A Re‐examination of Banking Supervision in the United Kingdom

DOIhttps://doi.org/10.1108/eb025664
Date01 February 1995
Published date01 February 1995
Pages38-41
AuthorShiraz Mahmood
Subject MatterAccounting & finance
Journal of Financial Crime Vol. 3 No. 1 Banking
BANKING
A Re-examination of Banking Supervision in the
United Kingdom
Shiraz Mahmood
Supervision of banks in the UK is conducted by
the Bank of
England.
The Bank which was created
by Royal Charter in 1697 was nationalised by the
Bank of England Act 1946. This Act gave the
Treasury the power to require the Bank to act in
the 'national interest',1 however, this power has
never been utilised and the Bank has retained a
high degree of autonomy from the Government,
thus enabling the Bank to apply a laissez-faire2
approach to the supervision of
banks.
Traditionally
the Bank has never favoured a heavy-handed
approach to regulation, but has relied upon the use
of moral suasion in its capacity as lender of last
resort.3 The Bank's supervisory philosophy has
been summed up thus:
'The Treasury and the Bank of England tended
to exercise their control by consultation, persua-
sion, and informal dialogues between the
responsible parties concerned, and the Bank of
England has never issued any formal directions
to bankers. This is the essence of moral sua-
sion.'4
This paper will examine the supervisory and
regulatory role of the Bank of England (the Bank),
in the light of the BCCI and Barings affairs. The
Bank's approach to regulation in the United King-
dom will be considered, as well as how its use of
the powers conferred upon it by the Bank Act
19875 might have prevented infamous closures of
two banks within approximately the last three-and-
a-half
years.6
SUPERVISION OF BCCI UNDER THE
BANKING ACT 1987
The Banking Act 1987 imposes a statutory duty
upon the Bank to supervise banks,7 however, this
docs not mean that the Act has codified what the
Bank's supervisory duties are, in fact sections of
the Act provide leeway for the Bank to use its
discretion and judgment in exercising its supervi-
sory functions. Indeed the White Paper on
'Banking Supervision'8 which led up to the 1987
Banking Act concluded that 'the essential charac-
teristics of the UK system, namely the wide
discretion given to the Bank of England in admin-
istering the supervisory regime and the freedom in
particular to set detailed prudential requirements
bank-by-bank, should continue'.9
In the light of the rationale behind the Banking
Page 38

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