The Bank of England's deputy governor for financial stability has resigned. Sir John Gieve had come under increasing pressure as scrutiny of his role during the credit crisis and the collapse of Northern Rock intensified.
Matters came to a head with the vacancy created by the retirement of the Bank's deputy governor for monetary policy, Rachel Lomax, which takes effect at the end of this month.
There had been rumours of a rift between the Treasury and the Bank about her replacement, and over the need to strengthen the Bank's perceived weakness in understanding and formulating policy on market stability.
Ministers were said to favour the promotion of Paul Tucker, the Bank's director for markets, but the incumbency of Sir John was an obstacle to resolution of the issue. Now that Sir John has fallen on his sword, the way has been cleared for the appointment of Charles Bean as deputy governor for monetary policy, and for Mr Tucker to be made deputy governor for financial stability.
The Bank said in a statement last night: "Sir John Gieve has decided he will leave the Bank next year, once changes to [its] responsibilities have been made. [He] believes the Bank's new responsibilities should be led by a new deputy governor who will serve a full term."
Sir John, a former civil servant, was appointed in January 2006 and had two-and-a-half years of his term to run. Although he had statutory tenure under the Bank of England Act, he may have felt his resignation was the only satisfactory solution for the Bank and the Government. The early exit of such a senior official is unprecedented since the central bank was given independence over interest rate setting 11 years ago.
However, Sir John was accused by MPs of being "asleep" during the Northern Rock crisis and gave a poor performance during his testimony to the Treasury Select Committee last autumn. When it emerged that he had been on holiday for two weeks in mid-August when the Bank was told of Northern Rock's problems, the committee chairman, John McFall, told him: "Frankly, I do not think you are doing your job." Sir John insisted he had been "alert to the dangers in the financial markets" and that it was not his position to be scrutinising individual banks.
Last night, in a further move to strenghten the Bank's ability to cope with financial turmoil, Alistair Darling used his first speech to the Mansion House as Chancellor to tighten his grip on the Bank. He made clear it would be held legally responsible for financial stability, and said that a new Financial Stability Committee would "guide the Bank's operations in this field".
Today, Mr Darling will tell the Treasury Select Committee that the governor and his two deputies will in future be limited to two terms in office. This means Mr King could not be reappointed, even if he wished to be, when his current term expires in 2013. Under the plans, the Bank's governing body, the Court, will be dissolved and shrunk from 16 members to 12, including Mr King, his two deputy governors, the chairman of the FSA and a string of non-executives, some of whom may be current members and other new appointments.
Just as outside experts have been brought in to deal with interest-rate setting via the Monetary Policy Committee, so the presence of figures from the City will, it is hoped, bolster the Bank's ability to deal with market crises.
Mr Darling said such a move would "bring valuable, external expertise to bear on the Bank's decision-making". Advertising for the posts of governor and deputy governor, and for external members of the MPC would, he added, "inject more openness and transparency to the process."