Bank under fire again – from its own veterans

As the Bank of England prepares to assume unprecedented economic powers, it is feeling the heat, reports Sean O'Grady
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The Independent Online

The "accountability deficit" of the Bank of England came under sustained fire from former senior Bank policymakers in evidence to MPs yesterday. Speaking to the Treasury Select Committee, former members of the Bank's Monetary Policy Committee variously described the Court of the Bank, its governing body, as "irrelevant", an "historical accident", lacking knowledge, unable to resist the pervasive dominance of Mervyn King, the Governor of the Bank, ("Governorthink") and insufficiently critical of the Bank's mistakes during the financial crisis.

Willem Buiter, a distinguished former external member of the MPC, was especially violent in his remarks. He said the new arrangements for financial regulation – with the Bank in charge of "macroprudential" oversight of credit and systemic risk as well as of individual banks – as "a complete mess... disastrously misconceived". The Bank's Court, said Mr Buiter, was an "essentially irrelevant ... historical accident" that should now be abolished. A new Financial Stability Committee to oversee credit growth and systemic risk has been set up in shadow form, again with heavy Bank representation on it and chaired by Mr King. But Mr Buiter suggested it would be better headed by the Chancellor, because taxpayers' money would be inevitably at risk.

As Andrew Tyrie, chairman of the select committee said, some MPC members damned the Court with faint praise. Charles Goodhart, a former senior Bank staffer, described them as "a fine collection of eminent people" – but unsuitable to the role of accountability, which he said was better in the hands of MPs and ministers. The Court's strengths, he added, were managerial rather than in policy: To ask the Court to "continuously second guess" the Bank or to appoint committees of inquiry into perceived Bank failures would be "a recipe for trouble". Another former policymaker, Sushil Wadhwani, said that the Court would be effective if it had some economic or financial expertise and knowledge.

Mr Wadhwani suggested a larger proportion of external appointments to the MPC and the new Financial Policy Committee. He said that he would be "wary of giving them [the Bank's leadership] even more power without checks and balances" while there is such an "accountability deficit". Another former MPC witness, Kate Barker, said the Treasury needed to be "more active" over financial stability .

Concerns about accountability fall into three distinct categories; the composition, powers and abilities of the Court, the governing body of the Bank since its formation in 1694; the increasing powers of the Governor as the Bank gains unprecedented influence over the economic life of the nation; and the heightened dangers of conflicts of interest and political bias. More minor worries include potential conflicts between interest rate and credit policy at a time when, say, falling commodity prices and a strong pound might leave inflation very low but where a housing bubble threatened to get out of control again – "errors of co-ordination".

As chair of the Monetary Policy Committee, the Financial Policy Committee, and the Prudential Regulatory Authority, which replaces the Financial Services Authority in 2013, Mr King will soon be in a unique position to steer broad economic policy – across interest rates, the creation of credit, including lending to homebuyers and business, and the policing of individual big banks. In many ways he will be more important than the Chancellor. There is the also practical point, previously raised by Treasury Select Committee member Michael Fallon, that the Governor may simply suffer from administrative overload, given his other duties such as representing the UK abroad and overseeing the general running of the institution. How much of his duties the Governor will delegate to his deputies is not clear. Even if he did delegate, Mr King and just three or four senior colleagues would still represent an extreme concentration of unelected – and arguably insufficiently accountable – power. It seems to be starting to be resented by MPs and other outsiders.

Hence the focus on the Court. It is argued that a Governor has too few internal constraints here. Despite downsizing and "modernisation" of the Court in 2009, it remains recognisably the same body as it has been for decades, if not centuries, which is a kind of quasi-regulator in the way the BBC's Board of Governors was once, but with the same disadvantages of closeness to the institution it is supposed to police. Indeed, so close is the Court to the Bank's leadership that Mr King and his two deputies actually sit on the Court. The Court is thus, arguably, not a robust enough body to curb a determined an intellectually assured Governor.

A particular criticism of it centres on Sir David Lees, the non-executive chairman of the Court who endured a disastrous session in front of MPs and displayed an apparent lack of grip on the Bank's work.

Apart from that, one problem for the Court may be that the scrutiny it does exercise over Mr King and senior colleagues is invisible to the public, while the preponderance of the "great and the good" – very much on the 1940s "Morrisonian" convention of the board of a nationalised industry – adds to the impression of it being out-of-touch, old-fashioned, inferior to the private sector's use of non-exec directors, and certainly no match for clever Mr King.

Since the Coalition Government was formed just over a year ago, Mr King has also faced criticism for apparently endorsing the Government's strategy to reduce the Budget deficit, to Labour irritation.