Fashions in bank regulation

Until the other day, the ruling wisdom was that it makes sense to separate the conduct of monetary policy from bank supervision. Combining the two roles, as the RBI does, is folly, we were told - among other things, there could be lack of focus and conflict of interest in doing so. The British separation of the Financial Services Authority from the Bank of England was held up a role model and the RBI was portrayed as being cussed in resisting any separation of roles.

That wisdowm is being turned on its head in the wake of the collapse of the British bank, Northern Rock. Now, we are told that the collapse could have been averted but for the fact that three players were involved- the UK Treasury, the BoE and the FSA- and none of them regarded as its primarily responsibility to avert disaster. Here is a sample from a comment in FT

It is, incidentally, worth noting that compared with the problems of mounting and co-ordinating a last resort lending operation to a big multinational bank, a Northern Rock bail-out should have been child’s play. But the tripartite division of responsibility between the Treasury, the Bank of England and the FSA has become the Bermuda triangle of the British financial system.

Evidently, fashions in bank regulation keep changing as they do elsewhere.