George Osborne announces shakeup of City regulation at Davos

Speaking at the World Economic Forum, the chancellor announces plans to put the Bank of England in charge of day-to-day policing of the financial sector

guardian.co.uk, Larry Elliott and Jill Treanor in Davos,  Friday 27 January 2012

A Royal Bank of Scotland branch. The chancellor announced the publication
of a Financial Services Bill that will put the Bank of England in charge of
day-to-day policing of the financial sector. Photograph: Andy Rain/EPA

George Osborne has said that the government's shakeup of City regulation would overhaul a failed system and prevent banks from ever again being as exposed to bad loans as they were when the financial crisis broke in 2007.

Speaking in Davos on Friday, Osborne announced the publication of a financial services bill that will put the Bank of England in charge of day-to-day policing of the financial sector.

He also said the chancellor would have the power in an emergency to direct Threadneedle Street to step in to help a troubled bank.

In a speech to UK business leaders, Osborne said: "I am today publishing the financial services bill that will overhaul the failed system of financial regulation which allowed such dangerous levels of leverage to emerge.

"The failings of that system are now well understood. The tripartite structure [with authority split between the Treasury, Bank and the Financial Services Authority] was incoherent, without clear lines of accountability. Everyone was so focused on ticking off a regulatory checklist that nobody felt it was their responsibility to use their judgement.

"The astonishing result was that RBS was allowed to take over ABN Amro when the credit markets had already frozen up."

Osborne added that under the old system it was unclear who was in charge in a crisis when taxpayers' money was at stake.

"We are putting in place clear lines of accountability, and restoring that crucial element of judgement," he said.

The chancellor said independent central banks should not be put under pressure to do what governments did not have the courage to do on their own account. There would be no ambiguity about who was in charge.

"During normal times the independent Bank of England will be responsible for prudential regulation and systemic stability, accountable to parliament. But in a crisis, when taxpayers' money is at risk, both the responsibility and crucially the power to act will rest with the chancellor of the day," he said.

"For the first time it will allow the chancellor to direct specific liquidity interventions to assist individual entities, the special resolution regime for banks and general interventions to preserve stability as long as the government is willing to take responsibility for the action and take the resulting risk on its balance sheet.

"I hope that we will never again see the paralysis and confusion that did so much damage when the latest crisis hit." .