1 Response by the
Court of the Bank of England|
1. We published our report on the Accountability
of the Bank of England on 8 November 2011. This has received
extensive support from financial institutions, commentators and
the press. The Joint
Committee on the Financial Services Bill also supported all its
main conclusions. On 12 January 2012 we received a response from
the Court of the Bank of England, on which we took evidence from
the Governor of the Bank, Sir Mervyn King, Michael Cohrs, an external
Member of the Financial Policy Committee and a non-executive member
of the Court of the Bank of England, and Robert Jenkins, an external
Member of the Financial Policy Committee, on 17 January 2012.
2. The Government plans to publish the Financial
Services Bill at the end of January 2012. Therefore, the Bank's
memorandum requires a swift initial response from us in order
to assist the Chancellor of the Exchequer in drafting that legislation.
We may return to the matters raised in this Report after the legislation
has been published.
3. In some areas, for example the term of office
of the Governor, the Bank agrees with our conclusions. In some
other areas, particularly with respect to the identification of
the accountability problem, the Bank has now moved towards accepting
the analysis in our Report. We welcome the Bank's acceptance that
with the major new roles and responsibilities must come new, stronger
forms of accountability and governance,
and that, in particular, accountability of the form constructed
for the Monetary Policy Committee will not be sufficient in the
field of financial stability policy.
4. However, there are some crucial areas where,
although accepting our analysis, the Bank's memorandum comes to
very different conclusions. We concentrated on these in our questioning.
We discuss these matters in the paragraphs below.
The Bank's proposed 'Oversight
5. The Treasury Committee recommended that Court
should be reformed into an appropriately qualified and resourced
Supervisory Board with, among other things, the remit to conduct
ex-post reviews, both internally and externally, of the Bank's
performance in the prudential and monetary policy fields.
6. The Bank agreed that it is possible for monetary
policy to be challenged effectively from outside the Bank, but
that financial stability policy "is different", as the
decisions may need to be made irregularly, in a crisis, or in
secret; there are many policy instruments the Bank may use; and
there is no single quantifiable objective against which to measure
Together, these differences will make it more difficult
for an authority outside the Bank, like the Treasury Committee,
to challenge and question individual financial stability policymakers.
This reflects what appears to be a similar analysis
to our own of the difficulties of effective scrutiny of the Bank's
financial stability objective. However, the Bank's proposed remedy,
despite appearances, is not at all similar:
Court is of the view that an Oversight Committee
for financial stability is needed within the Bank to supplement
the direct accountability of the Bank to the Treasury Committee.
7. The proposed Oversight Committee would be
a sub-committee of Court. It would scrutinise the financial stability
processes of the Bank. This proposal falls well short of our recommendation
in a number of important respects.
8. The Oversight Committee would only be able
to conduct reviews to assess whether the processes used in making
policy decisions "can be reasonably judged to have considered
a full range of options and to have taken account of the relevant
information, analysis (including of the lessons from the past),
differing views amongst policymakers, and challenges from outside
the Bank". The
Bank memorandum proposed that the Board would commission expert
authorities outside the Bank, for example the International Monetary
Fund, to conduct reviews of the merits of the policy decisions
themselves. The purpose
of such reviews would be:
to supplement the role of external members of policy
committees in bringing outside challenge and ideas into the Bank's
financial stability policymaking. The reviews would allow the
Oversight Committee to challenge the Bank to consider fully in
its policymaking processes the lessons from particular episodes
or issues. The Oversight Committee would assess whether the Bank
had properly thought through and responded to the conclusions
of the reviews that it had commissioned.
In evidence to us the Governor said that expert individuals,
as well as organisations, might also be called upon to carry out
the external reviews.
9. The Court of the Bank proposes that the Oversight
Committee be responsible for approving the terms of reference
of peer reviews of microprudential supervisory activities commissioned
by the Board of the new Prudential Regulation Authority. The PRA
will have a statutory duty to investigate and report on instances
of possible regulatory failure. Court believes such investigations
"should normally be led by an external authority".
