Recrowned King

In the flurry of Treasury proposals for reform of the UK financial system, the news that Mervyn King has been reappointed for another five-year term as governor of the Bank of England is welcome. His challenge is not only to set monetary policy in unusually troubled times - risks of economic slowdown and inflation both loom large - but to reconnect the Bank with the financial markets.

Mr King has made mistakes. History may decide that he was right to take a tough line on moral hazard during the early days of the credit squeeze, but to voice such strong views in public was an error of judgment, given that he was forced to back down a few weeks later. That is far outweighed, however, by his brilliance as a monetary economist, and his part in creating one of the world's most effective policy frameworks at the Bank. He is the best man for the job.

Mr King may be the right governor, but the Bank's lack of market savvy and connections was exposed last autumn, and it urgently needs a top executive who knows bankers and understands banks. Improving the balance of senior expertise, and including those with a private sector background, should be a priority as new appointments come through.

Of course, the Bank would know all it needed if it took over the supervision of commercial banks. But the government is right to leave that function at the Financial Services Authority.

Today's big banks trade bonds and derivatives as much as they take deposits. To have those wholesale activities regulated by the FSA but deposits and lending regulated by the Bank of England would be unsatisfactory. Duplicating everything at both the Bank and the FSA would be even worse. But simple "information sharing" between the two institutions is not enough.

What Mr King must insist is that some of his staff are seconded to the FSA and work supervising individual banks. That, or an arrangement like it, is the best way to give the Bank the information it needs to maintain financial stability during a future credit squeeze.

Compared with these crucial questions, the proposals to help keep Bank of England support operations secret are a sideshow. They might make it easier to rescue small lenders in normal times. But support on the scale of that given to Northern Rock last year, when markets are stressed, cannot be hidden.

The run on Northern Rock was a fiasco unmatched in recent British financial history. But there are now welcome signs that the right lessons have been learned and that no repetition will ever be allowed.