The new Governor of the Bank of England, Andrew Bailey

Sujet du concours 2019 – 3 – Bank of England governors are too powerful for their own good

Bank of England governors are too powerful for their own good

By Paul Wallace, Reuters, May 10, 2018


Mark Carney, the Canadian hailed as a rock-star central banker when he became governor of the Bank of England in 2013, has only a year to go before he leaves office. Already the race to succeed him is under way. But is this a job that any one person should have?

Carney, who was busy fielding questions from the press on Thursday about the BoE’s decision to keep interest rates on hold at 0.5%, is the central figure in determining British monetary policy. He chairs the committee that sets rates and decides on unconventional measures such as quantitative easing. He also chairs the Financial Policy Committee set up in response to the crisis of 2008 to consider and respond to systemic threats to financial stability. A third weighty task is chairing the Prudential Regulation Committee, which determines the supervision of not just individual banks but also insurers.

That’s too much power to confer on one person, however gifted, and one institution, however gilded.

There is a strong case for revisiting the reforms that have concentrated excessive authority at the BoE over and above its core responsibility in monetary policy. More immediately, there is also a strong case to shorten the length of time that any one individual can head so powerful an institution.

One of the reforms strengthening the BoE since the 2008 financial crisis is welcome. Its new capacity to tackle looming risks to financial stability makes sense. Central banks have in fact long been involved in this task. Already in the 19th century the Bank was intervening in order to quell banking panics. The “macroprudential” toolkit available to the FPC provides an alternative to the blunt instrument of raising interest rates to arrest dangerously strong credit growth. The committee can, for example, instead require banks to hold more capital against their lending or restrict loans to individuals who are borrowing high amounts in relation to their income.

The BoE’s role in supervising individual banks and insurers through the Prudential Regulation Authority is more questionable. When Labour chancellor Gordon Brown made the Bank independent in setting interest rates in 1997 he stripped awayits banking supervisory job, which moved to a new body, the Financial Services Authority. Conservative chancellor George Osborne undid this in a 2012 law, handing supervision back to the central bank, arguing that the divorce had contributed to the financial crisis.

Neither the Bank nor the FSA handled the banking crisis well, but Osborne’s rationale for his reform was unconvincing. There was a similar split of functions in Canada, yet it did not succumb to the crisis. By contrast, supervision by the central bank did not spare other countries, notably the United States, where the Fed – though not the only regulator – plays a crucial part through overseeing bank holding companies. The root of the problem was that supervision was generally too lax, whoever was formally in charge. As Adair Turner, the last head of the FSA before it was disbanded in 2013, argued soon after the financial crisis, the fundamental flaw was unwarranted “intellectual assumptions about the self-correcting nature of financial markets.”

A reversal of Osborne’s supervisory reform is necessary eventually in order to tackle the undesirable accumulation of power at the BoE. But now is not the right time to take such a step. Institutional disruption exacts its own cost. Banks would hardly welcome yet another reshuffling of regulatory functions so soon after the last one.

That makes it all the more pressing to curtail the time that any one individual can head this extraordinarily influential institution. Carney’s successor will be able to serve for eight years – the same as the president of the European Central Bank. This is too long, the more so since other checks and balances such as the appointment of external members to the three key committees are a feeble curb on the sway of the Bank insiders led by the governor.

Paul Wallace is a London-based writer. A former European economics editor of The Economist, he is author of “The Euro Experiment,” published by Cambridge UP.