10. The proposed role is therefore quite different
from the Treasury Committee's recommendation, that a new Supervisory
Board replace the Court with the authority to conduct reviews
of the Bank's performance:
We recommend that the new Supervisory Board conduct
ex-post reviews of the Bank's performance in the prudential and
monetary policy fields normally not less than a year after the
period to be reviewed. This would be consistent with avoiding
second guessing at the time of the policy decision. The reviews
should among other things enable lessons for the future to be
learnt. They should strengthen the Bank's collective memory. There
should be no presumption that the commissioning of a review implied
that the episode or function in question had been badly managed:
successes and failures should be reviewed alike. It would be a
matter for the Board itself to determine when and how such reviews
would be conducted, and into which issues.
11. The Court memorandum said that:
It is vital that the Oversight Committee does not
seek to second guess the decisions of policymakers themselves.
The passing of such judgements could threaten the relationship
of trust that is necessary between policymakers and the Oversight
Committee. Were the Oversight Committee to be seen to 'take sides'
in the policy debate, those policymakers from whom it differed
would be less likely to trust as independent its judgement of
whether proper processes were followed. And if the Oversight Committee
can give assurance that the processes followed took proper account
of the relevant information, options and challenges, there would
be little to be gained from knowing whether its members differed
from the policymakers in their resulting policy judgement.
In oral evidence the Governor reiterated that the
adamant that it did not want to be in the position
of second-guessing whether those individual decisions were correct
or not, either at the time or ex-post. Other people will do that
and, of course, in monetary policy it happens all the time. It
is already beginning in financial policy as well. There is plenty
of room for ex-post review, but I do not think the oversight committee
should set itself up as a body and say, "We are more expert
than the FPC or MPC." Who is going to oversee them?
12. The Court's reference to the Oversight Committee's
"taking sides" in the policy debate appears not to take
full account of our recommendation that policy reviews should
be conducted well after the event, precisely so as to avoid the
risk of "second-guessing" of current policy. The suggestion
that the Court would not want to be in a position to review performance
ex-post was raised with Michael Cohrs at our hearing.
13. Mr Cohrs, the other (non-executive) member
of the Court present, considered that while it was possible to
weigh the quality of a decision by focussing on the process, "you
could have had a great process but still have come, in retrospect,
to a decision that wasn't fantastic".
Internal second guessing of the policy committees would be "dysfunctional",
but "just looking at process becomes a bit too sterile and
may not get you to the heart of the issue".
He believed that there should probably be an internal investigation
by the Bank of its own role in the financial crisis which should
in due course be published, although he added that the crisis
was still continuing and the Bank was busy dealing with it.
Mr Cohrs also echoed our Report in calling for proper resources
to support the work of any Oversight Committee.
Adequate staffing is essential.
14. The Bank proposes that reviews would only
be carried out in the financial stability area.
We recommended that ex-post reviews should be carried out in both
the prudential and monetary policy fields. The Governor believed
that the work of the Oversight Committee did not need to include
monetary policy, since that was already examined by NedCo, the
committee of Court made up of all non-executives. However he was
open to the idea that the Oversight Committee could perform the
same functions in relation to monetary policy as the Court proposed
it should undertake on financial stability policy.
15. The Court memorandum suggested that the Oversight
Committee should have its Members and Chairman nominated by the
Nominations Committee of Court, but should be composed only of
non-executive members of Court. Executives might be invited to
attend its meetings to assist its work.
In evidence to us the Governor said that the Chairman of the Oversight
Committee should be chosen on the basis of his or her qualifications
for the task. This
echoes the point we made in our Report about the need for members
of the Supervisory Board/Court to be eminent individuals with
suitable financial and other professional experience.
16. The Governor was dismissive of any parallel
between the Bank and the IMF, whose Independent Evaluation Office
is an arm's length body which evaluates both policy and processes
of relevance to the mandate of the Fund. This was on the grounds
that the Bank had forms of accountability, including to the Treasury
Committee, which the IMF did not have, and because the IMF had
no oversight board at all. He did "not think this is a model
that has a great deal to offer the Bank, because its set-up is
really very different."
