Alistair Darling reveals strains with Mervyn King

Former chancellor Alistair Darling: "We need to be terribly careful"

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Former chancellor Alistair Darling felt the governor of the Bank of England did not fully grasp the UK's financial crisis, the MP's memoirs reveal.

He was so concerned he asked the Treasury if it had powers to order Sir Mervyn King to take actions he wanted.

Mr Darling, in his memoirs, also claims Sir Mervyn had a "poor relationship" with UK bank chief executives.

In a BBC interview he also cast doubt on planned regulatory changes, which he said he could see banks leaving the UK.

Mr Darling discloses in his newly-published book - being serialised in the Sunday Times - that he and Sir Mervyn had fundamental differences on how to respond to the financial crisis that began unfolding in 2007.

The then chancellor urgently wanted to get cash into the UK financial system "to stop it freezing", whereas Sir Mervyn said "that it wasn't the job of the central bank to assist banks in their continued profligacy".

Mr Darling writes: "That merely underlined the fact that he didn't recognise the scale of the problem.

"Our conversation was further evidence to me of just how poor was the relationship between the Bank of England and Britain's largest banks."

Mr Darling said the "essential day-to-day contact" between the governor and banks had been lost.

Analysis

In central banking terms, being described as "stubborn or exasperating" by your finance minister is probably a badge of honour. After all, you're either fully independent of government or you're a doormat. Sir Mervyn King is certainly not the latter.

But if a respected former chancellor of the exchequer says that you didn't "get" investment banking nor had adequate skills to deal with the biggest financial crisis since the Depression era, that's wounding in the extreme.

It's especially annoying for a Bank of England governor who is still very much in post with even more powers than two years ago - and who is about to oversee sweeping changes to bank regulation and structure.

Few central bankers have kept as low a profile as Sir Mervyn yet attracted as many headlines. One suspects he yearns for the old days when governors - unlike children - were heard but rarely seen.

He says the governor could be "stubborn" and "exasperating", though Mr Darling does add: "Despite our ups and downs, I felt I could work with Mervyn."

Nevertheless, the former chancellor sought advice from the Treasury over whether Sir Mervyn could be over-ruled.

The conclusion was that it was legally possible, but could have created a "disastrous" public row.

'Change needed'

With relations between Sir Mervyn and then Prime Minister Gordon Brown also at a low, there was much discussion about whether the governor should be re-appointed for a second term.

In an interview on Sunday on the BBC's Andrew Marr show, Mr Darling said the "Bank of England needs to change", saying that there should be a proper board of directors to oversee operations.

He described the BoE's Court, which looks after governance matters, as "an adornment", and said the governor should have less personal power.

"The governor should be the first among equals", Mr Darling said.

A spokesman for the BoE said: "The bank doesn't comment in public on private conversations."

However, on governance at the BoE, the spokesman said: "Bank policy is made by two committees, the Monetary Policy Committee and the Financial Policy Committee, on each of which the governor has one vote.

"The management of the bank is overseen by Court, the majority of whose members are non-executives."

Ring-fencing

Also in the Andrew Marr interview, Mr Darling questioned the effectiveness of planned changes to bank regulation, which have reportedly divided the coalition government and prompted veiled warnings from the City that finance firms may move abroad.

The Independent Commission on Banking is this month due to publish proposals on regulation, which may recommend "ring-fencing" banks' retail operations from their investment arms.

Mr Darling said such a move would not stop another financial meltdown.

"Ring-fencing banks' activities would be a very useful tool in managing collapse - but that's all it is. It is not going to stop it happening again."

Given the City's role as a global financial centre, "you need to be terribly careful about doing something which doesn't actually solve the problems we face... and you start losing banks because they start moving away," he said.

He also warned about the health of the global economy. "I'm very pessimistic now... The current government is squeezing the life out of the economy," he said.

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