Nobody's listening to you any more, Gordon

Gordon Brown yesterday attacked Conservative plans to reverse the nature of City regulation, saying that returning banking supervision to the Bank of England was “unacceptable” and “completely wrong”. Mentioning the failure of BCCI and Barings, Mr Brown said the old system did not work.

Well, that's plain wrong and explains why nobody is listening to Brown any more. The failures at both BCCI and Barings were the result of fraud. A bank regulator is not a policeman. That is the job of the internal and external auditors, the Met and the SFO. The job of the regulator is to regulate the banks' businesses based on the known facts, the published acounts and reported data, allowing the regulator to review and pass judgements on the legitimate business decisions of the banks' management teams.

Of course where fraud is discovered it is the role of the Bank of England to ensure that the position is quickly rectified, and the Bank would have been remiss if BCCI's accounts had not been signed off for years on end, or if Barings had reported years of substantial losses in its Singapore trading activities, but the facts are that BCCI's accounts were signed off by Price Waterhouse (who were later fined a substantial sum for their errors). The auditors in turn claimed that they were unable to report any defict in the acounts because they were unable to access the books of BCP, a Swiss subsidiary subject to banking secrecy laws. UK banking laws permit auditors to make exceptions for such circumstances, so how that can be blamed on the Bank of England rather than the government is a mystery to me

In the case of Barings, Nick Leeson was able to take on massive loss making positions by acting both as the floor manager for Barings' trading on the Singapore International Monetary Exchange and head of settlement operations. Barings had the correct procedures and policies in place by having two positions, but Lesson's line management failed by not implementing them correctly, their internal and external auditors were at fault for not noticing the failure and Leeson was at fault because of his wilful fraud, but it is ridiculous to think that the Bank of England should have been reviewing the org charts of every subsidiary of every financial institution when there were others who were supposed to do exactly that.

Once Leeson's fraud had been discovered the Bank acted to rectify the faults and managers other than Leeson were barred from working in the City. Barings was not found to have deficient policies, but to have failed to implement them, and the Bank was not found to have been warned about these failures and ignored the warnings.

But that is not what the bank supervisor's role is about. That is about monitoring and reviewing the entirely legitimate but potentially misguided decisions of the bank's management, their credit concentrations and their exposure's to different kinds of risk (including their potential exposure to fraud through inappropriate policies).

It was under the FSA that RBS, HBOS, B&B and Northern Rock appointed Managing Directors / Chief Executives of questionable quality, that those banks booked historically large exposures to the property markets and accumulated large positions in structured finance transactions that were poorly understood, relying to a great extent on credit ratings and in many cases incurring very large and ultimately terminal quanta of liquidity risk.

All of which were perfectly legal, but quite wrongheaded and missed by the FSA. But let us not forget about AIGFP, which ran up the most enormous exposure to credit derivatives in its London office but outside the regulatory scope of the FSA because the business was deemed by the FSA to be booked in a internal treasury unit. Now that was a total failure of regulation.