Alistair Darling the UK Chancellor of the Exchequer has had an up and down tenure in his current role, but tonight’s annual speech at the Mansion House was surely anticipated as a “safe gig”. Instead he finds himself upstaged by Mervyn King as Governor of the Bank of England and supposedly the “supporting act”. It is as if the valet had not only taken his car for a spin, but put the car up on bricks taken the tyres and syphoned the fuel tank.

Mr King’s remarks are likely to prove embarrassing for the government, he said at the Mansion House tonight that: “It is not entirely clear how the Bank will be able to discharge its new statutory responsibility if we can do no more than issue sermons or organise burials.”

Alistair Darling at the Treasury has resisted significant changes to the allocation of regulatory responsibilities between the Financial Services Authority, the Treasury and the Bank of England, the so-called Tripartite. The Bank of England’s regulatory powers and responsibilities have been largely devolved to the Financial Services Authority for some 20 years, but now the Old lady of Threadneedle Street wants her teeth back.

The approach of the UK Treasury is at odds with the proposals put forward by Mr Obama the timing of which also managed to upstage Mr Darling’s speech.

As an aside: it is a remarkable achievement to be upstaged twice in one’s own dinner time by such powerful figures, but then anyone watching Mr Darling’s public demeanour realises he spends most of his life being upstaged… usually by the former occupant of his current position.

The problem for the Chancellor is that the current “tripartite” regulatory regime in the UK where responsibilities are split between the Treasury, Bank of England and the FSA was introduced in 1997 by Gordon Brown the then Chancellor. The Government argues that the problems in regulation are not the same in the UK as they are in the US. It is argued by the Government that Mr Obama seeks to reform a Byzantine regulatory system, to streamline and rationalise it; whereas in the UK the rationalisation (they argue) happened in 1997 the problem was that the regulator was not doing his job either because he was asleep at the wheel or because he was under resourced.

Mr Brown has a reputation for favouring abstract and complicated solutions over practical & fit for purpose ones. Mr Brown’s ancestors it is pointed out were clergymen not engineers. The tripartite system lacks clearly defined lines of responsibility. Asking the Governor of the Bank of England what he thinks about a system that gives the responsibility for financial oversight and regulation to the FSA is a bit like asking a lamp post what it thinks about dogs, but he clearly thinks that the Governments proposed tinkering with the tripartite system is not enough.

The Governor appeared to differ from the Chancellor – on whether some banks have become far too big for the health of the economy.

The Governor said: “If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.”

By contrast the Chancellor told the same City audience that “The solution is not as simple, as some have suggested, as restricting the size of banks. We have learnt that you don’t necessarily need to be a big bank – or indeed a complex one – to threaten to bring the system down.”

Personally the Chancellor is right to say that the solution is “not as simple as restricting the size of banks”, but wrong to argue that it is not part of the solution. After all Lehman Bros was both big and complex and to argue otherwise is just tosh. Neither Washington nor Whitehall is hinting at a desire to break banks up into smaller, more narrowly focused businesses, but in my opinion it may be the only way to prevent the kind of systemic unwinding of the financial system that we saw over the past 12 months. The problem is that it is probably not achievable unilaterally – how could any one nation achieve such a control?