The 60-year-old replaces incumbent Mark Carney, who steps down from the position on 15 March after more than six years of service.
Chancellor Sajid Javid announced the appointment on Friday morning, describing Mr Bailey as “the stand-out candidate in a competitive field”.
“He is the right person to lead the Bank as we forge a new future outside the EU and level-up opportunity across the country,” he said.
Mr Bailey said it was a “tremendous honour” to be named the Bank’s 121st governor and acknowledged that his appointment came at a “critical time for the nation”.
“The Bank has a very important job and, as Governor, I will continue the work that Mark Carney has done to ensure that it has the public interest at the heart of everything it does,” he added.
The Treasury revealed that Mr Carney would extend his term until mid-March to “provide for a smooth transition”, at which point his successor will officially take charge.
Mr Bailey has been appointed on an eight-year contract and will receive a salary of £495,000.
The search for the new governor began in April, with London School of Economics director Minouche Shafik, Santander UK chairwoman Shriti Vadera and a former member of the US Federal Reserve’s board of governors, Kevin Warsh, also in contention to replace Mr Carney.
Although Mr Bailey is viewed as a safe pair of hands on account of his experience as head of the City watchdog, The Independent understands that there is concern within the Bank that “nothing will change” under the 60-year-old.
Ms Shafik, who served as the deputy governor between August 2014 and February 2017, had been expected among employees to succeed Mr Carney as late as last week. One insider described the decision to overlook the 57-year-old as “disappointing”.
Shadow chancellor John McDonnell expressed his concern over the appointment, writing on Twitter: “As an establishment figure with what some consider is a less than inspiring record at the FCA Andrew Bailey will need to demonstrate early that he appreciates the need to address the deep structural problems of our economy & like Mark Carney understands the climate change threat.”
Mr Bailey has come under heavy scrutiny during his tenure at the FCA amid a series of major personal finance scandals, including the £236 million collapse of London Capital and Finance.
The watchdog also drew criticism for its report on the Royal Bank of Scotland’s controversial treatment of small business, in which it recommended taking no further action against the bank.
Before joining the FCA in July 2016, Mr Bailer held a number of previous roles at the Bank of England, including deputy governor, chief cashier and executive director for banking services.
His appointment brings to an end Mr Carney’s tenure as the first non-British governor in the 325-year history of the Bank.
The Canadian succeeded Sir Mervyn King in July 2013 and later said he would stay for an extra year until June 2018, but was persuaded by then chancellor Philip Hammond to extend his term by another seven months to help ease disruption from Brexit.