The Bank is now in charge

The Bank of England will tonight become the most powerful institution in Britain.

To understand what is to happen at tonight’s Mansion House speech, you have to go back a year to last year’s Mansion House event. Then, with the recession and the financial crisis still raging, the Governor of the Bank of England and Chancellor Alistair Darling gave speeches that seemed totally at odds with each other.

In particular Mervyn King told a flabbergasted audience of City grandees that: “The Bank finds itself in a position rather like that of a church whose congregation attends weddings and burials but ignores the sermons in between,” in relation to his lack of powers to rein in the banking system’s excesses.

That was last year. Tonight will be a much more convivial affair. Governor King has already rubberstamped the coalition’s £6bn of spending cuts. Today he will receive sweeping new powers, responsibilities and authorities. He will be able to dish out the carrots and sticks for Britain’s broken bankers as well as the power of the pulpit.

The Treasury promises a “policy-rich” speech. The message: the Bank of England is in charge. The problem was the failure of coordination between the Financial Services Authority’s responsibility for day to day supervision of banks, and the Bank of England’s responsibility for the big picture on credit availability and global economic imbalances.

The great fear when Gordon Brown’s tripartite system was created was ‘overlap’ of authority. The reality was ‘underlap’, a chasm through which dropped Northern Rock and the half the UK banking system.

So the Bank is now in charge of “tilting against the wind”. Mervyn King will be removing the punchbowl before the next credit boom party gets out of hand. He will have a suite of tools, which are yet to be decided, but may include limits on mortgage loan to value ratios, limits on commercial property loans.

Banks will accept this. They will have to. They are more concerned by the Banking Commission headed by Sir John Vickers, and how that will suggest a restructuring of UK banking.

Of far more immediate concern within the Mansion House will be the bank levy. All pretence that this levy is a tool of policy is now dropped. It is a straight revenue raiser that will see the banks paying a chunk of the deficit for reasons of “fairness”. A billion pounds they could stomach.

My sense that between tonight and Tuesday that number will go rather higher. There’s plenty of last minute representations about how the banks will have to slash dividends at a time when BP is unlikely to be paying one. The Chancellor will be brushing over that crucial subject tonight. It is the burning issue.

Longer term, though, imagine a world where the banking system is back under the thumb of a Bank of England governor. A Governor who will be legally obliged to speak truth to power and put an end to politically enjoyable credit and housing booms. That is some power indeed.