This article is from the April issue of Total Politics
The Bank: Inside the Bank of England
Biteback Publishing, £18.99
This is a timely book. The Bank of England is about to acquire unprecedented powers over our lives and you might think that there is no better time therefore to examine how the bank has worked over the last 15 years and how it might work better in the future. Dan Conaghan, in this very readable book, quotes Walter Bagehot when he said: “There should be no delicacy about altering the constitution of the Bank of England.” Indeed so.
This book, for the most part, covers the history of the bank between 1997, when it gained operational independence from the government to set interest rates, to the end of last year. Conaghan charts the sometimes difficult birth of the Monetary Policy Committee following Labour’s general election victory in 1997. It’s right that while the bank seized the chance to acquire responsibility for monetary policy, it was reluctant – very reluctant – to give up the responsibility it had for the provision of financial services.
It’s worth noting that prior to 1997 much of the responsibility for this supervision actually lay with self-regulating bodies, some seven or eight of them, whereas in the past it had been sufficient for the governor of the bank to raise his eyebrows when concerned about the behavior of mainly British-based banks. That had changed by the time we were elected into government and the Financial Service Authority (FSA) was established. Although Conaghan doesn’t cover its development, I don’t believe the structure was necessarily wrong but it did perhaps spend too much time looking at rights of the consumer, rather than asking some of the more fundamental questions about the stability of financial institutions here and in different parts of the world.
Conaghan accurately describes the shift of the bank’s centre of gravity following the granting of independence on monetary policy. Financial stability was an unfashionable responsibility. If you wanted to get on then it was monetary policy that counted. That shift in bias became all too apparent when the financial crisis hit in 2007 when, as this book accurately reports, the Bank of England was woefully unprepared for what was happening within the banking system. Conaghan is critical of the bank and its governor at this stage, although he rightly reports that the bank was far more on the ball when the major financial crisis hit following the Lehman’s collapse. If I had a criticism, then it would be that the bank actually performed far better than the book gives it credit for doing so in that crucial period in 2008.
This is a study of the history of the bank in recent years. But it also attempts a critique of the governorship of Mervyn King. My view is that this can only be done after the completion of his term of office next year when, like everyone else who was around at the time, there are high points and some that were not so high. I don’t think one can offer an objective assessment at this stage.
However, Conaghan does highlight one major problem within the Bank of England and one that has been a feature of it in modern times: the bank takes on the character of his governor. That could be a good thing – I admired Eddie George from the time I first met him to the time that he demitted office. It can also be very difficult – see, for example, the many accounts of Sir Montagu Norman’s autocratic rule in the early part of the 20th century when he was the bane of all chancellors of any political colour.
With Sir Mervyn’s departure next year, there is now an opportunity to recast the bank’s constitution so that it is fit for the 21st century. That way the new governor, who will serve an eight-year term, can start off on a more sound footing.
From some time next year, the bank will be responsible for setting monetary policy (something that is done reasonably satisfactorily despite all the turbulence of the last few years), supervision of a large part of the financial services industry and it will have a new responsibility for something called ‘macro prudential supervision’. This is entirely uncharted territory, as the present government admits. The idea, though, is to survey the economic horizon and then ‘lean against the wind’ to dampen down any rising asset bubble. This is an entirely sensible idea – I recall suggesting it myself – but it could involve requiring banks to hold more capital, which will constrain the availability and the price of credit and directly increase mortgage rates at a time that might be politically inconvenient.
This is an awful lot to ask of one man or woman. There are very few checks and balances within the bank. The Court of Directors is largely an ornament and is reminiscent of the medieval court of The Sun King. It is not good enough that the court should confine itself to assessing processes and procedures of housekeeping in the bank. There needs to be proper governance where the governor is first among equals, although there are others who are contributing to the discussion. The Monetary Policy Committee is quite a good model here. Instead, we have a Byzantine structure where everything depends on the governor of the day. I can’t think of any model of corporate governance that would accept such a model, where one individual can work with such untrammeled power and influence.
Apart from appearances before the Commons Treasury select committee, there is precious little accountability here. Unless something goes wrong, when public funds are needed, the chancellor has to put up with whatever the governor decides to do. This is a new departure.
Conaghan’s book is well worth reading. It takes the reader through the arguments of the last 15 years. Every page raises the same two questions: how is the bank run and how are decisions are made? We can only hope that this book adds to the calls being made, by the Treasury select committee and others, that there is still the opportunity to amend the legislation that will hand so much power to an institution whose constitution has not changed to reflect modern times. Bagehot, yet again, was right and we should remember it.
Alistair Darling is the Labour MP for Edinburgh South West. He was Chancellor of the Exchequer from 2007 to 2010
Excerpts from The Bank: Inside the Bank of England, courtesy of Biteback Publishing
'The bank’s uneasy relationship with the outside world is partly because it is congenitally out of step with it. In many ways, it still resembles an academic institution, with Professor King as its unbending principal and an elite corps of economists as his star students. A senior Treasury official discerns this schoolmasterly character in many of the governor’s communications, rolling his eyes as he recalls a recent King memo beginning: “Let us consider…” In its upper echelons, there is still an air of the senior common room, with its petty rivalries and fractious staff meetings.'
'Once a month, Mervyn King and George Osborne have an early morning meeting, fuelled by “a good English breakfast”, either at the Bank of England or at No 11 Downing Street. It is an opportunity for each to update the other, not only on the state of the economy and the way the political wind is blowing, but also on the shape of the bank itself. These meetings are not minuted and therefore what passes between the governor and the chancellor remains secret. Oddly, we are back to where we were before the bank’s independence, when, as Philip Snowden, a long-forgotten chancellor, once put it: “The relations between the chancellor and the governor of the bank are intimate and confidential. What takes place between us is inviolable as if under the seal of the confessional.”'
'What does the Bank of England look like in 2012? After the upheavals occasioned by the financial crisis and the proposals to dismember the Tripartite, the bank remains battered, unbowed and noticeably unapologetic. It has in many ways been a beneficiary of the crisis; in the immediate aftermath of the credit crunch, the bank suddenly became wildly profitable. In mid-May 2009, it produced its annual report for the year ending 28 February 2009, which showed that pre-tax profits had quintupled, from £197m in the previous year to a thumping £995m.'
'Mervyn King, they say, has a quick temper but more frustratingly, an implacable resistance to changing his mind or revisiting a decision, even after the lapse of several years and a change in circumstances. Once a decision is made, there is no going back. “Mervyn has stamped his foot” is the last word on many matters. In the bank’s many committees, King’s word almost always goes, even if there is a vote and he is in the minority. The exception is the Monetary Policy Committee and its collegiate nature remains more or less intact.'