George Osborne to beef up Bank's regulatory role

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Chancellor George Osborne today outlined plans to beef up the Bank of England's role in financial regulation to replace the system that "failed spectacularly" to prevent the banking crisis.

Responding to an urgent question in the Commons he confirmed plans to give the Bank responsibility for both the overall "macro-prudential" supervision and oversight of the "micro-prudential" regulation of individual institutions.

Ahead of tonight's Mansion House speech, he also announced the appointment of former Bank of England chief economist Sir John Vickers to chair a commission on the future of the banking industry.

Shadow chancellor Alistair Darling warned that the changes would result in a "dog's breakfast" of a regulatory system.

The Government is committed to reforming the tripartite system of regulation introduced by Gordon Brown in 1997 by taking powers away from the Financial Services Authority (FSA) and giving them to the Bank.

Mr Osborne said: "The tripartite system ... failed spectacularly in its mission to ensure stability in the financial markets.

"The failure of certain banks cost the taxpayer a vast amount of money."

The Chancellor continued: "The British people rightly ask how this new coalition Government will learn from the mistakes of its predecessor.

"The coalition agreement commits us to reform the regulatory system for financial services in order to avoid a repeat of the financial crisis and that is precisely what we will do."

The Government will hand over to the Bank the responsibility for macro-prudential supervision "that should never have been taken away from it".

The tools available to the Bank were the subject of international discussion at European and G20 levels, he said.

"It is already clear that the tools will involve capital requirements to work against the cycle rather than with it," he said.

The Bank will be given responsibility for overseeing micro-prudential regulation because it needs "to have a deeper understanding of what is going on in individual firms".

Further details of the arrangements will be given to Parliament tomorrow, he added.

Turning to the new banking commission, Mr Osborne said: "The previous government would brook no debate about the future structure of the banks, the relationship between retail and investment banking, the question of how best to protect taxpayers and how to ensure greater competition in an industry which they actively sought to consolidate."

Mr Osborne said he wanted Britain to lead the debate about the future of banking, and said Sir John would bring "unquestioned experience, integrity and independence" to the role.

"He approaches this issue with an open mind," he added.

"Unlike the last government, this Government is prepared to confront the difficult challenges of the regulation and structure of the banks.

"We are prepared to learn the lessons of what went wrong, even if they are not."

Under the new plan to give the Bank a role in supervising individual institutions, Mr Darling said: "It has been suggested in some quarters, for example, the Bank of England might have dealt with whether or not RBS could have taken over ABN rather than the FSA."

He told Mr Osborne: "Don't you realise that, far from clarifying the situation, this is adding an additional complication?

"The risk is that we have a dog's breakfast of a regulatory system where no-one knows who is making decisions, no-one knows who is in charge."