The Treasury was put on the defensive yesterday as its plans to overhaul banking regulation to prevent a future Northern Rock-style crisis came under fire from both the Governor of the Bank of England and a powerful committee of MPs.

Mervyn King, the Governor, told the Commons Treasury Committee that he believed ministers were wrong to deny him powers, which will be given solely to the Financial Services Authority, to decide when a failing bank should be brought under the Bank of England’s direct control. Mr King won backing from MPs for his case that the Bank should also have powers to trigger the emergency regime for banks. Senior members of the Treasury Committee sounded warnings that the plans for only the FSA to trigger the regime created potential for confusion.

The Governor also accused the Treasury of having been ill-advised in its decision to spare high street banks the heavy cost of having to fund in advance a new deposit compensation scheme to pay out to savers after future failures. Mr King renewed his insistence that banks should be forced to pay billions to prefund the scheme. “I think it’s rather shortsighted that the banks shouldn’t put up money now,” he said. “If you wait until there’s a problem, that’s a bad time to ask.”

Both the Governor and the Treasury in turn came under attack from Treasury Committee members over a controversial proposal for Mr King himself to chair a new Bank of England Financial Stability Committee (FSC) to oversee the Bank’s work in policing financial institutions.

There was concern that this role for the Governor would create a conflict of interest by putting him in charge of a body partly responsible for scrutinising his own actions. However, Kitty Ussher, the City Minister, insisted that this was a matter that should be decided not by the Treasury but only by the Bank’s ruling Court of Directors. The planned FSC will be a subcommittee of the Court.

After a previous admission by Sir John Parker, the most senior nonexecutive Court member, that there were inconsistencies in Mr King chairing the FSC, Ms Ussher’s stance was lambasted by John McFall, the Treasury Committee’s chairman. “We really need to get this right. You have washed your hands of this. You have given it to the Court, which we do not consider a Rolls-Royce operation,” Mr McFall said.

Ms Ussher was also forced to defend the Treasury’s decision that only the FSA should be able to place a failing bank into the Bank’s control. “It’s important the responsibility is very clearly laid out, precisely to avoid a muddle,” she argued. Yet MPs on the committee voiced concerns that the plan would create confusion. “There is rich potential for muddle here,” Jim Cousins, a Labour member, said.

Times Recommends

• Lloyds TSB wins vote for HBOS merger
• Bank of England discussed 2% rate cut
• Woolworths dives as it confirms takeover talks