ALEX BRUMMER COMMENT: New look for the Old Lady

By ALEX BRUMMER, CITY EDITOR
Updated: 17:44 EST, 10 June 2009

Financial stability has long been the Cinderella of the Bank of England. Despite having its very own deputy governor, its prestige has lagged behind that of the monetary wing and the content of its Financial Stability Reports were ignored until the credit crunch descended almost two years ago.

When, in the pre-Northern Rock era, members of the Court, the Bank's non- executive board, requested a policy document on the financial stability mandate it was fobbed off.

Now, finally, after the worst banking crisis since the period running up to the First World War, it is being reinvigorated with its own 'independent' Financial Stability Committee (FSC) designed to mimic the success of the Monetary Policy Committee.

The Bank of England is creating a new committee designed to help stabilise it

Joining governor Mervyn King and his two deputies, Paul Tucker and Charles Bean, on this new committee will be four non-executives. For the moment they include Roger Carr, the chairman of Cadbury.

He knows a great deal about how easy it is to make the wrong bets on the financial markets from his experience with booze group Mitchells & Butler where he abandoned the chair for a safer haven after the company nearly drowned in a sea of toxic hedges.

Other non-executives will include veteran industrialist Sir David Lees, the Prudential's departing and capable chief executive Mark Tucker and Harrison Hurst Young, who heads the risk committee at Commonwealth Bank of Australia.

Fortunately, until now the Aussie banks like the Spanish banks have weathered the global hurricane rather well.

This is largely because of intrusive regulation and through the building of strong reserves in profitable years.

These are useful lessons for the UK banks as they seek to extricate themselves from a mother load of bad debts.

The big issue for the FSC is where the borders are drawn with the Financial Services Authority. A lack of clarity was one of the great weaknesses of the post-1997 settlement which saw banking supervision hived off to the FSA.

Part of the new role of the FSC will be to decide when to use the Bank's stabilisation powers - the ability to step in and take control of failing banks. This will be extraordinarily hard if most of the information rests with the FSA.

The view in the Treasury is that the Bank will have no trouble in obtaining all the data it
needs if it asks. That is not good enough.

If it is to actively intervene it needs direct access to all the regulatory information and intelligence available before the event not after.

The first task of the FSC should be to demand these powers now while there is still acute danger of financial collapse. At least one building society, for instance, is said to be on the brink.

If Labour won't force its beloved FSA to loosen its grip, then the Tories almost certainly will.

Fiat coup

You have to hand it to Fiat. It has seen an opportunity at the bottom of the worst car market in living memory and grabbed it with both hands.

Its alliance with 'new Chrysler', which will see it develop smaller American made cars for the Latin American and Russian markets, looks sensible.

By signing a deal at the bottom of the cycle, with the possibility of full ownership later on, it has limited its potential losses.

The Italian carmaker might well have been a better bet for the long term future of GM Europe. Instead, Britain allowed it to fall into the hands of unproven Canadian group Magna, backed by the unreliable oligarch Oleg Deripaska.

Faced with this choice it is obvious which way Britain should have jumped. But we were barely a player allowing the decisions about investment and jobs in London to be made in Berlin.

New First Secretary Peter Mandelson seems to have been far more concerned about adding to his own power base and portfolio than protecting motor manufacturing and jobs in the UK.

Rothschild redux

The House of Rothschild has a history of doing well in wartime dating back to Napoleonic times.

So we should not be that surprised that it is emerging from the meltdown in the financial markets with some aplomb.

Not only has it been an advisor to many of the firms seeking rescue rights issues, chairman David de Rothschild is trading on the merchant bank's stability, in a sea of chaos, to grab a larger share of the private banking market.

Careful observers will have seen a series of advertisements (including one in this paper) offering a 4.35 per cent gross return on cash deposits of £20,000 to £2million held for two years.

At a time when most banks are paying zilch and UBS, traditional home of wealth management, is in deep doldrums, NM Rothschild is showing it remains very alive to the needs of savers.