Mervyn King, Bank of England governor, will on Tuesday face questions from MPs over his working relationship with Alistair Darling, chancellor, amid tension over their respective roles in the Northern Rock crisis.
Mr King is believed to be frustrated with the chancellor, who is drawing up plans to make it clearer that he is in charge when dealing with the kind of crisis that engulfed Northern Rock.
With the saga still far from over, the Commons Treasury committee will on Tuesday grill Mr King over how he thinks such problems can be avoided in future. Mr Darling will give evidence again to MPs on January 10.
The committee’s report will feed into Mr Darling’s review of the operation of the “tripartite” system in times of financial crisis. The chancellor has said “lessons need to be learned” about the way the Treasury, Bank and Financial Services Authority handled the Northern Rock affair.
Mr Darling’s officials say he is attracted to a model based on the “Cobra” committee – the emergency body set up to deal with national emergencies. Under that system the police and other experts give advice, but decisions are taken by ministers.
That could mean, for example, making it clear that final decisions on lender of last resort operations – taxpayer-backed loans from the Bank – rest with the chancellor, Mr Darling’s aides say.
But the Cobra analogy is not precise. Mr Darling’s aides say the tripartite system is generally working well and that any changes to lines of responsibility will be based on “evolution, not revolution”.
They reject categorically suggestions that the Treasury would take powers to compel the Bank to pump liquidity into the system, a move which would strip away one of Mr King’s key responsibilities.
What became clear around the time of the run on Northern Rock was that the memorandum of understanding between the tripartite authorities did not specify precisely when the Bank would be able to modify its liquidity arrangements without Treasury authorisation.
The Treasury wants greater clarity in these matters, although the situation is now clearer by default, as the Bank last week announced a new three-month lending facility against wider collateral without Treasury authorisation.
Tensions between the Treasury and the Bank have come into the open in recent weeks, raising questions about whether Mr King will be reappointed for a second term as governor when his five-year term expires next summer.
Mr King gave an interview to the BBC in November in which he suggested the government should have acted more urgently in reforming depositor insurance and introducing legislation to allow intervention in failing banks.
Treasury officials described the interview at the time as “naive” and say Mr Darling is consulting on those issues.
The Sunday Times reported at the weekend that a “senior Bank official” said reforms favoured by Mr King had been held up because Gordon Brown and Mr Darling were “unable to focus because morale throughout the government is so low”.
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