Many people blame the Northern Rock debacle on the tripartite division of responsibilities between the Financial Services Authority, the Bank of England and the Treasury. But there are three separate roles. A regulator should protect the public in its dealings with financial institutions. A central bank should provide cash to the public and manage monetary affairs. A government department should formulate policy for the banking sector. A central bank which combines all three roles can compensate for failure in any one of them by printing money. But this is not, in the long run, a good idea.

Some see Northern Rock as a failure of supervision by the FSA. But this is to misunderstand the role bank regulation can play. Northern Rock adopted a strategy of aggressively pursuing market share in mortgages using cheap funding from the overblown securitisation market, and the strategy collapsed when the wholesale funding markets on which it depended dried up. The errors were errors of business judgment. We have every reason to think that Northern Rock was honestly and efficiently run.