In a white paper on financial regulation titled From crisis to confidence: Plan for sound banking the shadow chancellor George Osborne laid out the Conservatives' plan for a strong regulatory framework that would form "an essential component of a sustained economic recovery".
The Tories have proposed a complete overhaul of the tripartite system set up by Gordon Brown during his tenure as chancellor, which they claim led to a decade of "fiscal imprudence" that left the UK "more exposed" than most countries to the banking crisis.
Under the Tory plans, the BoE would be given responsibility for maintaining financial stability, including the regulation of all banks, building societies and insurance companies.
The BoE would be given the power to regulate the pay structures, risk levels, complexity and size of financial institutions, and the ability to force those that take excessive risks to hold large reserves of capital in a bid to protect taxpayers from having to fund future bailouts.
Osborne said: "If we can bring stability to our banking system, and reward long-term returns over short-term bonus chasing, then we will have put in place a key foundation stone of an economic recovery."
The Tories also plan to create a "powerful Consumer Protection Agency" that would unite the powers currently divided between the FSA and the Office of Fair Trading (OFT), and to ask the OFT and the Competition Commission to conduct a probe into consolidation in the banking sector, the results of which would inform their strategy of how to dispose of sizeable government stakes in RBS, Lloyds and Northern Rock.
The Confederation of British Industries (CBI) described the Tory proposal as a "radical blueprint" that would give the BoE "the most wide-ranging powers of any central bank in the major economies", but added that more explanation was needed.
CBI director general Richard Lambert said: "What most concerns business is what regulators do, rather than where they sit, and lots of big questions remain unanswered in these proposals. They include issues such as how the transition to a new structure would be managed, who would be responsible for markets and securities regulation, and whether the Bank would have the capacity to carry out all of its new functions.
"However, there is a growing consensus on the key issues which include an increase in the quality and quantity of capital held by banks, greater alignment of pay and long-term shareholder interests, greater regulatory focus on liquidity in financial markets, and the promotion of competition."
