UK Treasury Committee vs BoE: power, accountability and the Labour legacy

LONDON | In a conflicting discussion about the reforms the UK’s central bank should undertake in an era of financial crisis, the Treasury Committee on Monday published its new response to the Court of the Bank of England (BoE). The Treasury Committee wants the BoE to become more transparent and the Chancellor to face wider responsibilities.

The Committee, which is appointed by the House of Commons, opened the dialogue with the ‘Accountability of the Bank of England’ report last November. The Court of the BoE accepted only partially the recommendations expressed in the paper, though. Speaking about the BoE’s position, the chairman of the Treasury Committee Andrew Tyrie said:

“The Bank appears to have accepted the Treasury Committee’s analysis of the deficiencies of its current corporate governance structure. It also appears to recognise the shortcomings of the current accountability arrangements, given the Bank’s enhanced powers and responsibilities for financial stability.

“Unfortunately the Bank’s proposed remedy is not.”

With mentions to the public mood and the consequences to the economy in a time of high-volatility markets and approaching domestic recession, Mr Tyrie made clear that the parliamentary body feels the current scrutiny mechanisms of how the BoE functions is not satisfactory.

“The Bank needs a proper Board, fit for the 21^st Century[…] It is understandable that people don’t rush to embrace more meaningful and intrusive supervision of their activities. But in a public body with these powers, it is essential.

“The legitimacy of the Bank’s decisions will depend on it being properly accountable.”

The two institutions have clashed over the sort of entity that must act as the BoE’s supervisor. The central bank seems to favour a sub-committee of the Court itself formed by non-executives members only.  This sub-committee would be able to commission retrospective external reviews of Bank decisions, yet it would not comment on what was produced, nor would carry out any internal review. But what the parliamentary Committee has advised for is a supervisory board with a majority of external members in order to promote independent criticism.

“The Bank has still not properly reviewed its own role in the financial crisis,” Mr Tydie reminded, “the Court’s proposals would not permit the sort of review that the Financial Services Authority has recently conducted into Royal Bank of Scotland.”

The British central bank has already agreed to appointing its governor in future for a single term of eight year, publishing records of Court meetings and granting sufficient time for investigation of macro-prudential tools set out in secondary legislation.

Still, the Treasury Committee has pressed further on another issue: it believes that the Chancellor should get a more prominent role over the Bank. In today’s note, it said:

“The Bank has not accepted the Committee’s proposal that the Chancellor’s power of direction should be available as soon as the Bank has alerted the Treasury that a material risk to public funds is a possibility.  This is essential to ensure that the Chancellor is not faced with a fait accompli and without options; unable to intervene as a crisis develops and, in practice, incapable of altering direction as it breaks.”

So far, the BoE has set two conditions before the Chancellor can intervene in such a way: that there is a material risk to public funds and that the Chancellor, having consulted the Governor, is convinced there is a serious threat to financial stability. The Committee’s chairman retort is that

“the public will expect, when there is a material risk to public funds, the Chancellor to be in charge, to be seen to be in charge, and to be accountable to Parliament.”

The House of Commons’ committee, then, appears to seek a reversal of the separation between the BoE and Downing Street, which was engineered by the Labour Party when it was in government in 1997-2010 with Tony Blair and Gordon Brown at its helm. Nevertheless, if the Committee wins, Chancellor George Osborne and his successors may well come to regret it.