About-turn for governor

On Sunday evening Eddie George, the governor of the Bank of England, staked the bank's reputation on his judgement that the markets would take the collapse of Barings with relative calm.

His decision to let Barings go to the wall amounted to a dramatic change of mind after a day in which the Bank had been telling all comers that a rescue was vital to the health of the City and the financial system.

Mr George is a man who made his reputation at the Bank as an adroit manipulator and second-guesser of the markets. Like any good market operator, once events turned against him and a City or government financed rescue proved impossible, Mr George switched smoothly to defending his new position.

In essence this was that the disaster was the fault of a rogue trader with no wider implications for the markets.

So far his evening judgement that there would be no Black Monday certainly appears to have proved correct.

If Mr George had been wrong about the morning reaction there would have been much wider implications. A market collapse would have severely damaged the Bank's prestige and reputation in Whitehall and Westminster, just at the point at which it has made real progress towards its long-term goal of independence from government.

The Chancellor still sets interest rates, but the Bank's new highly public advisory role in monetary policy and its discretion to decide the exact timing of interest rate changes has given it a clout it has rarely had before.

That influence could have been smashed to pieces by a Bank misjudgement that led to a collapse in international markets, which would have put the government under heavy pressure.

But the Bank is not yet out of the woods. Under Mr George, a highly committed campaigner against inflation, the Bank's main emphasis has shifted to its role in monetary policy. But banking supervision has been the Bank's Achilles' heel - because controversy over supervision has repeatedly threatened to undermine its attempts to establish its credentials in wider economic policy areas.

Some experts on the financial markets believe that if the Bank is to be independent of government, it must shed its supervision role and leave the job to a separate agency. Otherwise each new banking disaster that emerges will undermine its credibility in monetary policy.

If it proves that there were warning signals in the markets missed by the Bank, then its supervisors are bound to come under political fire again. That could put new momentum behind the calls, so far resisted by the Bank, to hive off banking supervision altogether. That would be a break-up of the Bank of England.