Response from the Court of the Bank of England 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.

On 8 November 2011, the Treasury Select Committee of the House of Commons published a Report on the “Accountability of the Bank of England”.  On 19 December 2011, a Joint Select Committee of the Lords and Commons issued a Report on the Draft Financial Services Bill.  On 17 January 2012, the Court of the Bank issued its response to both.

Key points from the full response.

• 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.

For an update see our snippet: MPs reject Bank of England’s governance plan.

The Financial Times provides the following comment entitled:

King holds fast on Bank supervision

The governor of the Bank of England on Tuesday dismissed suggestions that its proposed new powers be subjected to internal checks and balances, in an often testy encounter with MPs.

Sir Mervyn King rejected the Treasury select committee’s proposal for a powerful supervisory board to be created within the bank, insisting such a body would damage decision-making by “second guess[ing] the decisions of policymakers”. His testimony allayed few concerns that the Bank would be insufficiently accountable once it adopted sweeping new powers over interest rates, the supply of credit and bank supervision early next year.

“This exceptionally powerful public institution needs stronger oversight,” Andrew Tyrie, Treasury committee chairman, said, adding that the Bank’s response was “still not adequate”. In November MPs demanded a powerful new supervisory board to replace the Bank’s existing 12-member court, which reviews policy and monitors Bank action on interest rates, credit and financial regulation. In October Alistair Darling, the former chancellor, described the Bank governor as a “Sun King around whom the court revolves”.

In written evidence published on Tuesday, Sir Mervyn instead proposed a new court oversight subcommittee to report occasionally – and then only on the processes by which the Bank regulates financial stability.

“It is vital that the oversight committee does not seek to second-guess the decisions of policymakers themselves,” Sir Mervyn argued. “The passing of such judgments could threaten the relationship of trust that is necessary between policymakers and the oversight committee.”

The Bank did, however, accept that future governors should be appointed to a single eight-year term rather than the current renewable five-year terms.

An external member of the Bank’s new financial stability regulator, the Financial Policy Committee, also accepted that it was difficult to balance the Bank’s powers. Michael Cohrs told MPs: “The governor is right that you don’t want to second-guess the [Bank’s rate-setting Monetary Policy Committee], but you are absolutely right that just looking at process is a bit too sterile.”

Independent corporate governance experts were critical of the Bank’s unwillingness to accept greater internal scrutiny. Bob Garratt, professor at Cass business school, said that only allowing an oversight committee to examine the process of policymaking, but not Bank policy, was “crazy”. “That is madness,” he added. “The whole point of such a committee is to help [the policymakers] make those decisions in the first place.”

The Bank’s proposed oversight committee would not have access to transcripts of policy meetings. Unlike the US Federal Reserve, which publishes its meeting transcripts with a five-year delay, Bank transcripts are destroyed once the formal minutes are agreed.

The Treasury said on Tuesday night that it had not yet decided if it would side with the Bank or MPs when it drafted Bank reform legislation due by the end of the month. But ministers are expected to back Sir Mervyn, potentially complicating the bill’s passage.