Sean O'Grady: Who's in charge in a crisis? It is now very much Mervyn, but it should be George

Outlook: It may – or may not, looking at recent events across the Channel – be too early to ask the question: "Who's in charge in a financial crisis?" But the Treasury's latest proposals on banking regulation do not in any event answer it very satisfactorily.

It is an important question, perhaps the most crucial of all, given the economic costs associated with this bank-driven recession. The direct and indirect costs, including loss of output, run into hundreds of billions of pounds, and will be paid for generations. The banking crisis, on some measures, has cost us more than two world wars and the foundation of the welfare state, but with rather less to show for it. Even if we had offset, say, a twentieth of those costs through better regulation, it would have saved vast sums.

Does it matter? The precise custom and practice of regulation varied across many countries, and was in rare cases sufficient to make a difference to how they survived the crisis, Canada and Spain being the two examples most often cited where institutional arrangements demonstratively helped. But that is not to say that the British could not do better than they did last time round. As the Treasury's paper says: "Perhaps the most obvious failing of the UK system is the fact that no single institution has the responsibility, authority or powers to monitor the system as a whole, identify potentially destabilising trends, and respond to them with concerted action." This has been paraphrased by Paul Tucker, the Bank of England's deputy governor for financial stability, and by Lord Turner, chair of the soon-to-be-dismantled Financial Services Authority (FSA) as "underlap". None of the "tripartite authorities" – Bank, FSA or Treasury – was in charge during the run on Northern Rock, during the credit crunch that preceded it in the summer of 2007, nor during the even more dangerous and costly crisis and failures in 2008.

That much we knew, and has been painfully chronicled by many of those involved. By the way, Alistair Darling's memoirs, which we may not have to wait too long for, will shed an interesting light on the actions of the various parties involved, including Gordon Brown, who single-handedly engineered the "rescue" of Halifax/Bank of Scotland by Lloyds TSB, a move that took a weak bank and a strong bank and contrived to combine them into one very big, very weak bank indeed. I wonder what Alistair made of that, and how much blame he will attribute to the other dramatis personae, including our old friend Fred "The Shred" Goodwin, Mervyn King, Adair Turner, Dick "The Gorilla" Fuld of Lehman Brothers, and the US Treasury Secretary Hank Paulson, who was reportedly decidedly uncomplimentary about Mr Darling after the Chancellor vetoed a Barclays deal with Lehman.

But let us look to the future, and the brave new world being devised by the Treasury and the Bank of England in which the Bank will be pretty much in charge of everything. Indeed, this is much more than a return to the pre-1997 position, when the Bank was solely charge of banks supervision. It now has insurance firms, hedge funds and who knows what else under its wing, bodies that were under an alphabet soup of "self-regulation" agencies in the old days.

After 1 January 2013, the provisional date for the changes, the Bank's empire will be more extensive than ever. It will be unmistakeably in charge. As now, it will warn of dangers in the Financial Stability Report, such as the coming bank re-financing crunch and exposure to sovereign debt (see charts). Two new bodies, the Prudential Regulation Authority (PRA), an FSA replacement that will be a wholly-owned subsidiary of the Bank, and the Financial Policy Committee will look out for – and, crucially, act upon – systemic risks, unsustainable credit booms and weakness in institutions.

Both bodies, as it happens, will be chaired by the Governor, Mervyn King, and be dominated by Bank officials. Hector Sants, the current chief executive of the FSA, will become a deputy governor of the Bank. Given that the PRA's remit is to help ensure financial stability, I'm not sure how his job differs from the other, existing, deputy governor for financial stability, Mr Tucker. Anyway, Mervyn will be in charge. Clear?

Not really. Or at least not wholly satisfactorily. The Treasury's paper, which could easily have been written by the Bank for the Bank, is careful to stress that where public funds are concerned the Chancellor will take the decisions, which is how it ought to be. The Governor will be required to meet the Chancellor twice a year for a formal session on financial stability, and they'll even publish "high level" (for which read uninformative) minutes. At the Treasury Select Committee last week, Mr King said that the important distinction between process and substance meant that the Chancellor ought not concern himself with chairing the Financial Policy Committee on the four occasions a year it will meet. The Chancellor shouldn't have to sit around while ten colleagues discuss the best way to implement a resolution regime in, say, a small building society, if there is no systemic risk posed.

Fair enough. But a Chancellor constantly and formally in charge at a time of systemic crisis, and, even in peacetime, should be in charge too of the response to a developing crisis, for you cannot know in advance if public funds will be needed. Arguably he also needs to satisfy himself that the situation is calm. At his discretion, he should be able to take the lead at any time.

The machinery for this already exists. The last government created the "Financial Stability Council" of the Chancellor, Governor and FSA Chair, chaired by the Chancellor. The White Paper is silent on its future, but there is a strong case for retaining it, in modified form, on top of the FPC and PRA, as a "high command" directing an emergency apparatus to deal with a crisis, and with the Chancellor clearly the person who is in charge.

It would be easy, for example, to turn the Council into the forum for the Governor's twice-yearly chat with the Chancellor, and it would be better to have the deputy governor/chief executive of the PRA there too, as the most intimately knowledgeable about the situation (or so you would hope).

If and when public money is clearly at risk of being used, or when systemic risk threatens the economy, the Financial Stability Council should have the power to direct the PRA to act. In an emergency, the FSC could be enlarged, and use sweeping emergency powers, including the ability to set aside domestic and EU rules on state aid or competition.

It might, say, include other ministers such as the Business Secretary, and Vince Cable would be something of an asset to it. Under a pre-election proposal from Mr Cable, it might even include opposition MPs such as the shadow Chancellor, though that may be politically naïve. It could co-opt outside expertise, and, on occasion, might be chaired by the Prime Minister. It might meet every day, or in permanent session. It would be best constituted as a proper sub-committee of the Cabinet, albeit a very unusual one. And, just as the COBRA ("Cabinet Office Briefing Room - Alpha", apparently) committee is activated during times of national emergency, such as the 7/7 attacks or the volcanic ash episode, so the FSC should be able to draw upon a team seconded specifically to this sort of role, "special forces" officials from the Bank, Treasury and other places, constantly ready to spring into action. It probably wouldn't save us from another catastrophe, but at least we'd know who to blame, and that would be someone who has to answer directly to Parliament and can be sacked: the Chancellor. The buck stops with him.

s.o'grady@independent.co.uk