the balance of power in the system as talk of a turf war grew after Bank of England Governor Mervyn King called for more authority.

Bank Bailouts

Since the credit crisis began, the U.K. has committed as much as 1.4 trillion pounds ($2.3 trillion) to underpin the banking system through direct investments, asset insurance and underwriting loans.

The government nationalized Northern Rock Plc after a run on its deposits in September 2007, seized Bradford & Bingley Plc and took controlling stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

Last week, the government said that the recession had begun three months earlier than previously thought, in April last year rather than June, and that gross domestic product fell 2.4 percent in the first quarter of this year, the most in 51 years.

Treasury Forecast

It means the recession already rivals that of the early 1980s, and most economists say it will be the worst since World War II. Darling stuck to his prediction of a return to growth by year-end.

Brown will tell Group of Eight leaders in Italy this week that banks are still not doing enough to lend and renew his plea for action as job losses mount, oil prices climb, investment slumps and countries increasingly resort to protectionism, his office said.

The damage wrought on the public finances has sparked a political row over spending, with the opposition Conservatives accusing Brown of misleading voters by claiming he can avoid spending cuts after the next election, due by June 2010.

Darling said the downturn had been sharper than he forecast at the time of the April budget, and signaled Britain’s 6 million public-sector workers face a squeeze on wages, setting the stage for a clash with unions that finance his ruling Labour Party.

‘Fair’ on Pay

“Public sector pay has got to reflect prevailing conditions. Inflation has gone way down,” Darling said. “We’ve got to be fair with regards to people who work in the private sector.” The government would review its pay policy “over the next few weeks,” he said.

The comments come after Steve Bundred, chief executive of the Audit Commission, in an article for the Observer newspaper called for severe pay restraint to help deliver the spending cuts he says are inevitable, whichever party wins the election.

The Sunday Times reported that civil servants are preparing proposals for public spending cuts of up to 20 percent after the next election amid concerns about the fiscal deficit, forecast by the Treasury to reach 12.4 percent of GDP in the year through March 2010.

Brown faces the prospect of a fresh revolt this week over his 2007 decision to abolish the bottom 10 percent tax rate, one of his last acts as finance minister before he succeeded Tony Blair.

Thirty Labour lawmakers led by Frank Field are threatening to block the entire budget in a vote on Tuesday unless the government compensates low-income families they say are still worse off.

The proposed blocking amendment would stop the levying of income taxes until the government agrees to pay full compensation, according to an e-mail sent by Field and fellow Labour lawmaker Greg Pope. The move has been backed by the Conservatives and Liberal Democrats, the statement said.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net