Accountability of the Bank of England: Response from the Court of the Bank - Treasury Contents

Appendix: Response from the Court of the Bank of England

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


  • The new responsibilities for the Bank of England in the area of financial stability will need to be accompanied by new accountability mechanisms. As with the mechanisms for monetary policy, at the centre of these should be direct accountability to parliament through the Treasury Committee.
  • Building on the recommendations of the Treasury and Joint Committees, we propose that this is supplemented by establishing an Oversight Committee, with direct access to the policymaking processes and papers in the Bank, and formed of non-executive directors.
  • The role of this Committee should be to assess whether the processes employed in making financial stability policy decisions have considered a full range of options and have taken reasonable account of the relevant information, analysis (including of the lessons from the past), differing views amongst policymakers, and challenges from outside the Bank.
  • The Oversight Committee should also commission reviews from experts outside the Bank of the performance of the Bank's financial stability policymakers. These reviews would recommend lessons for them. And the Oversight Committee would assess the Bank's response to those recommendations.
  • The Bank's financial stability role gives it operational responsibility for managing a financial crisis. All decisions in a crisis involving public funds, regardless of the amount, are however, for the Chancellor. So the forthcoming crisis management Memorandum of Understanding between the Bank and the Treasury should establish a clear framework for co-ordination. It should also establish a power for the Chancellor, when public funds are at risk and there is a serious threat to financial stability, to direct the use of the Bank's tools of crisis management.
  • We support the Treasury Committee's recommendation that future Governors of the Bank should be appointed for a single eight-year term.

Background to our Response

1.  The proposals set out in the Government's Financial Services Bill envisage major new roles and responsibilities for the Bank of England, and it is accepted that with those new powers must come new, stronger forms of accountability and governance. The Bank must be able to demonstrate to Parliament and the wider public that it has the expertise required to carry out those tasks, has been reasonable and proportionate in the decisions it has taken, and is subject to regular and searching democratic scrutiny. So we, the Court of the Bank, welcome the recommendations from both the Treasury Committee and Joint Committee on the draft Financial Services Bill regarding the governance and accountability arrangements of the Bank of England.

2.  The Bank faced a similar challenge in the 1990s when it was asked to take operational responsibility for monetary policy. Legitimate concerns were raised at that time about whether it was appropriate to delegate such significant powers to the Bank. In response, the Bank played a leading role in helping to establish a framework for accountability that has over time delivered substantial assurance to Parliament, to the public and to the financial markets. The Treasury Committee concluded that the accountability processes for monetary policy, built around published minutes, individual votes, regular evidence sessions at the Treasury Committee and pre-appointment hearings, showed that "it is possible to create effective accountability structures while at the same time removing politicians from day-today decisions"[42]. We aspire to put in place a framework to support the Bank's financial stability responsibilities that can be judged as positively.

3.  The defining feature of the accountability mechanism for the Monetary Policy Committee (MPC) is that the Committee as a whole, and its individual members, are held to account by the Treasury Committee at regular evidence sessions, We hope that accountability to Parliament through regular appearances before the Treasury Committee will form the core of the mechanism for accountability in financial stability policy. Ultimately, only Parliament can evaluate whether the policy decisions made by the Bank are aligned with the wishes of the electorate. So it is important that the structures of, and processes around, financial stability policymaking allow that. But there are important differences between monetary policy and financial stability policy, and these pose a challenge to designing the appropriate accountability mechanism.

4.  Monetary policy decisions are made regularly and generally monthly; the set of policy instruments is very small; the information on which they are based is in the public domain; policy decisions are made public immediately; and there is a single objective against which outcomes can be judged—the inflation target. This abundance of information means that it is possible for a group outside the Bank—the Treasury Committee—to give effective challenge and questioning to individual monetary policymakers.

