'Chaps' payments system is at risk of meltdown, warns Bank

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The Bank of England warned yesterday that it would take action if necessary to strengthen Britain's payments system for big transactions.

Chris Salmon, the Bank's chief cashier and director of banking services, said the current system was unacceptably risky because it was open to meltdown if a lender failed. He said there were too many banks making big payments through the Clearing House Automated Payment System (Chaps) for securities transactions. Those institutions are taking out huge unsecured loans with the 18 Chaps correspondent banks during the day.

Mr Salmon said the danger was evident in 2008 when counter-party banks demanded more collateral from Lehman Brothers. In Britain, a troubled UK bank made payments through a much smaller bank. "These exposures could well have put the smaller bank in significant financial difficulty had the authorities not intervened in the failing bank," Mr Salmon said.

He added that the Bank "may consider recourse to more formal actions" if lenders did not volunteer for correspondent status.

Meanwhile, the Chancellor, George Osborne, formally ruled out offering MPs a veto on the appointment of a Governor of the Bank of England, but said he would listen to their concerns about the Bank's powers and accountability when it assumes the power to regulate the flow of credit in the economy in 2013.

He said he wanted the Bank to look at the big picture rather than "box ticking", and pointed to the failure of regulators to question the Royal Bank of Scotland's takeover of ABN Amro during the financial crisis as an example of how not to do it. "Hold on, in the middle of all this uncertainly, do we really want RBS to buy an enormous Dutch bank," he said. "We need common sense injected into the system, not just people saying, we're compliant with points one to 10."

Mr Osborne also told members of the Treasury Select Committee that he wished to appoint Robert Jenkins to the interim Financial Policy Committee, replacing Richard Lambert, the former director-general of the CBI, who resigned before the committee's first meeting last month.

Mr Jenkins is a former head of Foreign and Colonial Asset Management and will be one of four "external" members of the financial risk watchdog. Mr Osborne said he was keen for the external members to "challenge" Bank group-think and "governor-think". He conceded that Alastair Clark, an external member of the interim FPC, was unlikely to serve on the committee once it becomes permanent.

The committee voiced doubts about whether Mr Clark could be considered "external" given his 37 years at the Bank.