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THE Bank of England is trying to push through reforms to the banking system to prevent another Northern Rock crisis but is being frustrated by a prime minister and a chancellor who are said to be too demoralised to take action.

City sources say Mervyn King, governor of the Bank, would like to introduce fundamental reforms but believes that recent political setbacks have left Gordon Brown and Alistair Darling distracted. They are said to be “unable to focus because morale throughout the government is so low”, according to one senior Bank official.

The government has been thrown off balance by several disastrous polls. The one in today’s Sunday Times shows it trailing the Tories by 13 points; it has been left reeling from a series of blunders, including a row over political funding and the loss of personal records of 25m people.

Today’s YouGov poll of nearly 1,500 people shows that the Tories are in their strongest position for 15 years.

The Tories are on 45%, against 32% for Labour and 14% for the Liberal Democrats, compared with 41%, 35% and 13% a month ago. It appears to be women voters in particular who are deserting Labour. The Tories enjoy a 20-point lead among female voters, compared with six points among men.

The poll also shows an unprecedented drop in Brown’s personal ratings. At the height of the Brown “honeymoon” in August, the prime minister had a net approval rating of +48%, the difference between those saying he was doing a good job and those saying he was doing badly.

In October, when he was agonising over whether to call an early election, his approval rating was still a healthy +30%. It dropped to –10% last month and to –26% this month.

The lowest point reached by Tony Blair was –34% in April 2006, which was at the height of the cash for honours scandal.

The Bank of England’s criticism will cause surprise at the Treasury, where Darling has given public support to the Bank throughout the crisis. It comes as the Treasury and Downing Street are considering whether to offer King a second term. His five-year term in office expires next summer.

It also follows a dispute last month when the Treasury was irritated by comments made by King in a radio interview in which he appeared to blame Darling for not acting more urgently over Northern Rock.

King denied that he had apportioned blame but his remarks were seen as “naive” by Treasury insiders.

The Treasury is still trying to put together a deal for Northern Rock to be sold to one of two private sector bidders. However, ministers concede that nationalisation might be the only feasible option.

The Bank feels there are still big holes in the regulatory system that need to be plugged. King favours better protection for savers and apparently believes that this would prevent a run on any other bank.

He is understood to want the government to introduce a US-style insurance system that would enable savers to get up to £100,000 immediately if a bank was in trouble. At present they are guaranteed only £35,000 and could have to wait up to a year to get their money.

The Bank argues that this reform would stop a run on a bank because savers would feel their money was safe. Darling agrees, but so far has made no move to introduce these reforms. The main opponents have been the banks themselves.

The governor is also believed to be unhappy that he could not act swiftly to arrange a reorganisation or merger of Northern Rock because it is a public company. He accepted a ruling by the Financial Services Authority (FSA) that a prolonged process of obtaining shareholder approval would be necessary and this would have led to the closure of the bank.

Bank officials say the US system would have bypassed the problem. One joked: “There are times when we can learn things from others, even America.”

The US Federal Deposit Insurance Corporation insures deposits and also has the power to take early action to prevent banks going under, including forcing the kind of reorganisation that King would like to have imposed on Northern Rock.

In addition to better insurance and greater powers to intervene earlier in a troubled bank’s affairs, the governor is said to be “begging the chancellor and the prime minister” to give the FSA or a new agency the power to regulate bank liquidity.

The Treasury has made it clear that it will bring forward reforms to the tripartite framework for regulating banks and financial markets after the Commons treasury committee has made its recommendations. King and his colleagues are due to give their final evidence to the committee on Tuesday.

How the parties stand

Who would you vote for in a general election?

45% Conservative
32% Labour
14% Liberal Democrat

— is the biggest for 15 years
— rating has slumped from +48% in August to -26%
— there will be a recession

Source: YouGov

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