5.  Financial stability policy is different. Even excluding the Prudential Regulation Authority (PRA), which will be a subsidiary, the Bank will be responsible for a wide range of policy instruments including macroprudential policy, regulation of systemically important financial infrastructure, use of the Bank's balance sheet, and the operation of the Special Resolution Regime. Although, for macroprudential policy, it is expected that the Financial Policy Committee (FPC) will meet on a fixed timetable, many other financial stability policy decisions not taken by the FPC, covering the Special Resolution Regime, infrastructure regulation and the Bank's balance sheet, must often be made irregularly and sometimes in a crisis situation. They must on occasion remain undisclosed for a time after they are made and can often be based on information that will remain undisclosed for some time. Moreover, although the FPC will publish, and report against, indicators of financial stability, there is no fixed quantitative objective against which to measure performance.

6.  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. Because of this, 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.  Finally, the Bank's role gives it operational responsibility for managing a financial crisis. Some policy decisions in a financial crisis will, however, have implications for public funds. Those decisions, no matter how small the amount, must be made by the Chancellor, so a clear framework for co-ordination between the Bank and the Treasury in a financial crisis will be required. And in a fast-moving situation where there is a serious threat to financial stability and public funds are at risk, it is important that the Chancellor has a power to direct the Bank in the use of its tools of crisis management. These tools are: the provision of liquidity support, and the operation of the Special Resolution Regime. A clear framework for cooperation and a direction power should be encapsulated in the forthcoming crisis management Memorandum of Understanding (MoU) between the Bank and Treasury.

8.  Direct accountability to the Treasury Committee, a new Oversight Committee for financial stability, and the Crisis Management MoU. form the core of our proposed framework for accountability in financial stability policy. The first two sections of this paper, on the Oversight Committee and on crisis management, describe these in more detail. In doing so, we note where we agree with, and occasionally differ from, the recommendations of the Treasury Committee and the Joint Committee on the draft Financial Services Bill.

9.  The final three sections, on the Court of the Bank of England, the role of the FPC, and on appointments and conflicts of interest, respond to the recommendations of the parliamentary committees in these other areas.

An oversight Committee for Financial Stability

10.  The Treasury and Joint Committees recommended that Court, renamed as a 'Supervisory Board', should oversee the Bank's policy functions. We consider a unitary board, like Court, composed of both executive and non-executive directors, to be the best structure for dealing with the governance and management of the Bank. But for conflict of interest reasons, it is our view that oversight of the Bank's processes is best performed by non-executive directors. We therefore propose to create an Oversight Committee for financial stability that does not include Bank financial stability policymakers, such as the Governors, although they may be invited to contribute to its meetings. This Oversight Committee would be a sub-committee of, and have its detailed terms of reference determined by, Court. And its members and chairman would be appointed by the Nominations Committee of Court.


11.  Court's view is that the Oversight Committee's remit should cover the processes around: the FPC; the Bank's regulation of systemically important financial infrastructure; the use of the Bank's balance sheet for financial stability purposes; the Special Resolution Unit; and the links between the PRA and these functions.

12.  The Oversight Committee should be responsible for assessing whether the processes employed in making policy decisions in these areas 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.

13.  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.


14.  Building on the recommendations of the Treasury Committee we do, however, think that the Oversight Committee should commission periodic reviews of policymaking performance from expert authorities outside the Bank. Such reviews would consider in detail specific periods or issues in financial stability policy. They could cover both the processes followed in making the decisions as well as, with the benefit of some hindsight, the merits of the decisions themselves. An obvious example of the sort of body to provide assessment would be the International Monetary Fund (IMF). The main output would be recommended lessons about the way policymakers had gone about their functions.

15.  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.

16.  Court's view is that the Oversight Committee should decide when and how to commission such reviews and that those reviews should take place no less than one year after the period being reviewed. The terms of reference of such reviews would be made available to the Treasury and Treasury Committee and, once completed, the reviews would be made available to them. Our strong presumption is that the reviews would also be made public.


17.  Whether or not the Oversight Committee has chosen to commission any external reviews, it would produce a regular annual report on its work. That report would cover the Committee's assessment of the processes followed to reach financial stability policy decisions, and its assessment of the way the Bank had responded to any external reviews it had commissioned.

