UK Treasury Committee: Chancellor Should Direct BOE At Times Of Crisis
fxbom.com
10:07 AM
LONDON -(Dow Jones)- U.K. lawmakers responsible for scrutinizing economic policy Tuesday called for sweeping changes to the way the Bank of England is run, including giving the Chancellor of the Exchequer power to direct it during times of financial crisis.
In a report on the BOE’s governance, the House of Commons’ Treasury Select Committee also said governors should be limited to a single term of eight years, recommended that the BOE’s governing body be renamed, slimmed down and given new powers, and that the BOE should publish measures of financial stability that give outsiders a means of judging its performance.
The report comes as the BOE is undergoing a major transformation, and recovering powers to supervise and regulate financial institutions that it lost in 1997. That is a response to perceived failings in the U.K.’s response to the financial crisis that began in 2007, when coordination between the BOE, the government and the soon-to-be disbanded Financial Services Authority appeared weak and their responses confused.
The Treasury Committee’s main and most controversial recommendation for improving the response to a future crisis is to give the Chancellor of the Exchequer authority to direct the BOE when public funds are placed at risk.
“The lines of responsibility and accountability between the Chancellor of the Exchequer, Treasury, and the Bank of England at times of financial difficulty must be clarified,” the Treasury Committee said. “In a crisis, where public money is at risk, the Chancellor should be given statutory responsibility for the conduct of affairs, including a limited special power to direct the Bank.”
If adopted by the government, that recommendation would qualify the independence of the central bank.
U.K. interest rates are set by the BOE’s nine-member Monetary Policy Committee in order to ensure that the annual rate of inflation rate is 2.0% over the medium term. Although inflation has been well above that target in recent years, that does at least give the public a way of judging the MPC’s performance.
The Treasury Committee wants to see the new Financial Policy Committee set targets that are similarly clear.
“The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance,” the Treasury Committee said. “The selected range of indicators must be flexible and under constant challenge and review, not only by parliament, government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public.”
The Treasury Committee said that to guard against “group think”–or the development of an institutional view that is slow to change when circumstances do–a majority of members on the MPC and the FPC should come from outside the BOE. The two committees are currently dominated by BOE officials.
At present, the person appointed by the government as governor of the BOE is limited to two, five-year terms. The Treasury Committee said that could raise doubts about the governor’s independence from political pressure as the first of those terms came to an end, assuming he or she wanted a second term. And so it recommended that the governor be appointed to one term of eight years.
The governor is appointed by the government of the day, and the Treasury Committee said that in order to ensure that appointment isn’t influenced by party politics, it should be able to reject the government’s chosen candidate, as well as stop any attempt to dismiss a governor.
Since it was established in 1694, the BOE’s governing body has been the Court of Directors. The Treasury Committee said that body needs to renamed and slimmed down to reflects its role as the central bank’s “supervisory board.” It also said that members of the new body should have more direct expertise in economic policy and financial supervision than the current incumbents.
The Treasury Committee said the new body should more explicitly monitor the performance of the BOE’s management in performing its monetary policy and financial stability roles, arbitrate where there are conflicts between those two functions, and be more involved in setting and justifying the BOE’s budget.
“The evidence that we have received suggests that the governance of the Bank needs strengthening and that it needs to be more open about its work,” the Treasury Committee said. “The Bank must be held more clearly to account than it has been in the past.”
BOE Governor Mervyn King said he would study the report “carefully” before responding.
“The report is wide ranging and detailed,” he said. “The Bank has always made clear that with the expansion of its responsibilities…new arrangements for the governance and accountability of the Bank would be necessary.”
-Paul Hannon; Dow Jones Newswires, +44 20 7842 9491 , paul.hannon@dowjones.com
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