December 24, 2007	Monday	Zilhaj 13, 1428

There is a growing feeling in the financial circles here that the tripartite system( the Exchequer, the Bank of England and the Financial Services Authority) of regulating and supervising banks and financial markets has failed. And it needs either to be replaced by some more innovative and more agile system or should be subjected to drastic reforms.

The circles close to Chancellor Alistair Darling believe that the existing system lacks an overall commander and therefore the Chancellor should fill the vacancy making himself the key decision-maker in any future financial crisis, overruling the Bank of England and Financial Services Authority, if necessary.

While final decisions will await the recommendations of the Commons Treasury committee, which has been investigating the Northern Rock affair and the turmoil in credit markets, work has been going on at the Treasury on toughening the regime.

Darling is understood to favour a system in which experts advice coming from various authorative sources could be conflicting but not obligatory on the Chancellor to accept all of them. Instead he would like to sift the advice and take his own decision and take full responsibility for its success and failure.

It is widely believed in the City as well as by the Financial Services Authority that the Bank of England moved rather too slowly to save the Northern Rock. The Governor of the BoE, Mervyn King, however, insists that even a quicker hand out of what has now reached £25 billion would not have saved the bank from the run.

Mervyn King had refused to provide liquidity initially because he was concerned about the “moral hazard” or bailing out of irresponsible banks. But the delay in taking this decision is now being blamed for pushing the government to consider the unthinkable—nationalisation of Nortern Rock Bank!

It is believed that if the system is reformed and the Chancellor made the final authority then perhaps in a similar situation in future he would be able to order the Bank to pump in liquidity, against its objections, if he was persuaded by the arguments of the FSA and his own officials.

The Treasury’s proposals to toughen up the tripartite system will come in the new year. King and his colleagues gave evidence last week while Darling has a session scheduled for January 10 when the nationalisation proposal will be considered seriously.

Meanwhile, financial markets remain nervous despite last week’s joint action by leading central banks to head off a severe liquidity squeeze over the coming weeks by providing £50 billion of short-term assistance to the banks.

The inflation figures are expected to edge up from October’s 2.1 per cent rate

The market in general is still vague about the depth and width of the crisis. Some feel that it is the worst since 1972, but others pointing at so many mergers and takeovers taking place in the midst of the crisis say, it would be all over in a few months time without causing any serious damage to the world economy at large.

Those who hold the first opinion believe this financial crisis would spill well into 2008, the write-offs from the big banks would continue – particularly if rating agencies downgraded debt – and the only way out was for a number of banks to raise fresh funds in the market. They further believe last week’s $100 billion bail-out from the world’s central banks would not be enough.

The bigger concern, they say, was that the credit crisis could spilt over into the wider economy, dragging America into recession and then seeped into the rest of the world. If this happened, then not even China will escape. Unlike Black Monday in October 1987, this time there has not been a stock-market crash, instead it looks like a deep and more prolonged slide.

As a result there are some painful facts – big corporates are now paying closer attention to their fixed and variable cost bases, and redundancies are inevitable in the new year.

A lot of the companies bought over the past two years are no longer worth what they were acquired for. This will lead it is said, to a further set of write-offs from banks.

Share prices in companies in the FTSE 250 and under are being pushed down on even a whiff of negative news. Among Britain’s top 200 quoted companies, nearly 10 per cent now have dividend yields higher than interest rates. That suggests, it is believed, that investors are growing increasingly concerned that the dividends and growth cannot be maintained, or that stocks are merely oversold. Some believe that if there is a conclusion to be drawn from this, it is that polarisation of opinion will continue: the big banks have more pain to come and shares will continue to be smacked.

It is further believed that if the government starts as has already been announced, to tinker with the tax treatment of offshore trusts held by rich foreigners living in Britain, it will undo all the success achieved over the past decade in establishing London’s status as a world financial centre.

The City’s ability to attract the cream of world finance is due to the lenient way the government treats the tax affairs of non-domiciles. This has resulted in the City being the envy of rivals New York, Frankfurt and Paris.

But that status is now at risk. This opportunity has not been lost on Switzerland. London is now looking at Zurich with envy as the Swiss are working particularly hard to attract big corporates and the super-rich. They are negotiating tax deals and are starting to attract the attention of the private equity and hedge-fund world, as well as the big firms that want to cut their corporation-tax bills. It is a threat which the City feels the government should wake up to and stop talking about tighenting regulations, nationalisation and taxing the rich non-domiciled further.