Darling brings in panel to oversee Bank

A panel of City insiders will be brought in by the Government to monitor and advise the Bank of England through impending financial trouble, in an almost unprecedented challenge to the authority of the Bank's Governor, Mervyn King.

The plan is part of an overhaul outlined by the Chancellor Alistair Darling to place financial stability "right at the front" of the Bank's operations. Mr Darling told Parliament yesterday that "we should learn from the example of the monetary policy committee" in which outsider experts help make interest rate decisions.

But the move will be seen as a significant blow to Mr King, who some blame for failing to adequately foresee the Northern Rock fiasco, a repeat of which the latest Government reforms are designed to avoid. Experts said last night that the introduction of an outside panel from the City constituted the biggest challenge to a governor's authority since the Bank's independence a decade ago, when Sir Eddie George threatened to resign over banking supervision.

There are signs that the proposal came as part of internal political wrangling at the Bank, specifically over the choice of deputy governor for monetary policy to replace Rachel Lomax. The panel was seen as a possible quid pro quo for Mr King's choice of Charles Bean, the Bank's chief economist. In return, ministers are said to be determined to install more outside advice on the Bank, potentially threatening the position of Mr King and Sir John Gieve, the deputy governor for financial stability.

The move builds on proposals for reform on banking supervision outlined in a consultation document in January by the Bank, the Treasury and the Financial Services Authority.