Treasury insiders moved last night to quell fears that government plans to set up a special committee to police parts of the Bank of England are riven with conflicts of interest.

Observers in the Square Mile and beyond said that it could be extremely hard to create a panel whose members were experienced enough to add value in overseeing the Bank's financial stability role while not, at the same time, having conflicts of interest.

City sources gave warning that any figures with sufficient knowledge of conditions in the markets would have to be highly placed in institutions and would therefore have vested interests in their advice to the Bank.

Treasury sources last night conceded that it would be a “challenge” but they said they would look to appoint other senior figures to the committee from outside the banking sector.

One said: “They have got to be people who are suitably qualified to act as a collective, with different types of experience in markets and with no conflicts of interest.”

The panel is being prepared as part of a pact that will allow Mervyn King, Governor of the Bank of England, to appoint Charles Bean as deputy governor to replace Rachel Lomax.

Alistair Darling, the Chancellor. has made it clear that he wants to beef up the bank's oversight of financial stability after the Northern Rock debacle.

Although Mr King's views on interest rates and economic policy are challenged regularly within the Bank by both internal and external members of its rate-setting Monetary Policy Committee, the Governor has unchallenged authority over the Bank's role in markets and the City.

Last night, George Osborne, the Shadow Chancellor, said the Bank needed more powers to step in and rescue financial institutions if they get in trouble.

“The priority is fixing the regulatory structure,” he told The Times.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax