King faces accusation that the Old Lady was asleep at the wheel

Was the Bank of England asleep at the wheel?

Recently Jon Moulton, the chairman of Alchemy Partners, remarked to reporters that at a recent breakfast meeting with Bank of England officials "none of them knew what a 'CLO' actually was". It's a collateralised loan obligation, in case you were wondering: a debt security – i.e. a financial asset you can buy and sell that has some collateral attached to it, such as,to take a topical example, a bundle of American sub-prime mortgages.

Mr Moulton was being unfair. I've read speech after speech by Mervyn King, the Bank of England governor, his deputies, his officers and economists all thinking aloud about the huge growth in credit around the world. Attached to most of these orations are charts showing impressive research into the most arcane but vital aspects of the international financial system. I think they had one of those for CLOs, as it happens.

They knew what has been going on, and voiced their concerns. Trouble is, that was all they did and, arguably, all they ever could do. In 1998, after the Bank of England had been awarded operational independence, its supervisory functions over individual banks were transferred to the Financial Services Authority. The Bank wasn't happy but, after the collapse of the BCCI in 1991 and Barings in 1995, their reputation in these matters was no longer high.

However, there was a problem, as the Bank remained responsible for the efficient and orderly functioning of financial markets. In the words of the Memorandum of Understanding between the Bank, the FSA and the Treasury, the Bank had to "ensure the stability of the monetary system as part of its monetary policy functions" and "it is uniquely placed to do this, being responsible for monetary stability and having representation on the FSA board [through the Deputy Governor].". And, as the Northern Rock episode demonstrates, it is obliged to fulfil its historic role as a last-resort lender when needs be. So while its "macro economic" functions could be theoretically divorced form its old regulatory role, in reality the two were still linked.

Perhaps, now that it is too late, the review of financial regulation to be conducted internationally via the G7 economies will help us learn the lessons of the Northern Rock debacle. Before then, everyone will be conducting their own inquests. One thing seems clear: this debacle has not been anyone's finest hour.