18.  That report would be published as part of the Bank's own Annual Report. We expect that the Treasury Committee would wish to question members of the Oversight Committee on it. So we expect members of the Oversight Committee to give evidence to the Treasury Committee as least once a year.

19.  The impact of the Oversight Committee will be strengthened if it conducts its business in a transparent way. As a sub-committee of Court, the Oversight Committee will report to it. And following the recommendation of the Treasury Committee, we propose in future to publish a record of Court meetings. The record will be published, as recommended by the Treasury Committee, two weeks after the Court meeting, and would incorporate the regular reports of the Oversight Committee.


20.  It is clear that, to fulfil its remit, the Oversight Committee will need direct access to the Bank's policymaking processes. Court's view is that three things, in particular, will be necessary. First, the Oversight Committee will need periodically to be able to question each of the Bank's financial stability policymakers.

21.  Second, members of the Committee should have access to the information and analysis on which policy decisions were made. The Oversight Committee should have access to all papers from the policy process that are necessary for it to complete its reports or to commission reviews.

22.  Third, we also agree with the recommendation that members of the Oversight Committee should have the right to attend meetings of the Bank's statutory policymaking committees. Members of the policy committees have expressed some reservations about this proposal, which we suggest can be met by: (1) allowing a maximum of two members of the Oversight Committee to attend any given meeting; (2) allowing attendance only with the consent of the chairman of the policy committee (but such consent would not be unreasonably withheld); (3) establishing clearly that any attendance by a member of the Oversight Committee was on the basis that members of the Oversight Committee are responsible not for passing judgement on policy decisions but instead for monitoring the process by which they were made.

23.  We note that, to the extent members of the Oversight Committee attend policymaking meetings, and have access to recent policy papers, they will also need to be subject to the same financial dealing rules as apply to members of the Bank's policymaking committees.


24.  Court itself will be responsible for approving the PRA's budget and financial management, for its remuneration policies, and (with the Treasury's approval) for appointments of nonexecutive directors to the PRA Board. Court's view is that the Oversight Committee for financial stability should monitor the processes around the links between the Bank's financial stability functions on the one hand and the PRA on the other.

25.  The PRA Board should be responsible for commissioning regular peer reviews of its microprudential supervisory activities. The Oversight Committee would be responsible for approving the terms of reference of such reviews and for ensuring that the PRA Board had responded to the conclusions of those reviews. Some reviews would have implications for the financial stability work of parts of the Bank other than the PRA. The Oversight Committee would monitor and assess the Bank's response to these.

26.  The draft Financial Services Bill also states that the PRA will need to investigate and report on instances of possible regulatory failure. Such investigations will be commissioned by the PRA Board, possibly at the direction of the Treasury. In our view, those investigations should normally be led by an external authority.


27.  Given the role of the Oversight Committee we have described, we very much agree on the need for its members, as a group, to have a rich mix of skills. In our view, we start from a rather stronger position than suggested in the Treasury Committee's Report, with current Non-executive Directors including three bankers (one of whom has also been a supervisor), two insurers, two industrialists with long financial and governance experience and a trades unionist. Our aim is to maintain and strengthen further this range of skills and experience as opportunities arise mindful always of the commitment of time and focus that will be required to perform this oversight role, and the need to avoid conflicts of interest (described below).

Crisis Management

28.  Some of the most far-reaching recommendations in the Treasury Committee's Report relate to the lines of responsibility and accountability between the Chancellor, Treasury and the Bank at times of financial crisis. We strongly agree with the need for a clear framework to establish who is in charge of what instruments and when. That should be encapsulated in a Memorandum of Understanding between the Bank and the Treasury, to be published alongside the Financial Services Bill.

29.  Three key principles, based on the Treasury Committee's Report, should guide the Bank's approach to establishing such a framework. The first is that the Bank and the Treasury have clear and separate responsibilities. At the most general level, the Bank has operational responsibility for financial crisis management; the Chancellor and Treasury should have sole responsibility for decisions on all uses of public money, however large or small the amount.

