By: Channel 4 News, 16 June 2010

The Bank of England becomes the most powerful institution in Britain, says Economics Editor Faisal Islam, as Chancellor George Osborne outlines plans to give the Bank greater powers to oversee the financial industry.

Mr Osborne was called to answer an urgent question in the Commons on banking regulation ahead of tonight's Mansion House speech, one of the key addresses in the chancellor's calendar.

He confirmed to MPs that he plans to give the Bank responsibility for both the overall "macro-prudential" supervision and oversight of the "micro-prudential" regulation of individual institutions. 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.

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

The Bank is now in chargeThe Bank of England will tonight become the most powerful institution in Britain, writes Economics Editor Faisal Islam.

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.

"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."

Mr Osborne is expected to outline plans to overhaul the entire financial system tonight in his first set-piece speech to the City.

Mr Osborne is expected to announce that the Bank of England will get new powers to clamp down on risky banking activities, including the ability to restrict the amount banks can lend. That could allow the bank to cap the amount homebuyers would be able to borrow, blocking, for example, loans greater than 75 per cent of the value of a home, and restricting some business loans.

More from Channel 4 News- Banks and government: who knows who?- Cameron: tackling debt will change our lives- Economics Editor Faisal Islam blogs

However the speech is likely to confirm that the government is rowing back from its original pledge to scrap the Financial Services Authority, created by Gordon Brown to regulate financial activities. It will, though, lose many of its powers to the Bank of England, including ultimate authority over banking supervision.

Mr Osborne, who has blamed the FSA for failing to spot the warning signs of the economic crisis, is likely to reduce its remit still further by setting up a new consumer protection body and an economic crime agency to investigate financial malpractice.

Unemployment

Prime Minister David Cameron and acting Labour Leader Harriet
Harman clashed during prime minister's questions today over the economy at prime minister's questions.

New unemployment figures out today showed almost two and a half million people are now out of work. Unemployment rose during the three
months to April by 23,000.

Long term and youth unemployment also went up, but the most striking rise is those classed as "economically inactive", now more than eight million people or 21.5 per cent of the working age population, the highest level since records began.

Mr Cameron described the figures as a "mixed picture", and blamed record unemployment on the failings of the past Labour
government.

Ms Harman accused him of "talking the economy down" to "soften the public up" for planned spending cuts.

Some economists fear that the government's plan to make sweeping cuts in public spending could put even more people out of work. Unite leader Tony Woodley warned that "unemployment is never a price worth paying, it destroys lives and leaves permanent scars on our communities."

But employment minister Chris Grayling said businesses should be offered real incentives to grow and create job opportunities in future.