A fateful decision 12 years ago by Gordon Brown, egged on by envious Treasury officials, led to the catastrophic failure of UK regulators to anticipate and prevent the banking crisis, according to a former Bank of England director and City grandee.

Sir Martin Jacomb, a former chairman of Prudential and director of Barclays, criticised the Prime Minister for his “disastrous” decision while Chancellor to strip the Bank of responsibility for banking supervision and hand it to the newly created Financial Services Authority.

Sir Martin, who was a director of the Bank for ten years until 1995, also claimed that the decision was “at least partly the outcome of long-harboured but unspoken jealousy and suspicion” at the Treasury.

He said: “The Treasury has long been envious of the Bank of England. Viewed from Whitehall, the Bank seems grander, with a long and splendid reputation, particularly internationally, and with relationships with other central banks which give it a special air of authority.”

Mr Brown and the Treasury deliberately split the responsibilities so as to “divide and rule”, Sir Martin added, saying that the Treasury had felt bruised and misled by the Bank over an earlier scandal — the failure and rescue of Johnson Matthey Bank.

He said that Eddie George, the Bank Governor at the time, was “far from content” but too loyal to resort to public debate.

The ultimate responsibility was Mr Brown's, Sir Martin said. “His desire for ultimate control was decisive; and it ended in failure.” The Bank lost its influence over the banks and could no longer obtain detailed information on their behaviour in order to make well-informed macro-prudential decisions.

Sir Martin argued in a paper for the Centre for Policy Studies that the Bank of England should take over the FSA and create a new body, the Systemic Policy and Risk Committee, which would be ultimately responsible for financial stability.

The Treasury responded last night that the Bank had continued to have a role in macro-prudential supervision after 1997, both through its financial stability division and membership of the Tripartite Committee, the body of Bank, FSA and Treasury officials that is responsible for financial stability.

Separately, the House of Lords Economic Affairs Committee argued that responsibility for macro-prudential supervision — the setting of general rules and standards governing banks to foster stability — should be given back to the Bank from the FSA.

The tripartite arrangements had failed, Lord Vallance, its chairman, said, “in part because it was not clear who was in charge in a crisis and because not enough attention was paid to macro-prudential supervision”. The committee said that a new policy lever should be introduced to counter the pro-cyclicality in the banking sector. This could be the level of loan-to-value ratios or capital requirements and the Bank could adjust these, just as it sets interest rates, to damp down the credit cycle.

It also suggested:

— Compulsory reporting of credit default swap trades.

— Forcing credit-rating agencies to buy and hold the bonds they rate.

— Forcing banks to pre-fund the depositor lifeboat rather than run it on a pay-as-you-go basis.

— Allowing bank non-executive directors to serve for longer than ten years and to have their own executive.

— Encouraging bank supervisors to liaise with bank auditors.

— Greater oversight of overseas bank branches by UK authorities.

The Treasury is due to publish a paper this month giving its views on regulatory reform.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive