LONDON LETTER:Banking regulation failed in the UK. But are reforms to the central bank and Financial Services Authority going to be the solution? asks MARK HENNESSEY

THREE YEARS ago, before the global financial crisis erupted, Gordon Brown travelled to the Mansion House in London to extol the City’s virtues, growth and ballooning profits.

This week, Conservative George Osborne, his successor bar one, came to bury some of the reforms Brown made in his opening days in the treasury.

Under Osborne’s proposal, which the Liberal Democrats do not like but to which they have bowed, supervision of banks will once more come under the Bank of England. The Financial Services Authority (FSA) is being brought back to operate as an arm of the bank inside Threadneedle Street, where it had been before Brown made his sweeping regulatory changes in 1997.

Suitably attired in black tie, unlike Brown, who refused to comply, Osborne told the dinner on Wednesday: “At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify let alone prevent. No one was controlling levels of debt and, when the crunch came, no one knew who was in charge.”

The Bank of England will get extra powers to force banks to improve their liquidity ratios and to block certain types of lending, such as the 125 per cent mortgages which became a feature of the boom. The hope is the reforms will help identify future bubbles – though the bank’s record in this regard with the powers it had, even if only by issuing warnings, is questionable.

Bank of England governor Mervyn King, who will now be in charge of supervision and interest rates, is understandably pleased with the increase in powers: “Monetary stability and financial stability are two sides of the same coin,” he said. “During the crisis, the former was threatened by the failure to secure the latter. [The bank] cannot effectively perform its role as lender of last resort without first-hand knowledge of the health of the banks to which it might provide support.”

The Bank of England has escaped responsibility for its own role in the crisis. While the FSA failed miserably to understand what was going on inside the banks it was supposed to inspect, the central bank failed to curb the massive increase in private borrowing that took place following Brown’s 1997 decision to grant it independence.

Private sector and borrowing by the banks doubled, leading to the credit boom. King, in the eyes of critics, could have increased interest rates. He always refused, believing such a move would spur unemployment, even though unemployment was at near-historic lows and many of the jobs created were being filled by immigrants, rather than by British workers.

Both King and Osborne are now happy to give the impression the Bank of England is getting back responsibility for financial stability, along with the return of supervisory powers. The reality is it never lost the former, though it often tended to behave as if it had – particularly in losing much of the in-house experience it had.

Now there are worries about how the Bank of England will use its new powers once it gets them. Lord Adair Turner, the chairman of the FSA, warned last year the problem was not the regulatory structure, but the rules they were trying to enforce. The FSA itself, abysmal before the crisis, has performed better since.

Next time, and there will be a next time, the Bank of England will not be able to deny responsibility.