Mandelson tells Bank of England to share powers

Lord Mandelson will today throw his weight behind the Treasury and the Financial Services Authority in the argument about whether the Bank of England should be granted more powers, as evidence grows that Britain's banks are facing an avalanche of bad debts.

In a speech to the British Bankers' Association tonight, the Secretary of State for Business will say: "While I think there is an argument for the Bank taking a more direct role in financial stability issues, I do not support a 'twin peaks' system. I believe the lesson of the last year is we need a stronger regulator, not a weaker one.

Lord Mandelson will add: "We need to keep prudential and conduct of business expertise in one place, in a regulator capable of seeing all parts of the picture at once. That regulator has to be the FSA."

Lord Mandelson will also warn that he has "never felt such a sense of distrust and anger between the financial sector and the rest of the economy".

The Business Secretary's remarks will strain relations between the Bank and the Government, which have grown acrimonious in recent weeks. The Governor of the Bank of England, Mervyn King, has repeatedly asked for the necessary "toolkit" for the Bank to implement the statutory duty it has been given under the new Banking Act to "contribute to protecting and enhancing the stability of the financial systems of the UK".

In his testimony to the Commons Treasury Select Committee last week, Mr King astonished MPs by saying he had not seen nor even been consulted about the Government's forthcoming White Paper on regulation. A spokesman for No 10 subsequently said Mr King would see the Financial Services Strategy, which was originally scheduled to be issued this Wednesday but which will now be published next week.

The Treasury apparently wants the Bank to share its statutory role with the FSA, and indeed for the Treasury itself to be "at the table", on the grounds that it would have to pay the bills if things went wrong again. Critics say this multilateral arrangement threatens to institutionalise the confusions that led to the Northern Rock debacle and the first run on a British bank in almost 150 years. But ministers seem worried about concentrating too much power over economic decision-making in the hands of the Bank's unelected officials.

Governors of the Bank have in the past shown themselves to be jealous and fearsome creatures if they fear the interests of the Bank and of the wider economy are at risk from government actions – though none have "gone public" as Mr King has.

In 1997 Mr King's predecessor, Eddie George, threatened to resign when the then-Chancellor Gordon Brown decided to transfer the Bank's supervisory powers to the FSA, a decision that has parallels with today's debates. George Osborne, the shadow Chancellor makes little secret of his desire to grant the Bank more powers, and to relegate the FSA to the role of consumer watchdog – statements that have added to the unwilling politicisation of the Bank.

The latest survey of the financial services' sector by the Confederation of British Industry indicates that some companies "look like they may be starting to come through the worst". However, a net balance of 97 per cent of banks and 98 per cent of building societies said they had seen an increase in the number of bad debts in the second quarter of this year, with a similar expectation for the next three months.

Today, Lord Mandelson will underline the dissatisfaction of many when he cautions: "There are clear expectations that credit must be made available – and not just available, but reasonably priced."