A "new settlement" between the British people and the banks was promised by the Chancellor, George Osborne, in his first Mansion House speech.
Mr Osborne launched a scathing critique of the previous "tripartite" regime for financial regulation, put in place by Gordon Brown in 1997, where responsibilities were split between the Financial Services Authority, the Bank of England and the Treasury: "No one was controlling levels of debt, and when the crunch came no one knew who was in charge."
Mr Osborne criticised the FSA's reliance on "box ticking" and rules rather than judgement.
The FSA, the centrepiece of Mr Brown's reforms, will be dismantled, with the bulk of its role in regulating the banking system and individual banks being transferred to the Bank. The FSA becomes a subsidiary of the Bank, with a "powerful" new Consumer Protection and Markets Authority taking on the FSA's work at the retail end. A single agency to "take on the work of tackling serious economic crime" was also announced.
The Governor of the Bank, Mervyn King, speaking at the same dinner, said that "putting prudential regulation into the same organisation as the oversight of consumer protection and market conduct didn't work in practice".
Hector Sants, the outgoing chief executive of the FSA, will join the Bank as chief executive of the new macroprudential regulator. Andrew Bailey, the chief cashier of the Bank – whose name is familiar because it appears on banknotes – will serve as his deputy. A new Financial Policy Committee will be set up at the Bank, which will oversee the new "macroprudential" role.
Mr Osborne said that the Bank will be granted the powers to regulate the growth of credit in the economy it has long sought, commensurate with the mandate it was given in last year's Banking Act to help ensure financial stability.
The Financial Policy Committee will take decisions on whether to implement the so-called macroprudential tools. This would involve varying the capital or liquidity requirements of the banks to restrain or to encourage lending, depending on the economic environment; the Bank might also seek to cap or relax loan-to-value and income multiples on the residential mortgages, again depending on the economy or housing market. The aim would be to avoid the reckless lending during the earlier part of this decade that fuelled a property bubble and crash, as well as to encourage banks to lend during a slump, as now.
Mr King said: "Monetary stability and financial stability are two sides of the same coin. During the crisis the former was threatened by the failure to secure the latter... A credible macroprudential regime could help forestall both excessive exuberance and unnecessary caution."
He added: "This type of regulatory regime, and its objectives and tools, are largely untried and untested. But that is not a reason for not trying and not testing."
Mr King alluded to the financial crisis in the eurozone, and tacitly called for Germany to expand her economy to help the weaker states: "Countries with current account surpluses, while understandably wanting to avoid unsustainable fiscal paths of their own, have a responsibility to expand domestic demand so that the imbalances can be reduced.
"Only if the two sets of policies work in tandem will growth prove sustainable."
Register for free to continue reading
Registration is a free and easy way to support our truly independent journalism
By registering, you will also enjoy limited access to Premium articles, exclusive newsletters, commenting, and virtual events with our leading journalists
Already have an account? sign in
Join our new commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies