There is an oft-quoted Scottish proverb which might have been on the mind of the Governor of the Bank of England during this last week: “Confession Is Good For The Soul.”
Sir Mervyn King used the first radio talk by a Governor of the Bank of England in peacetime for more than 70 years to attempt to apologise for the Bank’s ‘failure’ to anticipate the financial crisis.
The moment of truth was ruined by his allocation of the real blame in everybody else’s direction. Sir Mervyn said, in so many words, that –
a) The Bank should have done more but, apart from writing reports, there was little it
could have done.
b) The new regulations introduced in 1997 took away most of its powers and it was
powerless to intervene. This is open to question. The Bank retained responsibility
for the stability of the banking system. The reality is that all its attention was
placed on the Monetary Policy Committee and the setting of interest rates to
control inflation (which, of course, it has failed to do in recent times).
Bank of England, Threadneedle Street, London, England. English: The Bank of England in Threadneedle Street, London. Deutsch: Sitz der Bank von England in der Londoner Threadneedle Street. (Photo credit: Wikipedia)
The Bank of England remains the only member of the tripartite regulatory system that has not allowed public scrutiny of its role in the crisis: both the Treasury and the Financial Services Authority (“FSA”) have done so.
The UK’s regulatory system is facing great change with the FSA being replaced by the Prudential Regulatory Authority and the Financial Conduct Authority.
However the real attention is on the setting up of a Financial Policy Committee which will monitor the banking sector while the Monetary Policy Committee controls interest rates. The Bank’s accountability to Parliament remains the subject of intense discussion between the Treasury Select Committee (under the chairmanship of Andrew Tyrie MP) and the Governor.
The real impact of these events is that financial regulation is stagnating while costs soar. The appointment of a new Governor of the Bank of England in 2013 (with senior resignations worrying all too common) will also hinder progress. The Coalition Government, led by the Chancellor of the Exchequer, rushed into these changes. After the Queen’s Jubilee celebrations and the Olympic Games, autumn will come and the financial regulatory chaos will remain and probably be even more complex. This week one report suggested that media was overtaking financial services as the London’s main revenue generator.
The Scottish proverb quoted above is, in fact, missing one word. The actual proverb reads:
“Open confession is good for the soul.”
Instead of meaningless introspection by the Governor, dithering by the changing FSA and empty rhetoric by the Treasury Select Committee, the Chancellor should realise the serious affect the regulatory muddle will have on the UK’s growth prospects.
Perhaps ‘Open confession’ by all parties is the real answer.
Tony Drury
Twitter: @tonydrury39
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The problem is that the Bank of England (BoE) was indeed powerless to act to avert the crises of 2007-08 as the Banks had been de-regulated by the Tories during the 1980′s. Furthermore, they did give warning as to what was happening with Northern Rock but were ignored by the Financial Services Authority (why they were given the responsibility originally given to the BoE is beyond me).
Research has shown (Ryan-Collins, Greenham, et al 2011) that contrary what free marketeers think, the BoE doesn’t have much control on how much money is created by the Banking industry. Remember that notes and coin only amount to around 3% of our money supply whereas the remaining 97% is created as interest bearing loans by the commercial banks. It is the confidence of the banks in the loans to the public and the demand for money that decides the money supply.