Osborne set to back Sir Mervyn in bitter battle over Bank rules

Chancellor to support supervision plan as powers over mortgage market are transferred

George Osborne is set to come down on the side of Sir Mervyn King in the increasingly bitter battle between the Bank of England governor and the Treasury Select Committee over how the Bank ought to be supervised.

The committee argues in a report published today that the proposals put forward by Sir Mervyn, below, and the Bank's ruling court last week to create a new "oversight committee" for the Bank would not make the institution sufficiently accountable to Parliament for future controversial decisions it might make.

"The Bank's proposed remedy...falls well short of what is required" said Andrew Tyrie, the Chairman of the Treasury Committee. "The Bank needs a proper Board – fit for the 21st century". The report also argues that the Bank of England has still not been held properly accountable for its performance in the 2008 financial crisis.

The Chancellor must decide whether the new Financial Services Bill – which will be published before the end of the month and could emerge as early as this Thursday – will contain the recommendations of the Bank or the much more powerful form of external supervision favoured by the Treasury Select Committee. Treasury sources have indicated that the wording of the final bill is likely to be closer to the recommendations of Sir Mervyn than those of the Treasury Committee.

There were irate exchanges between members of the Treasury Committee and the Governor on the subject of supervision at a public session last week. The Conservative MP Jessie Norman accused the Governor of behaving "disrespectfully" by failing to provide the committee with adequate notice of his counter proposals for reform.

Some in Parliament privately suggest that Sir Mervyn's proposals on supervision lack support even from other members of the Bank's court but that the Governor is such a dominant figure that no one dares to make the counter case.

"I don't think he has wide support, [but] nobody likes contradicting the Governor. He's the Sun King," said one MP. The MP also suggested that the Governor was attempting to water down supervision by proposing a reform that would promise more oversight than it actually delivered. The new Financial Services Bill will transfer the bulk of the macro-prudential regulatory powers that currently reside with the Financial Services Authority to the Bank of England. A Financial Policy Committee will be established, under the authority of the Bank and chaired by the Governor, which will have the power to curb lending in booms, including placing limits on the public's access to mortgages.