30.  The second principle follows from this and is that there should be a clear framework for cooperation between the Bank and Treasury when there is a material risk of circumstances arising in which public funds might be used. We agree with the Joint Committee that both parties have a duty to co-ordinate. The Bank should alert the Treasury to increasing risks of a use of public funds and must always notify the Treasury immediately when there is a material risk of circumstances arising in which public funds might be used. The Treasury must take decisions involving public funds in a way that does not hinder operational management of the crisis.

31.  The third principle is that the Chancellor should have a power to direct the crisis management operations of the Bank. That 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. The power of direction should cover the instruments of crisis management available to the Bank, and Parliament should be notified of any use of the power.

32.  It is our view that the Oversight Committee for financial stability should not play a direct role in crisis management but, consistent with its overall objectives, it should monitor two things: first, whether the Bank could reasonably be assessed to have notified the Treasury of a risk to public funds at the appropriate time; and second, whether the processes followed in the Bank's operational management of a financial crisis were conducted appropriately.

The Court of the Bank of England

33.  The work of Court, detailed in the appendix, has changed considerably since 2003. Its work today, in the governance, management and oversight of the Bank is detailed and intensive. The Bank's new responsibilities, and the proposed new Oversight Committee, mean that the workload of Court, having already risen, will increase significantly. That increased workload will probably make necessary an expansion of the resources supporting Court. The Bank stands ready to provide whatever support is necessary for Court and its committees to discharge their responsibilities effectively.


34.  We agree with the Treasury Committee that Court should continue to be responsible for coming to an explicit view about the level of, and changes to, the allocation of resources for all areas of activity, as it does now with its scrutiny of the Bank's budget. That will include the financial stability and monetary areas of the Bank's work—but will crucially also include responsibility for the budget of the PRA, which we will begin scrutinising from 2013. More broadly, we will expand our monitoring of the budgetary, value for money, risk control and performance reporting processes of the Bank as its responsibilities grow. These issues are already core to the work of the Bank's Audit and Risk Committee and Court intends to continue to conduct at least one Value for Money review a year, focused on a particular operational activity. Court will report on all of these activities in the Bank's Annual Report and will stand ready to appear before the Treasury Committee to give evidence on its role in this area when asked to do so.


35.  The Treasury Committee recommends a further reduction in the size of Court. As the Committee notes, Court's membership fell from nineteen to twelve following the Banking Act 2009. That has considerably improved the nature and effectiveness of Court discussions. With the introduction of a new Deputy Governor for Prudential Regulation, Court would need a minimum of nine members to ensure that non-executives were in the majority.

36.  We do not believe, however, that a further reduction in size is either desirable or feasible. It would divide the increased workload among an unworkably small number of people, and would complicate, if not make impossible, the staffing of the sub-committees through which much of Court's detailed oversight work is conducted. In our view that would make it unrealistic to expect that the Treasury would be able to continue to attract to the Court of the Bank high-calibre individuals to what are intended to be part-time roles.


37.  The Treasury Committee Report suggests that Court should be re-named the 'Supervisory Board of the Bank of England'. Court is not a supervisory board as commonly recognised, it is a unitary board because (rightly in our view) it includes several members of the Bank Executive, in the form of the Governor and the two (ultimately three) Deputy Governors. One alternative would be simply to rename Court the 'Board of the Bank of England'.

38.  Whether or not to rename Court is a matter for Government. We simply note that Court itself is divided on the balance of the arguments. On the one hand, renaming would recognise the considerable changes in Court's actual and prospective responsibilities in the past decade. On the other hand, it could give rise to serious misunderstandings, since amongst central banks 'Board' is often used to refer to an executive and/or policy making committee, as exemplified by the Federal Reserve Board and the Executive Board of the European Central Bank.

The Role of the Financial Policy Committee (FPC)


39.  We agree with the recommendation of both parliamentary committees that appropriate time should be granted for scrutiny of macro-prudential tools set out in secondary legislation. As with monetary policy, the FPC can operate effectively and credibly only under delegated authority from elected politicians. Its tools must have democratic legitimacy, both as a matter of constitutional propriety but also in the interests of operational effectiveness. It is of the essence of macro-prudential policy that, from time to time, the FPC may judge it necessary to tighten requirements at a time of buoyant economic and financial conditions in order to safeguard medium-term financial stability. Such decisions will not always be popular, and will therefore be feasible only if carried out under close democratic oversight and using tools that have been agreed with Government and Parliament. The precise mechanics for achieving this are for Government and Parliament to decide.