We disagree with the Governor on this point. However, it is this
Committee which has suggested internal ex-post review of policy
and processes, in part because, as the Bank itself has acknowledged,
we are not in a position to examine all aspects of financial stability
17. The authority of any Oversight
Committee will depend on its statutory remit far more than its
structure or membership. We welcome the Governor's flexibility
as to the remit of the proposed Oversight Committee, which he
has said could also include monetary policy. Such a Committee
should also examine the work of the Prudential Regulation Authority.
18. Parliament's practical ability
to hold the Bank to account will rest, to a substantial degree,
on the extent to which the Court develops into a proper board,
with adequate scrutiny and review powers. Court lacks much of
what is required under present arrangements. The Oversight Committee,
as proposed in the Court's memorandum, does not plug that gap.
The Oversight Committee's role, as proposed by the Court, would
be so heavily circumscribed that it could not be relied upon to
provide adequate scrutiny. It is unrealistic to suppose that an
oversight body could plausibly be expected to commission an external
review of a policy decision without assessing the substance. Nor
could such a body be expected to avoid engaging with the implications
of the policy conclusions of that external study.
19. We are unconvinced by the
Court's argument that internal review of policy, as distinct from
process, is undesirable in principle. On the contrary, internal
review is essential. Most public and private institutions have
the capability and self-confidence to debate and review policy
internally without damage to the institution concerned. We do
not exclude a role for external review; it should occur when the
Bank does not itself have the skills to conduct such a review,
or for other reasons thinks that an external review would be better
than an internal one. We reiterate our view that the body commissioning
internal and external reviews should be adequately resourced and
staffed within the Bank.
Provision of information to Parliament
20. In our Report we said that:
The House of Commons and, on its behalf, the Treasury
Committee will scrutinise the policy and processes of the Bank
of England. To that end, it is important that requests for information
and data from this Committee to the Bank are met. [...] The Court
should be willing to provide all information required by this
Committee to meet the requirements of parliamentary accountability
[...]. The new Supervisory Board should be required to ensure
that the requests for information are met, as long as they are
not unreasonable. An unreasonable request might be one which was
untimely, vexatious or disproportionately costly.
We recommend that the new Supervisory Board be
responsible for responding to requests to the Bank for factual
information from the Treasury Committee and the Treasury.
21. The Governor assured us that the Bank would
meet requests for information from the Committee, and that Court
had not included this in the memorandum because it had taken for
granted that the Bank would do so.
22. The Governor also said that in future lender
of last resort operations where secrecy was required, he and the
Chancellor would brief the Chairman of the Treasury Committee
and the Committee of Public Accounts. He conceded, however, that
in the case of RBS this had been overlooked.
The Bank's track record is mixed. When asked last year to disclose
the minutes of the Court's meetings on the Northern Rock crisis,
it took refuge in the unacceptable position that, since there
was no requirement under the Freedom of Information Act for it
to provide such information, there was no need to do so to Parliament.
We commented in our previous report that:
The fact that a reasonable request to the Court to
scrutinise the functioning of the Bank during a time of exceptional
crisis has been declined is a reflection of the problem with the
accountability of the Bank of England that our inquiry has sought
The request for Court minutes is outstanding.
23. We welcome the Governor's
assurance that the Bank will respond to requests from this Committee
for information. The Court/Supervisory Board should be responsible
for monitoring the way this duty is carried out. Parliament needs
prompt and full responses to such requests in order to hold the
Bank to account.
24. It is important to avoid
cases where significant operations are undertaken by the Bank
without any accountability at all. On one recent occasion the
Bank failed adequately to inform the Chairman of this Committee
about a secret operation. The Chairman of Court should have the
duty to inform the Chairman of the Treasury Committee and of the
Committee of Public Accounts where the Bank acts as a lender of
last resort, or where the Chancellor is notified by the Bank of
a risk to public funds but the crisis is resolved without recourse
to public funds.
25. We recommended that the Chancellor be given
statutory responsibility for a crisis after the formal notification
by the Bank of a material risk to public funds. We further recommended
that the Bank give the Chancellor an early warning, in the event
that it considered such a notification was likely. At this point
the Chancellor should, we said, have a discretionary power to
be able to direct the Bank if he or she so chose.
26. Again, the Bank has provided an alternative
proposal which, although apparently in broad accord with our views,
does not deliver what we recommended:
- the Court suggests that crisis
management, including the Chancellor's temporary power of direction,
be encapsulated in a Memorandum of Understanding.
