Banking Bill

Of all the weeks to make that argument, I am not sure that this is the best one. However, I was coming on to exactly how that intervention should be made. We should create a new statutory requirement on the FSA to take into account the Bank's assessment of market-wide risk when setting capital and liquidity requirements on individual banks. We would call that a debt responsibility mechanism. The Bank of England would be required on the basis of legislation to write a regular open letter to the FSA setting out its assessment of market-wide risk and levels of debt in the economy. The FSA would then be required to outline how it would respond to those recommendations from the Bank. That would force the Bank of England to maintain an active role in macro-prudential supervision and would force the FSA to consider an institution's risk not just in isolation or at a certain point in time, but in terms of the market context and through the economic cycle. That means that the regulator would have the power to take pre-emptive action to control the overall lending of banks in the system when there was a danger of an asset boom. We have to address the problem—in the end, the solution offered by Alan Greenspan, the honorary economic adviser to the Prime Minister, did not sufficiently address it—of how we deal with asset price booms. We have got independent central banks to deal with retail price inflation, but how do we deal with asset price booms? After the events of the past month, the Greenspan approach, from the man who opened the new Treasury building, which is just to let the bubble burst and pick up the pieces afterwards, is clearly not one that we should allow to be taken again. Tackling that point will be a big issue for debate, not just in democratic Parliaments, but in central banks.