Accusations fly between the Old Lady and the Treasury

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The Independent Online

They call it, grandly, a tripartite regulatory regime, comprising the Bank of England, the Financial Services Authority and Her Majesty's Treasury.

Each august pillar has its role, set out in memoranda of understanding. The FSA is there to scrutinise individual banks; the Bank of England looks after the markets and financial stability; the Treasury has a watching brief because they'd have to sign the cheques and remain politically accountable. The arrangements were inaugurated in 1998, when the Bank lost its monopoly as City regulator. Fine as it seemed, it was in reality a rickety, three-legged stool. Since it collapsed, when the run on Northern Rock exposed the British financial system's shortcomings to a gobsmacked world, there has been debate as to which of the tripod's supports was most wonky.

The FSA usually comes off worst in any briefings from the Bank or the Treasury. But yesterday, in a rare interview, Mervyn King, Governor of the Bank, in effect, dropped the Chancellor in it. It might have been inadvertent, the Governor speaking from the other worldly atmosphere of an ante-room to the Governor's parlour – oblivious to the mischief that the media can make with an ambiguous remark. The Governor was seeking, possibly, to preserve the niceties by stressing that any action – or lack of it – in an attempted rescue of Northern Rock by Lloyds TSB was, formally, the responsibility of Mr Darling. Lloyds TSB wanted a little extra from the public authorities before it was willing to take on the stricken mortgage bank. Thus Mr King told us: "I said to the Chancellor: 'This is not something which a central bank can do.' They don't normally finance takeovers by one company for another, let alone to the tune of £30bn, which is rather a large amount of money.

"So I said 'this is a matter for government'... and I don't think it took the Chancellor very long to recognise that not only was this something which central banks don't do, it's also something that governments don't do".

From this was spun a story that Mr Darling "vetoed secret move to save Rock". You can tell the Treasury isn't best pleased: "This story is wrong," said a spokesman. "At no stage was the Government approached with a substantive proposition for Northern Rock that required state support. Instead there was a general inquiry as to whether the Bank might provide commercial banking facilities of £30bn at non-penalty rates for up to two years, in the same way as an investment bank. In any event this general inquiry was not followed up with any detailed proposal."

Hard to say who's right; but it isn't very, well, tripartite.