My FT article: give new Governor a better chance of success by fixing flaws in Bank of England reform Bill – 23rd April 2012
Wanted, a new governor of the Bank of England. Only superhumans need apply. Because, as things stand, I fear he or she will face a near-impossible task.
Being governor was a tough job even before the bank was made independent in 1997, when the power to set interest rates was handed to the Monetary Policy Committee. Sir Mervyn King’s successor will, however, assume leadership of a massively enlarged central bank, at a time of economic stress, with new, onerous and complex responsibilities in prudential and consumer regulation as well as its role in monetary policy and financial stability.
Just think what the job description entails. To chair the MPC, the perfect candidate needs a good understanding of monetary economics, a real grip on the very complex and unstable world we are now living in and the ability to communicate as easily with consumers and small businesses as with media and financial analysts.
Chairing the new Financial Policy Committee requires very different skills and experience, however. After the global failure of financial regulation, the new governor needs a deep knowledge of financial markets with the ability to ask the difficult questions that banks do not want asked, and to fight our corner in European negotiations.
Tougher financial regulation is central to the bank’s new mandate and the governor must lead from the front. However, with businesses worried that their need for investment capital is coming second to the aim of banks to rebuild balance sheets, this governor also needs to understand the real economy of growth and jobs, preferably with a record of standing up for small and medium-sized businesses.
The governor will also have to work with an expanded team of deputies with their own semi-autonomous empires. Not to mention parliament and the Treasury select committee, which are on the case like never before. The governor now also has overarching responsibility for the financial education of the population and ensuring the regulators tackle financial exclusion so that all citizens can get fair access to basic financial products.
It is quite possibly an impossible job. In my view, it is made all the harder by the flaws in the Bank of England reform bill, which parliament debates today. There are three things the government can do now that will give the new governor at least a better chance of success.
First, we need greater clarity over the new Bank of England’s multiple objectives. At times these will come into conflict. That is why the current legislation makes clear that as the MPC makes decisions to meet the inflation target, it takes into account the impact on growth and jobs.
The same must be so for financial regulation, where the Financial Policy Committee must also have regard to the government’s growth, employment and investment objectives. An exclusive focus on financial stability could bring a dangerous risk aversion and stifle the real economy. This is a point the CBI has made strongly. The government should amend the bill.
Second, we need much greater accountability so these new and much more complex arrangements can be properly scrutinised. The new governor will, in my view, be strengthened and not weakened by greater transparency and clarity than we have had before. The chair of the Treasury select committee is right that the bill does not go anywhere near far enough in this regard, which is why Labour will support his amendment today.
Indeed, we would go further. The uncharted terrain of macroprudential policy-making makes the new FPC incredibly powerful. Parliament should be given the space and time to debate the regulations it proposes. Changing the terms of mortgages, business loans or credit card repayment terms at a moment’s notice cannot be done without improved accountability.
Third, the chancellor must clear up the deep confusion at the heart of the bill about who is responsible for what in the run-up to and during a financial crisis. The bill currently heaps far too much power on to the governor, who – when dealing with the chancellor – will now be able to internalise and suppress the inevitable conflicts between financial stability on the one hand and monetary stability, fiscal risk and moral hazard on the other.
It makes no sense that the deputy governor who heads the prudential regulator has no undisputed right to put his views direct to the chancellor, whether or not the governor agrees. This is not stable or sensible and – on the basis of my experience – is downright dangerous.
Furthermore, obfuscation in the bill around how “ad hoc committees” will function in a crisis adds to the sense that much of the new wiring between the bank and the Treasury has not been properly thought through. These need to be fixed and our amendments set out to do that.
Wisdom and experience are vital for good leadership – qualities that in my view could be found equally well in an external as an internal successor. But the bank needs more than the right personality. If the governor is to have a fair chance of success, the flaws in objectives, accountability and crisis management must be resolved immediately.Posted November 24th, 2015 by admin