We recommended amending the Bill to make arrangements statutory;
- the Court agrees that the Bank should alert the
Treasury to an increasing risk of use of public funds. However
the Bank's proposal excludes the use of the Chancellor's discretionary
power of direction at this time.
We said that the Treasury needed to know "as early as reasonably
possible" that it might receive a formal notification of
a material risk to public funds, in order to give the Chancellor
"enough time to consider other policy options". Such
an early warning should trigger "a discretionary power for
the Chancellor to be able to direct the Bank if he or she so chooses";
- the Court has added an additional condition to
the Chancellor's power to direct. It proposes that the power should
be triggered when there is a "material risk to public funds
and the Chancellor, having consulted the Governor, is satisfied
that there is a serious threat to financial stability" [our
- even once the Chancellor has been formally notified
of a material risk to public funds and has taken control of the
Bank, the Court proposes that he or she should be restricted to
directing the "crisis management operations of the Bank"
using "instruments of crisis management" (which are
defined as the provision of liquidity support and the operation
of the Special Resolution Regime).
Our recommendation was that, during a crisis, the Chancellor,
accountable to Parliament, should have the power to direct any
appropriate operations of the Bank.
27. The Governor was unwilling to go into detail
about the memorandum of understanding that was being prepared
alongside the legislation, but said that it would provide clarity
and that we would be pleasantly surprised by the proposed arrangements.
28. The Chancellor, accountable
to Parliament, must have the discretionary power to direct a crisis
where a material risk to public funds is developing. He or she
should not, as was the case in the Johnson Matthey rescue in 1984,
be faced either by a fait accompli, required
to accede to an emergency request for support at the time a crisis
is breaking out, or, as was the case in 2007, by a refusal on
the Bank's part to provide additional funding to the banking system
in order to alleviate a developing liquidity crisis.
29. A memorandum of understanding
may be needed to govern some of the arrangements between the Bank
and the Treasury in a crisis, but it should not be relied upon
for determining how a crisis will be addressed. As much detail
as possible about the Chancellor's power of direction should be
set out in statute. This will greatly improve the clarity of the
responsibility of the Chancellor for conduct of a crisis and thus
his or her accountability.
30. We welcome the Court proposal
that any Oversight Committee should monitor whether the Bank has
notified the Treasury of a risk to public funds "at the appropriate
time": this should help ensure that the Bank does so as early
as reasonably possible.
31. The legislation must define
the trigger for the Chancellor's assumption of the power to direct
the Bank. The Court's proposal for a double trigger is unacceptable.
A material risk to public funds alone should be enough to pass
responsibility for affairs to the Chancellor.
32. Legislation should also
define the scope of the power of direction. Court's suggestions
are too circumscribed. The extent of the Chancellor's authority
should not, in a crisis, be restricted to certain instruments
of crisis management. He or she must have a general power to direct
the Bank when public funds are at risk.
The role of external members of
the MPC and FPC
33. The Treasury Committee recommended that a
better balance between internal and external members of the FPC
and MPC be found. We proposed that the ratio of internal to external
members alter so that externals were in a majority, in order to
promote debate and creative tension, and to discourage groupthink.
34. The Court's memorandum, however, disagreed.
It claimed that it was neither "necessary or desirable"
for the FPC or MPC to have a majority of externals. It claimed
that historical voting showed that "sustained dissent has
come from internal as well as external members".
The Governor stated in oral evidence that the MPC had "a
demonstrable track record of not having groupthink".
We, however, heard evidence (some from ex-MPC members) which said
that groupthink was a problem in the Bank.
The fact that internal members have dissented at times does not
tell us whether or not the hierarchy of the Bank in some degree
35. The Court also argued that changing the ratio
of external to internal members of the FPC and MPC would dilute
internal membership "to the point where the Committees could
not be presented as distinctively Bank Committees", which
would "undermine the Government's purpose of asking the Bank
to undertake these activities in the first place".
The Governor said in oral evidence that without a majority of
Bank executives these committees would not really be Bank committees.
He was also concerned about the FPC growing too large for fruitful
discussion if it had more external members than internal, given
that five of its 11 voting members were Bank executives.
