Chancellor of the Exchequer George Osborne proposed laws to give the British Treasury sole power over when to bail out banks, sweeping aside opposition from the central bank as he seeks to end confusion over who should take charge during a crisis.

The Financial Services Bill, laid before Parliament in London today, will give the chancellor power to order liquidity support for an institution, unwind its operations and all other aid for the financial system that requires taxpayers’ money. The central bank wanted those powers to be exempt from the bill, lawmakers said this month.

“Independent central banks should not be put under pressure to do what governments do not have the courage to do on their own account,” Osborne said in a speech today to the World Economic Forum in Davos, Switzerland. “There will be no ambiguity about who is in charge.”

Bank of England Governor Mervyn King resisted pressure from the Treasury to extend liquidity to banks from 2008, arguing that the bank shouldn’t bear potential losses from the support. Osborne said he hopes the measures will end the “paralysis and confusion” that began when Northern Rock Plc ran into funding difficulties in 2007 and continued through to the nationalization of Royal Bank of Scotland Group Plc.

“During normal times, the independent Bank of England will be responsible for prudential regulation and systemic stability, accountable to Parliament,” Osborne said. “But in a crisis, when taxpayers’ money is at risk both, the responsibility and, crucially, the power to act will rest with the chancellor of the day.”

The Treasury Committee, a cross-party panel of lawmakers, on Jan. 23 said the Bank of England resisted Osborne’s desire to take control as soon as the bank tells the Treasury there is a “material risk” of taxpayer funds being required in a banking crisis, the lawmakers said. The bank wanted the division of powers to be contained in a Memorandum of Understanding, instead of being enshrined in law.

The bill is scheduled to be approved by legislators in late 2012. It will pave the way for the central bank’s Financial Policy Committee to take action to address risks.

King and Osborne began work on the new laws in June 2010, a month after Prime Minister David Cameron’s coalition government took office, on the regulatory overhaul. It will give the Bank of England more power than it has ever had in its 318-year history.

When the previous Labour government took office in 1997, Gordon Brown, the chancellor at the time, handed the bank powers to set interest rates, while stripping it of supervisory and some financial-stability responsibilities that it is now set to regain.

The bill also allows for the creation of the Financial Conduct Authority, a body with powers to publish summaries of disciplinary investigations earlier and to ban risky financial products or intervene in how they are marketed.

The legislation will also establish the Prudential Regulation Authority, which will be responsible for overseeing all deposit-taking institutions, insurers and investment banks and effectively replaces the FSA.

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

(Blomberg)