View from City Road: New battles for an Old Lady of 300
Wednesday 27 July 1994
Its newfound vigour is partly down to the debilitation of the Treasury, which suffered a profound loss of confidence after the exchange rate fiasco of September 1992. The Bank was able to step easily and neatly into the policy vacuum left by the ERM collapse. The result was that an unprecedented degree of power over monetary policy was shifted from Whitehall to Threadneedle Street.
Former Treasury officials remember consultations with the Bank over interest rate changes as a polite formality. These days the two hold a serious debate and their exchanges are published, albeit six weeks after the event, for all the world to see. Eddie George, Governor of the Bank, no longer needs to subscribe to the new orthodoxy of full central bank independence to get his heart's desire; he already has it in all but name.
Ministers continue to insist there is no possibility of a democratically unaccountable institution such as the Bank being canonised to Bundesbank-like status. But, in effect, they have lost the battle. The Bank already calls the shots.
The secret, as Mr George pointed out in a speech at one of the many birthday celebrations this week, is publication of the minutes of his monthly meetings with the Chancellor. Mr George told a boisterous gathering of City economists that their comments on the minutes were ill-informed and sensationalist; but, nevertheless, having his advice in the public domain had improved the quality of that advice no end.
Publication of the minutes makes it extremely difficult for the Chancellor to override the Governor's advice on interest rates. Eddie George chooses, and if he gets it wrong, everybody will know who to blame.
The Bank's newfound responsibility for monetary policy has led to an internal reorganisation with the top division officials now firmly entrenched in the more glamorous monetary stability arm of the Bank. It tends to be the disgruntled second division that gets the donkey work of financial supervision.
Long term, however, there may be an opportunity for the Treasury in this. Combining the functions of banking supervision and monetary control under one roof never made a great deal of sense, though the Bank argues fiercely otherwise. Today, with the borders between banking and other financial institutions more blurred than ever, it makes even less. With the Bank still tainted by the errors it made over the collapse of BCCI in July 1991, it is clearly reasonable for the Treasury to claw back some responsibility for supervision.
The spate of scandals over pension transfers and training standards at insurance companies makes financial regulation a hot policy question. The signs are that the Treasury is gingerly picking it up. The Bank of England has come a long way since the days of its first Governor, John Houblon, as little more than a conduit for government borrowing. But it may have further battles to fight if it is to retain long-term control of banking supervision.
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