40.  As well as establishing an effective relationship with Parliament, the FPC will also need to ensure a good understanding of its objectives, analysis and decisions amongst market participants and the broader public. When it was given operational responsibility for monetary policy the Bank embarked on a major campaign to build a public constituency for low inflation. A similar exercise is now required to build and strengthen the constituency for financial stability, and the Bank has therefore established a new unit in its Public Communications Division to lead this work. The FPC has already published two six-monthly Financial Stability Reports (FSR), accompanied by a newly-introduced press conference involving both Bank and FSA officials. FPC members have made frequent speeches, public appearances and media contributions; and FPC members and Bank staff have had regular dialogue with businesses and financial market participants from around the UK. A range of simple introductory material has been provided on the Bank's website, or is under development, and the new unit will investigate other innovative ways to get the FPCs messages directly to the public.

41.  As the reports of both the Treasury and Joint Committees highlight, accountability for financial stability matters is complicated somewhat by the fact that the policy objective cannot be reduced to a target as simple as that for monetary policy. With that in mind, we agree with the recommendation made by both parliamentary committees that it would make sense to have an exchange of letters between the FPC and the Treasury in the context of the Treasury's 'remit' for the interpretation of the financial stability objective.

42.  We agree too on the merits of the FPC setting out the indicators it will use to gauge financial stability. The Governor wrote to the Treasury Committee setting out his preliminary thoughts on a suitable list on 10 August 2011 and these data are now routinely provided to the Treasury Committee ahead of evidence sessions. As the Governor noted, the precise nature of a more formal set of indicators, and their role in the policy process, will require careful thought, since there would clearly be risks in 'hard wiring' an excessively narrow set of measures into legislation. The FPC has already begun to set out its quantitative analysis in some detail in its FSR, the latest of which was published on 1 December 2011. The FSR will, we believe, provide an important tool for holding the FPC accountable, as the Inflation Report has for the MPC. But the FPC can, and should, go further in setting out its view on the most important indicators of financial stability, and we expect it to revert to the Treasury Committee on this issue in due course.


43.  We agree with the recommendation of both parliamentary committees that the status of the FPC as a Committee of Court should be reviewed. Court's view is that there is merit to the FPC, like the MPC, being a committee of the Bank. This would serve to highlight the distinction between the role of Court, which is focussed on governance and oversight, and the role of the Bank itself, which is focussed on policymaking and operations.


44.  We agree with the conclusion of both parliamentary committees that such conflicts are unlikely to arise: the MPC and FPC have different policy objectives, and different tools with which to achieve them. It is conceivable that the FPC might occasionally choose to 'tighten' its policy instruments (for instance, to slow the expansion of the financial system) at a time when the MPC might wish to 'loosen' its own policy stance (for instance, because the medium term outlook for inflation had fallen). But far from reflecting a conflict between the two frameworks, this shows the value of extending the policy toolkit. By itself, monetary policy could not achieve both objectives simultaneously. Equipping the FPC to pursue macro-prudential stability reduces the constraints on monetary policy, and vice versa.

45.  It will, however, be important to ensure that both MPC and FPC are aware of the thinking of the other committee. In this regard, we take considerable comfort from the provision for cross-membership of the FPC and MPC. Currently there are four members of both Committees—the three Governors and the Executive Director for Markets. In addition, we see no reason to prohibit some cross-membership amongst external members too, providing they are suitably qualified for both roles.

46.  We do not believe that it is necessary or desirable to make statutory provision for a joint meeting of MPC and FPC. Although of course an informal meeting of this kind is always open to the two Committees, a formal meeting would be large and unwieldy, and would not have well-defined rules of procedure. But we do agree with the recommendation of the Treasury Committee that, in the very unlikely event of a conflict arising, the Governor should consult the Chairman of Court about the process to be followed to deal with it.



