A new Bank of England for a new Governor
While that is a great starting point for reforming the Bank merely changing the man at the top is not enough. There must be wholesale reform of both the structure and culture of the Bank of England if the new Governor is to avoid the mistakes of his predecessor.
The big problem at the Bank was that it was too hierarchical, lacked transparency and in the financial field focused too much on moral hazard than on supporting the financial system. Much of this stemmed from the power of the Governor to push the Bank in the direction he wanted. Under Sir Mervyn everything was focused on monetary policy and meeting the inflation target. The financial stability role at the Bank was downgraded and no attention was paid to financial markets. The result was that the Bank missed the financial crisis coming, and was to slow to respond when it arrived. It simply did not join the dots between the financial markets and the implications for the economy.
While it did act aggressively everything finally blew up in 2008, it has repeated its errors in the aftermath of the crisis. Instead of ensuring that the supply of credit was maintained, the Bank withdrew its support and forced banks to raise capital and liquidity. The result is that lending has fallen as banks have cut balance sheets and the economy has stalled despite hundreds of billions spent on QE.
The structure and culture of the Bank needs to be changed so Mr Carney and his new team can join the dots. We would start with his role as Governor. Under Sir Mervyn the Governor simply had too much power with all decisions flowing through him. If that was undesirable in the old smaller Bank it is a disaster waiting to happen in the newly enlarged Bank.
In our report, we will propose that the new Governor cedes some of that power to his Deputy Governors who take over the day to day management of the Bank. He would take on a Chairman like role ensuring coordination across all areas of the new Bank. To enhance that communication those Deputy Governors would also by right sit on each others committees. It is bizarre that under the current proposals the Deputy Governor for the Prudential Regulatory Authority would not even sit on the Monetary Policy Committee.
We also propose that the Governor and his team are made more responsible to the Court of the Bank. The new Court would be made up entirely of non-executives (not including the Governor and his Deputies as currently) and it would hold formal reviews of the performance of the Governor and his team annually. No more reviews to be held five years after the event. Accountability will be a yearly event.
To change the culture we believe the Bank needs more outside influence. We would amend legislation to give the external members of the MPC and FPC a majority so the Bank insiders could be outvoted. We propose that the two committees meet together once a quarter to ensure that policy decisions are coordinated and not taken in isolation. We also believe there should be teams created inside the Bank to challenge the consensus view. Finally we think the Bank should seek to hire many more people with financial experience into its ranks and send its staff out on secondment to financial institutions so they understand markets.
Only then can we be confident that the new Bank under its new Governor can change enough to avoid the mistakes of the past and ensure us all of a more stable future.