Labour's first action when it came to office in 1997 was to grant the Bank of England independence. Why did it do this and what did it mean? There are a number of reasons for the decision, ranging from the personal ambitions of the chancellor, Gordon Brown, and the political symbolism at the heart of the “New Labour Project” through to academic fashions and the demands of global finance. Ironies abounded, too: it was a Labour government that made the move although a former Labour government had nationalized the Bank in the first place; the Tories had been dreaming of granting the Bank independence while Labour had barely mentioned it; and the Bank seemed to be rewarded for its egregious failures of the 1990s. Nonetheless, although the bolt might have been unexpected, it did not come out of a clear blue sky.

This chapter will first trace how and why the decision to grant the Bank of England operational independence for monetary policy was taken, and why this also led to the creation of the Financial Services Authority (FSA). The second half of this chapter will look at how this new, “international best-practice” supervisory regime allowed the build-up of unrecognized risks in UK financial markets, channelled the global financial crisis into the country, and led to the conditions for the first bank run in the UK since Victorian times. The final irony is that a period starting with the removal of a quasi-state department from the public sector ended with the world's largest private bank being quasi-nationalized. What went wrong?

The debate in the 1990s: central bank independence and the institutional structure of bank supervision

Nigel Lawson had wanted to give the Bank of England independence in the 1980s (Lawson 2010). Margaret Thatcher had not, and so nothing happened. For all the idea may have followed logically from her commitment to monetarism, it was violently at odds with her method of governance and obsession with control. Economics lost out to politics. In the early 1990s under John Major there were sporadic calls for Bank independence, which grew after the ERM debacle (Kynaston 1994).