THE MONDAY INTERVIEW; Michael Foot; Picking up the pieces at the Bank

The nightmare on Threadneedle street is over but the new head of supervision will not be allowed to forget it. He spoke to John Eisenhammer
Click to follow
The Independent Online
Michael Foot is a lucky man. After all, he could have taken over as the top dog of supervision at the Bank of England this time last year. Instead, he moved gently into the executive director's office on 1 March with the Nightmare on Threadneedle Street now comfortably distant in City memories. "Pretty grim", "very difficult" and "rather fraught" are just some of the ways Mr Foot chooses to remember 1995 at the Bank.

There was Barings of course, a City establishment humiliation of the first order, that shook the Bank of England's supervisory mandarins to the core. Then there was the embarrassing departure of the deputy governor, Rupert Pennant-Rea, following exposure of his sexual escapades within the Bank's imposing walls. Last, but certainly not least in terms of the Bank's battered self-esteem, there was the public battle of wills with the Chancellor of the Exchequer over interest rates. Not only was the Bank overruled by the politicians, which happens regularly, but it also lost the intellectual argument, which is not meant to happen.

Staff morale was low, as a confidential survey conducted by an outside body showed last August. The Bank was on the wrong end of regular pastings in the media. The supervision department, where Michael Foot was deputy to Brian Quinn, a wiry Scot with 14 years behind him at the Bank, was particularly targeted. Spectres from the past, Johnson Matthey Bankers and BCCI, rose up to join forces with Barings in public invective against supervisers who seemed to have been asleep at the wheel.

"The public criticism, the sniping, was thoroughly unpleasant, personally offensive - but if you can't take it you shouldn't be in supervision," reminisces the 49-year-old Mr Foot.

Any connection between the Barings debacle and Mr Quinn's stepping down are purely coincidental, the Bank insists. It let it be understood that Mr Quinn, who is 59, had asked the Bank's court of directors before the Barings collapse not to appoint him for a third term. But it does allow Mr Foot to take over at a time of great potential for change and improvement. For all the Bank's vigorous defence of its supervision record, there is no escaping the fact that the Barings investigations exposed weaknesses that the Bank is now seeking to put right.

The Board of Banking Supervision's report into Barings made a host of recommendations for change, which boil down to formalising and strengthening the Bank's procedures for identifying those areas of its banking charges' businesses that pose the greatest risk and so require the closest attention. There was too great a reliance previously on individual judgement, as typified by the only senior Bank official dismissed after Barings, Christopher Thompson, who had left a potentially critical request for clarification from Barings languishing in his in-tray.

"The criteria our line managers used before were qualititative, relying on the knowledge and judgement of the individuals dealing with the banks to pick things up. Now we are developing a whole set of yardsticks which will flag up the things that need to be questioned. As far as we know we are going further than any other supervisor in the world," says Mr Foot.

Arthur Andersen, the accountants, have been brought in to run the Bank's processes through the consultancy mill. Late next month, or more likely into May, they are expected to deliver their thoughts on establishing a so-called Quality Assurance Mechanism, which most of the big accounting firms use to review management decisions and practice on a continuous basis.

"Arthur Andersen is a management-driven thing. They are here to help us as managers to manage the process. By the time they are finished we will have a clear framework for supervision and clear statements of our risk priorities."

The Bank has already brought into play some of its new yardsticks. It now concentrates on any part of a banking group it looks after, on a geographical or product basis, that accounts for more than 5 per cent of regulatory capital, more than 5 per cent of group profits, or involves exposure by the bank to any entity within its group of more than 10 per cent of capital.

"Looking back at Barings, the regulatory capital criteria would not have been triggered because everyone thought Barings Futures Singapore was not trading risk. The profits yardstick would have been triggered at some point in 1993 or early 1994, and had we known of the letters of comfort from Barings bank to the various securities operations within the group, it could have triggered the third yardstick quite early on, as well as the large quantities of cash going out in late '94," Mr Foot says.

Hardly surprisingly, he is unimpressed by those arguing that the Bank should be stripped of its supervisory responsibilities and left to concentrate on monetary policy. He does not even believe that a future Labour government is all that committed to these sort of radical reforms.

"Alastair Darling (Labour's City spokesman) has spoken several times of the fact that the Bank of England has an international reputation, and that one must be careful not to damage the City of London's overall appeal. This certainly falls well short of any commitment to the more radical changes some talk about," says Mr Foot.

Pointing to much closer cooperation with the Securities and Futures Authority since Barings, Mr Foot says a lot can be done without changing the structures. "Shuffling brass plates on the door itself does nothing. It is really only Japan that has a structure bringing securities and banking supervision under one roof, and if you want an example of how bad cooperation can be when under one roof then you need look no further than Tokyo."

Furthermore, he argues, "all other countries that brought supervision under one roof tend to have rather small financial markets, such as the Scandinavians. Is this cause or effect?"

But as he drives forward the changes to the Bank's supervisory machinery, Michael Foot is not trying to forget the dark days of 1995 completely. In true British spirit, Barings brought an element of Dunkirk to Threadneedle Street, he believes.

"It brought together a group of people under tremendous pressure. Most of them look back on it as the most interesting, tremendous period of their life. There was an esprit de corps - you found out who can take it, and who cannot."