Chancellor of the Exchequer George Osborne was clearly right to abolish the Financial Services Authority and restore responsibility for bank supervision to the Bank of England. The previous government's experiment with an independent regulator was a disaster, contributing both to the huge buildup of leverage in the UK financial system during the boom and the inadequate policy response in the early stages of the crisis. The crisis has shown that central bankers, as lenders of last resort, need to know what is going on inside banks.

But Osborne's regulatory changes don't go far enough. Handing responsibility for financial stability to a new Financial Policy Committee within the BOE was a missed opportunity. The FPC will be given new powers to tackle excessive risk-taking in the banking system, most likely including powers to alter capital and liquidity requirements. But this so-called macroprudential tool kit would have been far better handed to the BOE's existing Monetary Policy Committee, already responsible for setting interest rates.