47.  Court is not responsible for appointing the Bank's Governors. Nevertheless, we welcome the proposal from the Treasury Committee that future Governors should be appointed for a single term of eight years. Our assumption is that Deputy Governors would continue to be appointed for renewable five-year terms. It is also our view that Governors should continue to be expected to take part in appointment hearings in front of the Treasury Committee. Whether the Treasury Committee should have a veto over the appointment of the Governor is, however, a matter for Government and Parliament. And whether, as the Joint Committee suggests, the Chancellor should consult the Chairman of Court over the appointment of the Governor, is a matter for Government. Whatever framework is put in place it is of fundamental importance that it should continue to safeguard the Bank's independence.


48.  A high priority for the FPC (and in due course the PRA Board) is to be accountable to parliament through the Treasury Committee. A number of in-depth appointment hearings and evidence sessions have already been held, and we expect FPC hearings to become a regular part of the Treasury Committee's work.

49.  Our view continues to be that members of the MPC and FPC should give evidence to the Treasury Committee before they take up their post. Whether or not to adopt the Treasury Committee's proposal to hold pre-appointment hearings with candidates for membership of the FPC (and MPC) is a matter for Government. We would note only the importance of ensuring that these hearings are held early enough in the appointment timetable to ensure that the Bank's policy committees are not required to operate with gaps in membership.

50.  Decisions about the relative numbers of internal and external members of the MPC and FPC are ultimately for Parliament. But we are not persuaded that having a majority of external members, as proposed by the Treasury Committee, is either necessary or desirable. Neither internal members nor external members vote as a block. Sustained dissent has come from internal as well as external members. And diluting internal membership to the point where the Committees could not be presented as distinctively Bank Committees would undermine the Government's purpose of asking the Bank to undertake these activities in the first place.


51.  We strongly agree with the emphasis that both parliamentary committees place on the need for the FPC to have people with financial sector experience amongst its members. The Treasury Committee Report recommends that the Bank may need to vary its approach to conflicts of interest to make it easier to appoint industry practitioners in the future. But, as that Report notes, there is no evidence that the Bank's approach, set out in the FPC Code of Conduct, proved a barrier in the appointment of the FPC's current members. The two members with extensive experience in the private sector, Michael Cohrs and Bob Jenkins, have already proved themselves to be strong members of the Committee, and we are very glad that the Treasury has been able to appoint people of this calibre and experience.

52.  The same is true for Court where it will be important to continue to operate a flexible approach to assessing potential conflicts of interest, led (as now) by the non-executive Chairman, working closely with the Treasury. Court already applies best-practice standards to potential conflicts. The Nominations Committee of Court is responsible for monitoring whether likely conflicts of interest are sufficiently severe to prevent someone becoming a member of Court or continuing to serve as such. Court also maintains a record of members' external involvements and can require members to withdraw from agenda items in which they have a direct interest.

53.  In addition, Court also puts in place financial dealing rules, covering members of the Bank's policymaking committees, the executive and the staff of the Bank. As we note above, these dealing rules should also apply to members of the Oversight Committee who have access to the same information as members of the Bank's policymaking committees.

54.  We are not persuaded that any dilution in these standards would be an appropriate response to the Bank's new responsibilities. The actions of the Bank's policy committees will have significant implications for all parts of the UK economy. The credibility and legitimacy of the Bank can be preserved only if the taking of those decisions and the monitoring of the processes that were followed in making them were not, and were not even perceived to be, influenced by a conflict of interest.

55.  The Bank Rate Tribunal of the late 1950s[43] illustrates how seriously conflicts of interest, or perceptions of such conflicts, can harm the credibility of policymaking bodies such as the Bank. If such circumstances were to recur, Parliament would ask how the Bank, obliged to act in the interest of the UK public as a whole, had allowed this to happen. In this regard, the best practice standards required of public sector policy-making bodies are, and must be, very different from those applied to private sector boards. A central bank's reputation for acting unambiguously in the public interest, once lost, can be very hard to rebuild.

