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In addition to these varied duties, the Bank also has to keep a watchful eye over the City. This brings it into a wide variety of areas. It reported its concern about the activities of the London Metal Exchange some eighteen months before the tin market collapsed. The scandals at Lloyd’s insurance encouraged the Bank to intervene and impose an outside Chief Executive, even though it had no real powers over the insurance market.

The Bank’s most important supervisory activities, however, relate to the banking system. As we have already seen, the Bank has often used its powers to regulate the asset portfolios of banks. It is also concerned to ensure that bank depositors are protected from collapse. This role was brought into the public eye in 1984 when the Bank was forced to step in and buy the Johnson Matthey Bank, for the nominal sum of ?1, to save it from insolvency.

The Johnson Matthey scandal forced the Bank to revise totally its supervisory functions. After deputy governor Kit McMahon left the bank, George Blunden, the man who guided the banking system through the secondary banking crisis of 1974-5, came out of retirement to take on McMahon’s post. The Bank was faced with dealing with two problems: the prevention of fraud and the avoidance of bank failures.

It was clear that the 1979 Banking Act, which divided banks into two tiers – top-rank banks and licensed deposit-takers – had proved unsuccessful. The new system created a Board of Banking Supervision which included independent members as well as the Bank’s supervisory team. The Board will be responsible for advising the Governor on a wide variety of issues, including the development and evolution of supervisory practice, the administration of banking legislation and the structure, staffing and training of the Banking Supervision Division.

The two-tier supervisory system was abolished and to cope with the greater workload, the staff of the Bank’s supervisory department was substantially increased. Under the new system, authorized institutions will need to have minimum net assets of ?1 million and issued capital of at least ?5 million to be able to call themselves a bank. They will need to report certain information about their lending patterns to the Bank. It will be a criminal offence ‘knowingly or recklessly to provide information to the supervisor which is false or misleading in a material particular.

One of the most tricky areas in banking supervision is the role of bank auditors. The Bank of England had hinted that auditors might be required to report to it directly – a breach of the time-honoured tradition of confidentiality between auditors ad audited. After some debate, a compromise was reached under which auditors were required to inform the Bank of potential disasters such as the possibility of fraud. In addition, the Bank will have powers to appoint a second firm of accountants if dissatisfied with the work of the first group.

The Bank of England must be notified of any exposure to an individual customer in excess of 10 per cent of a bank’s capital (equity and near-equity). Exposures of over 25 per cent will require prior notification to the Bank. (As mentioned in the Introduction, Johnson Matthey Bank lent 115 per cent of its capital to just two borrowers.) In addition, anyone who buys a stake of more than 5 per cent in a bank must report it to the Old Lady; anybody wishing to control a bank would have to be declared ‘a fit and proper person’ by the Bank.

These powers give the Bank real teeth to cope with potential scandals. The old Bank would not have needed them, but the modern financial system is less of a gentleman’s club. As the Johnson Matthey case illustrated, one cannot rely on bankers to be prudent wit their depositors’ money.