36. We are not convinced by
the arguments of Court for the retention of a majority of internal
members on the MPC and FPC. A bare majority of externals would
not in our view dilute the Committees in the way, or with the
consequences, that the Governor claims. A majority of externals
is a necessary and sensible precaution against groupthink.
37. We do not agree with the
Governor that the FPC would necessarily need to expand in order
to have a majority of external members. Four, rather than five,
very senior Bank executives should suffice.
38. It is greatly in the public
interest that the new legislation provide a satisfactory long
term framework for the accountability of the Bank of England.
It will increase, not diminish, the authority of the Bank. The
Court of the Bank of England has gone some way towards accepting
the framework of our proposals for its future governance and accountability.
However, we have set out in this Report a number of outstanding
points, contained in our original Report, that must be reflected
in the Financial Services Bill. If they are not, we may need to
ensure that the Bank is accountable in other ways, such as the
use of select committee specialist advisers to undertake reviews
in the Bank on our behalf and to assist us in obtaining appropriate
documentation. These alternatives are likely to be less satisfactory
for the Bank, Parliament and the public. They are also less likely
than our proposals to bolster the authority of the Bank's decisions.
We want to see a strong, authoritative Bank.
1 For example see leading article "Accountability
and the Old Lady", Financial Times, 9 November 2011,
p 12, and "City hails proposed Bank curbs", ibid.,
p 4 Back
Response from the Court of the Bank to the recommendations
made by the Treasury Committee and Joint Committee on the Draft
Financial Services Bill on the accountability of the Bank of England,
para 1, appended to this Report Back
Ibid., paras 3-6 Back
Response from the Court, para 6 Back
Ibid., para 12 Back
Ibid., paras 14 and 15 Back
Ibid., para 15 Back
Uncorrected transcript of oral evidence taken before the Treasury
Committee on 17 January 2012, HC (2010-12) 1753, Q 45 Back
Response from the Court, paras 24-6 Back
Treasury Committee, Twenty-first Report of Session 2010-12, Accountability
of the Bank of England, HC 874, para 81 Back
Response from the Court, para 13 Back
HC (2010-12) 1753, Q 23 Back
HC (2010-12) 1753, Q 53 Back
HC (2010-12) 1753, Q 55 Back
HC (2010-12) 1753, Qq 16-17 Back
HC (2010-12) 1753, Q 13 Back
Response from the Court, para 11 Back
HC (2010-12) 1753, Q 19 Back
Response from the Court, para 10 Back
HC (2010-12) 1753, Q 51 Back
HC (2010-12) 874-I, para 62 Back
HC (2010-12) 1753, Qq 184-6 Back
See Response from the Court, para 5 Back
HC (2010-12) 874, paras 86-8 Back
HC (2010-12) 1753, Qq 64-5 Back
HC (2010-12) 1753, Q 67 Back
HC (2010-12) 874, para 87. The Committee also said in the same
paragraph that "The fact that the Freedom of Information
Act excludes such functions is irrelevant: Parliament should receive
material from the institutions it holds to account well beyond
that which would be available under FoI. The Court should be willing
to provide all information required by this Committee to meet
the requirements of parliamentary accountability, not hide behind
Freedom of Information provisions." Back
Response from the Court, para 28 Back
Ibid., para 30 Back
HC (2010-12) 874, para 166, Back
Response from the Court, para 31. The Governor appeared to be
suggesting that there might be different triggers at one point
when he gave evidence, but later stated that he wished to see
two criteria being met before the power of direction took effect. Back
Response from the Court, paras 7 and 31 Back
HC (2010-12) 1753, Qq 73, 77, 78, 81 Back
See Rt Hon Alistair Darling MP, Back from the Brink, 2011,
pp. 318-319 Back
Response from the Court, para 50 Back
HC (2010-12) 1753, Q 113 Back
See HC (2010-12) 874-II, Q 155 and Q 244, and Ev 109 Back
See HC (2010-12) 874-II, Q 155 and Q 244, and Ev 109 Back
HC (2010-12) 1753, Q 121 Back
HC (2010-12) 1753, Qq 113, 119 Back