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Accusing a group of influential cross party MPs of conducting a witch hunt last year seemed to be at best foolish, at worst damaging.

Foolish because the comments, made by Eddie George, governor of the Bank of England, when he was questioned by MPs on the Bank’s role in the collapse of Barings, clearly irritated those directing the questions. It seemed to them as though the Bank’s governor was not entirely happy being answerable to parliament and suggested to them that he had something to hide.

Damaging because these same MPs, sitting on the Treasury and Civil Service Select Committee, were also looking into the future role of the Bank and its place in the financial services industry in general.

However, the comment now has all the appearance of the pre-meditated action of a brilliant man. For Eddie George’s flash of temper over what he considered to be an unfair line of questioning has paid off.

In the run up to his “witch hunt” accusation, George had been at pains to point out the Bank’s limited resources. It was difficult to attract good young staff, capable of becoming effective supervisors, he said given the criticism levelled at the Bank every time there was a problem. Added to this, is the lack of funds. The Bank’s salaries are tied to government pay scales, and Bank salaries are seriously out of kilter with the mega-buck packages available for top quality people in the City. The Bank simply cannot compete for their services with the banks it supervises.

Lessons are learnt from each banking collapse, and further steps are taken to improve supervision – though to date the steps have not gone far enough, prompting the need for further remedial action after each problem. The Banking Act came into force in 1987 after the collapse of Johnson Matthey in 1984. A Bank of England special investigations unit was set up after BCCI’s failure in 1991.

Barings’ collapse last year is no exception. A year and a half after the failure of Britain’s oldest merchant bank, the Old Lady said it planned to spend an additional #8m to improve banking supervision. Added to this, pay for specialist staff is to be raised and 100 more people are being hired.

Previous supervisory reorganisations have smacked of closing the stable door after the horse has bolted. But the Bank hopes these latest measures will be far more effective. The reorganisation follows an expensive eight month review of supervision by accountants Arthur Andersen. It was presented to the Bank’s steering committee, chaired by deputy governor Howard Davies and its findings were accepted in full.

This time the Bank had to be seen to be acting swiftly and to be putting effective remedies in place. In theory it still faces the threat of losing its supervisory role altogether to a new Banking Commission, leaving the Bank with a monetary role only – an idea raised by Alistair Darling, Labour’s City spokesman, four years ago.

The changes proposed by Arthur Andersen are intended to recognise that the banking environment has changed and improve the Bank’s understanding of activities that form an increasing part of banking business, such as trading in derivatives and other securities. Such activities are more subject to sudden and dramatic swings in profitability or loss than traditional banking businesses. They are harder to understand and, as such, harder to control.

Arthur Andersen’s report, “Findings and recommendations of the review of Supervision and Surveillance,” identified several key findings. The first was an endorsement of the current system. The review recommended that the Bank’s supervisory style, where supervisors exercise informed judgment within approved standards and guidelines, be maintained.

That said, however, some change was necessary, as was a closer alignment of the standards and processes of supervision with its supervisory objectives.

The Bank has listened to the criticism of its supervisory style that followed the Barings collapse. It has heeded the talk of adopting the German model in which supervision and the monetary role are separate or a US-style Securities and Exchange Commission to replace the Bank of England.

It has attempted to pre-empt any such forced change by looking at methods used by counterparts overseas and other regulators in the UK and adopting those that will fit into the UK system.

One of the themes of the review was to include a formal periodic risk assessment of each institution. This follows the practice of the US Federal Reserve and of Imro, the UK fund management industry regulator, and bases supervision on risk analysis, discriminating between institutions according to the riskiness of their main activities. It hopes that a more effective risk assessment process will improve the structure of meetings with its charges.

The review also recommended enhancing the effectiveness of existing supervisory tools, such as prudential information and reporting accountants’ reports.

External auditors will be expected to take clearer responsibility for the figures they compile on behalf of their banking clients – a move that has been a long time coming.

It said information technology should be used more effectively to capture, manage, analyse and present the wide range of supervisory information.

The Bank spends less on IT than any of the other nine regulators studied by Arthur Andersen. It now plans to develop computer software to enable it to analyse the performance of competitor banks.

The Bank was surprisingly open about its shortcomings and the need for change. Davies admitted that Bank staff were not experienced enough – hence the additional funds, to be met from the Bank’s own resources, to improve pay for specialists in activities such as derivatives. It will also increase training, particularly in information technology as it plays an increasingly key role in banking supervision.

The calls for more far-reaching change have not gone away. An incoming Labour government could yet carry out its threat and separate the dual roles of the Bank. But change to banking supervision for the sake of change is really not the answer.

The Bank may have got it right this time. It is attempting to shake off its old shackles of secrecy. It has exposed the flaws in its workings to public scrutiny and set out plans for remedying them. It must be given time to make its new system work.

Patricia Tehan is banking correspondent with The Times.