The case for privatising the Bank of England

Earlier in the week, David Cameron signalled that he believed that banking regulation should be returned to the Bank of England. However, there is a danger in thinking piecemeal about this problem. As is proposed by Tim Congdon, in Central Banking in a Free Society, it is vital that the Bank of England is privatised, has its capital significantly increased to around £15billion, and is allowed to use freely its lender of last resort function to support banks that are illiquid but solvent.

The emasculation of the Bank of England by Gordon Brown in 1997 is substantially responsible for the current mess. A system of maintaining banking stability that had been copied all round the world was destroyed and the Bank of England turned into a monetary policy research institute. When Northern Rock hit problems, the Bank did not know how to act. It had lost its day-to-day experience of the banking sector and there was uncertainty as to the roles of the FSA, the Bank of England and the Treasury. Instead of the Bank of England using its lender of last resort function generously and quickly, Northern Rock collapsed and confidence evaporated…

Read the rest of the article here.

Privatising it is a cop-out. I ran a Fun Online Poll (click my name) and 43% agreed the MPC should just be disbanded. The ‘lender of last resort’ theory is a cop-out as well; there ought to be a statutory debt-for-equity swap procedure if banks get in a mess, problem solved.

A debt for equity swap sounds like a reasonable way of dealing with the orderly winding up (or recapitalisation) of an insolvent bank. The lender of last resort function is there for a different reason – it is to provide liquidity to an illiquid bank.

Privatising it is a cop-out. I ran a Fun Online Poll (click my name) and 43% agreed the MPC should just be disbanded. The ‘lender of last resort’ theory is a cop-out as well; there ought to be a statutory debt-for-equity swap procedure if banks get in a mess, problem solved.

A debt for equity swap sounds like a reasonable way of dealing with the orderly winding up (or recapitalisation) of an insolvent bank. The lender of last resort function is there for a different reason – it is to provide liquidity to an illiquid bank.

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