In this paper Tim Congdon, a leading economist, argues that the Bank of England should be privatised. Perhaps more controversially he argues that two lesser known reforms made at the time Gordon Brown gave the Bank of England independent control of monetary policy in 1997 were key in causing the UK’s financial crises that began in August 2007.

The first of these reforms was to remove from the Bank of England responsibility for the supervision of the banking system and to create the Financial Services Authority (FSA). The second was to create a new agency of the Treasury to manage the national debt. It is these two ‘minor’ reforms of the Bank of England that Congdon argues had catastrophic effects in the financial market crises of 2007 and 2008.

Congdon argues that when Northern Rock hit problems the Bank of England did not know how to act as it had lost its dayto- day experience and there was uncertainty as to the roles of the FSA, the Bank of England and the Treasury. This led to the Bank of England not using its lender of last resort function quickly enough when Northern Rock ran into difficulty and ultimately caused the bank to collapse.

The loss of confidence that followed sent the UK into a painful recession. It is not surprising that we are asking the question of what caused the high street banks to get themselves into such a mess.

How did the banks, the regulators and the Government fail to see some of the practises which were putting the banking sector on course for a financial crisis? Unsurprisingly the answer is not an easy one.

There are some indications we could be at a stage where the downturn seems to be easing (though the jury is still out on this) and in essence we may be at the point where the fire fighting is over and can turn from crises management to contemplation of what went wrong.

The president of the European Central Bank has recently said that some countries, including the UK, had seen the worst of the recession and “that we are seeing a slowing down of the decrease in GDP.”

Mervyn King, the Governor of the Bank of England whose institution comes under fire from Congdon, is perhaps more subdued and when presenting the Quarterly Inflation Report said that he saw some reason for optimism that the pace of economic decline had moderated.However, he did add caution that the economy would take time to heal.

This is why Tim Congdon’s monograph is so timely. It is now over 20 months since the financial crises began, and with indications that any recovery will be slow, his argument that the Bank of England should be privatised and essentially owned by the commercial banks provides pause for thought.

Congdon believes that if the commercial banks owned a stake in a privatised Bank of England they would not want to put their capital at risk by providing risky banks with liquidity. Privatisation would also provide an effective form of regulation; if the commercial banks had a stake in the Bank of England then they would not want regulation to be too heavy handed or to impose unnecessary costs.

This would ensure the right amount of checks and balances would be created to protect this capital and ensure a privatised bank would not need to act as lender of last resort to support banks that are illiquid.

This is where some would say Tim Congdon’s argument for privatisation is flawed as in handing regulation to a privatised Bank of England owned by the commercial banks, you would effectively be giving self regulation to bankers whose risky approach to lending was a key factor in causing the present financial crisis.

There are likely to be many more articles and analysis of what went wrong and suggestions on how to improve the banking system before we are out of the present financial crisis. This does not lesson the relevance of Congdon’s argument but recognises the scale of the financial crisis and means contribution and opinion is required from a wide range of commentators and experts before consensus can be reached on the reforms required to prevent a crisis of a similar nature in the future.

As a banker from a charitable bank whose low risk model has meant it has served its sector well and is growing at the fastest rate in its 22 year history, I would caution that any reform needs to be balanced with the need to ensure the financial markets are allowed to operate effectively and provide businesses with lending facilities that will underpin economic activity and drive growth.

It is essential that we resist the temptation to over regulate and stifle any economic recovery. I am sure that this is something Tim Congdon and everyone who has an interest in the banking sector would agree with.

Peter Mitchell is chief executive of CAF Bank

To download the paper visit: /www.iea.org.uk/ record.jsp?ID=157&type=release

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