56.  The Bank would, however, welcome a broader debate on how conflicts of interest should be dealt with in public policymaking. Such a debate might then allow a universal framework for dealing with conflicts in public positions to be established and policed by the Government. Members of the MPC and FPC could be covered by such a universal agreement.


57.  The Court of the Bank shares the aim of Parliament to build accountability and governance mechanisms for the Bank's new responsibilities in financial stability that will ultimately be judged to be as successful as those put in place after 1997 for the Bank's monetary policy responsibilities. The core feature of all those mechanisms has to be the direct accountability of policymakers to Parliament through the Treasury Committee. But we recognise that, due to differences in the nature of financial and monetary policy, it will be more difficult for the Treasury Committee to hold financial stability policymakers directly to account than monetary policymakers. It is our hope that the proposals we put forward, building on the recommendations of Parliament, for an Oversight Committee for financial stability, on a crisis management Memorandum of Understanding, on the Court of the Bank, the structure of the FPC and on appointments, will enable Parliament to be as effective in holding the Bank to account for its financial stability policy as it has been for its monetary policy.

Signed, on behalf of the Court of the Bank of England:

Sir Mervyn King


Sir David Lees


Appendix: The role of Court as at December 2011

58. The role of Court has changed considerably since 2003. It comprises 12 members of which 9 (including the Chairman) are Non-Executive and 3 are Executive (the Governor and two Deputy Governors). This compares with a Court of 19 before the 2009 Banking Act of which 16 were Non-Executive. The lower number results in stronger participation and more structured discussion.

59. Some of Court's functions arc similar to those carried out by the Board of a public company. Its principal role is governance, which it exercises through surveillance designed to ensure adequacy of resources and a rigorous approach to process. As with a public company Court delegates appropriate tasks to sub-committees, in particular Audit and Risk, Remuneration, and Nominations. It forms ad hoc sub-committees to oversee specific tasks, a recent example of which has been to determine the future accommodation of the PRA.

60. Again as with a public company, Court approves the annual budget and financial forecasts of the Bank, which involves the allocation of resources, and regularly monitors actual performance against budget. Court approves the Annual Report and Accounts. It also oversees the setting of personal objectives for the Executive, promotes value for money initiatives, participates in succession planning and induction programmes for new entrants and annually reviews its own effectiveness.

61. Court also has specific responsibilities for a range of activities that are peculiar to the Central Bank. It has a 'catch all' responsibility for managing the affairs of the Bank which includes determining the Bank's objectives and strategy. This responsibility is discharged partly by delegation to the Governor and partly through specific matters that it reserves to itself. These are carefully documented and reviewed annually. The aim of Court is to ensure the effective discharge of the Bank's functions and to ensure the most efficient use of the Bank's resources.

62. Court approves the Bank's strategic priorities for the year ahead under the headings of Monetary Stability and Financial Stability and, on a regular basis, monitors progress against them. Court also reviews risks to the Bank's balance sheet on a regular basis and monitors closely the risk map of the Bank through the Audit and Risk Committee which in turn receives regular reports from the internal audit function.

63. A specific responsibility of Court, undertaken by the Chairman but with a report back to Court, is to review with individual MPC members the processes and procedures followed by the MPC. Informal meetings are held by the Non-Executive Directors with external members of the MPC and the Non-Executive Directors are invited to attend pre-MPC meetings to familiarise themselves with current monetary policy issues. Visits around the UK with the Bank's Agencies are also encouraged. The Chairman plans to extend these activities to the FPC.

64. More recently, Court and the Audit and Risk Committee have been closely involved in monitoring the PRA transition project both as regards costs and timing. This is probably the largest project the Bank has undertaken and involves considerable Bank resources.

42   HC (2010-12) 874, para 29  Back

43   Report of the Tribunal appointed to Inquire into Allegations of Improper Disclosure of Information relating to the Raising of the Bank Rate, January 1958 (Cm. 350) Back

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Prepared 23 January 2012