The new UK Labour government has won fans in the City of London by announcing, after only a few weeks in office, a wholesale reform of financial regulation.
In general, we support the move to split regulation off from the Bank of England (and to make the central bank independent). But the role of the new regulatory body needs to be carefully thought out. There are some traps it could easily fall into.
The Bank of England has behind it the weight of 300 years of history and all the accumulated prestige that entails. Despite one or two much-publicized failures (notably BCCI and Barings), the quality of its regulation was generally well regarded.
The new authority will take over the mantle of the Securities and Investments Board, with the additional role of supervising commercial banks. The SIB has a perfectly decent reputation in the City, but it is less well-known abroad. It also started life as a self-regulatory body; most of its staff are former practitioners. That will give it less clout than the Bank.
The Bank of England will find losing bank supervision something of a relief.