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The Bank of England’s responsibilities are now so extensive they no longer fit into brief statements of purpose. Instead the central bank’s grand ambition is “to promote the good of the people of the UK”. To do so, the bank pledges to maintain trust in money and banknotes, control over inflation and financial stability, and to guarantee sound banks and insurers.
Mark Carney’s task since becoming governor in 2013 has been to modernise the bank to carry out its new broader mission at the same time as integrating the banking regulation functions inherited from the defunct Financial Services Authority. “I’m very pleased with the way the institution’s coming together,” Mr Carney says unprompted, declaring this as the main achievement of his first two-and-a-half years. He is particularly proud of the “evolution of culture” and “the number of initiatives that sort of bubble up from within the institution”.
Although the governor has occasionally taken credit for initiatives that were almost complete before his arrival, such as ensuring a woman, Jane Austen, will appear on the next £10 note, few BoE watchers doubt there has been a revolution in Threadneedle Street.
Under the governor’s One Bank initiative to break down departmental barriers, legacy staff from the FSA are fully part of the BoE and research projects are broader based, although some insiders complain this is not happening as much as the governor claims.
The way interest rates are set has been transformed with much more information immediately available; the minutes of the bank’s governing body are published; and staff can express dissenting views in the BoE’s lively blog, Bank Underground.
Andrew Tyrie, chairman of the Treasury select committee, says this blizzard of initiatives now needs to show results. “The only good reason for rearranging the institutional furniture is to enable the bank to produce a better quality product — in the bank’s case, higher quality decisions. That’s how structural reforms should . . . be judged,” he says.
Many of Mr Carney’s changes meet these criteria, observers say. With the BoE Court now able to instigate reviews of the bank’s activities, Mr Tyrie adds: “It will have something resembling a board fit for the 21st century. Now the board needs to do its job. And parliament needs to keep an eye on it.”
Among the changes to the bank’s top team was to put Andy Haldane in charge of bank-wide research. This, say insiders, used one of the BoE’s most prodigious talents well and removed the new chief economist from day-to-day management — not his forte. Michael McMahon of Warwick University says the move “should help the bank with its analysis of important issues”. Mr Carney’s appointment of Minouche Shafik as one of the deputy governors also won praise; the Egyptian-born economist boasts an impressive CV in international financial institutions.
Those calling for much greater transparency in the BoE’s thinking have also been pleased. Richard Barwell of BNP Paribas says Mr Carney’s ability to place equal weight on all aspects of the BoE’s work has been a near-unqualified success. “It feels and looks like a very different place,” he says.
Others complain that the increased openness can be little more than skin deep. Philip Rush, chief UK economist at Nomura bank, says external briefings to City economists have “almost dried out” and “are less open”. Public displays of accountability such as the BoE’s Open Forum in November and its internal watchdog, the Independent Evaluation Office, have had little impact.
But the acid test of whether the BoE has changed is when it comes under fire in a crisis. Here it has not always lived up to its new open and accountable image.
It was slow and secretive responding to a computer failure of the Chaps payment system in 2014 which prevented homeowners completing housing transactions. It fought a proposal in the most recent Bank of England bill that it should be open to greater scrutiny from the National Audit Office. It was accused of poor judgment when Gertjan Vlieghe, a hedge fund economist, joined the rate-setting Monetary Policy Committee and was initially allowed to retain a share in future earnings of his former employer Brevan Howard, which specialises in predicting the direction of interest rates. Mr Vlieghe has since cut ties with Brevan Howard.
The bank has faced tough questions when its name came up in two of the City of London’s biggest scandals, concerning rigging of the foreign exchange markets and the Libor reference rate.
Earlier this year, the BoE explicitly drew a line under the old era of central banking, where a rise of the governor’s eyebrows was enough to influence behaviour. “The days when ‘constructive ambiguity’ was seen as a helpful foil for central bankers are behind us,” Minouche Shafik, the BoE’s deputy governor for markets and banking, declared in March.
Her speech came as the BoE unveiled a package of measures intended to overhaul transparency, particularly in how officials interact with market participants. The BoE has attracted the scrutiny of enforcement agencies on both sides of the Atlantic during both the Libor and foreign-exchange rigging scandals.
The forex scandal has arguably been the more damaging: the BoE had to commission a £3m taxpayer-funded inquiry by a veteran City barrister, into whether any of its officials knew of forex-rigging. Lord Grabiner’s findings cleared officials of wrongdoing but said Martin Mallett, the BoE’s former chief forex dealer, should have escalated concerns to his superiors. The BoE sacked Mr Mallett for “unrelated” misconduct. The thoroughness of Lord Grabiner’s report was then questioned not only by the select committee, but also by the US Department of Justice, which has its own parallel probe into forex-rigging.
A third, unrelated criminal investigation could be even more damaging for the BoE. The Serious Fraud Office is investigating whether bank officials told lenders to bid at a certain rate during emergency money market auctions during the financial crisis to minimise the risk of one lender being singled out. The SFO’s investigation, which is ongoing, is unprecedented.
The BoE was loath to admit the probe’s existence until the FT revealed it in March, just days after Ms Shafik announced the BoE’s new accountability. This raised questions from the select committee about the BoE’s professed transparency. Asked about the SFO probe, Mr Carney says: “We have to be transparent, and we will be transparent, fully transparent as soon as we can, but not before. Because if we were transparent before, it’s totally self-defeating.”
After several voluntary interviews with BoE officials — including senior ones — David Green, the SFO’s director, is weighing whether there is sufficient evidence to press charges and whether this would be in the public interest.
This case continues to hang over the bank and will test Mr Carney’s drive for openness, accountability and a new modern institution. He is clear, however, that reforms will continue. “We’ve made a very good start . . . but it really has a long way to go,” the governor says.