Lord King, the former governor of the Bank of England, kept the governing body of the central bank in the dark on serious internal dissent, denied non-executive directors information about financial stability and fell out with them over alleged leaks, minutes from the financial crisis reveal.
Almost full BoE Court minutes from mid-2007 to 2009, published on Wednesday, underline the importance of transparency and streamlined governance of the central bank proposed in December by Mark Carney, the present governor.
The minutes, which he agreed should be released after numerous requests from MPs, showed the Court and its subcommittees provided little useful scrutiny of the BoE before and during the financial crisis.
Andrew Tyrie, who chairs the House of Commons Treasury select committee, said the minutes showed the central bank did not have a board worthy of the name. “Even when questions were asked by individual non-executive directors, the executive usually presented a unified front to the Court, apparently rendering it of little or no use as a forum for creative discussion and constructive challenge,” he added.
Responding to the publication of the minutes, Lord King told the Financial Times that the documents showed that all the actions of the BoE had been “fully” reported to the Court.
“Far from being dysfunctional, Court discharged its duties in a difficult period within a statutory framework that imposed a number of constraints that have subsequently been relaxed: Court was too large, it had a number of members with serious conflicts of interest, and there was no provision for a non-executive chairman, “ he said.
“What matters to the country are the decisions that we took, and those decisions prevented a repetition of the Great Depression and made it possible for the recovery that is now under way.”
The minutes and Lord King’s response are unlikely, however, to change the picture of the Court as a hapless body ill-equipped to deal with the crisis.
BoE Court members’ lack of knowledge on the bank has caused public embarrassment before. In 2011, Sir David Lees, its then chairman, was unable to recollect that the bank diverted significant resources away from financial stability before the crisis and another non-executive director struggled to name Sir Paul Tucker, one of the then deputy governors.
In July 2007, just a month before the crisis hit, Andy Haldane, now BoE chief economist, presented a paper to the Court on how the central bank would assess risks to financial stability in future. The minutes show the non-executives thought his presentation was “excellent in terms of its accessibility”.
Yet hindsight reveals its content to be remarkable for the director’s question whether the new approach gave fresh insights into risks in the financial system. “It had not identified any looming gaps,” the minutes said, while the risk report of the same meeting mentioned high inflation and recruitment and retention risks as worthy of note.
In October and November 2007, Court directors were not told of serious dissent among senior staff, including from Sir John Gieve, deputy governor for financial stability, over the delayed and feeble response by the BoE to the run on Northern Rock. “Court was largely out of the loop,” Sir John told the FT in 2012, which is confirmed by the lack of any substantive discussion reported in the minutes.
Instead, despite serious tensions between the government, the Financial Services Authority and the bank in the run up to the Northern Rock bailout, which were widely reported at the time, Court was given inaccurate statements and blindly accepted that the early days of the crisis had “proven the sense and strength of the tripartite framework”.
Although he repeatedly described his work during the crisis as “fun” in a radio interview last month, in September 2007 Lord King made a point of thanking Court members “for the messages of support during the recent difficult period”.
Information on the BoE’s plan to recapitalise Britain’s insolvent banks were also not revealed to Court until after they were implemented in 2008. When Court members observed the internal financial stability discussions, which they were supposed to oversee, only one non-executive complained that “some data had been made available to the meeting participants — but not to the observers”.
The reason for the executive’s desire to withhold information from the Court, the BoE said, was because there were potential conflicts of interest and a fear that sensitive contents would leak.
This lack of trust between the executives and non-executives is evident from a Lord King’s comments, reported in the June 2008 minutes, that press articles had suggested the Court was revealing information, which “had impacted on the Governor’s confidence to share critical and sensitive information”.
The Court had a long discussion about whether it could describe itself as “fully briefed” about the crisis and much less about financial stability itself, Mr Tyrie said. “Understandable though these instances of back-covering may have been, the non-executive directors appear to have done little thinking of their own about financial stability and to have added little or no substantive value to the Bank’s work on it,” he said.
“The Court was almost entirely reactive: there is hardly any sign of its non-executives coming forward with suggestions or constructive challenges to the assumptions of the executive.”
Code name: ‘Badger’
After the disaster of the run on Northern Rock, the Bank of England was adamant that it needed to keep any support for British banks secret. This was seen as so important that in meetings to approve further covert action in 2007 and 2008, discussions and minutes referred to code names rather than the actual names of banks in trouble.
The words “Northern Rock” were allowed to be mentioned publicly, but the governor and his colleagues discussed possible support for “Badger”, before Bradford & Bingley crashed.
It offered a £3bn collateral swap with “Tiger”, but Alliance and Leicester never used the facilities offered, which have not been disclosed to date.
“Fox”, “Lark” and “Phoenix” all borrowed secretly from the BoE, which are better known as HBOS, Lloyds TSB and RBS. For the still nationalised RBS, the code-name “Phoenix” suggests either eternal optimism at the BoE, or just one of the “moments of laughter” that Lord King, then bank governor, sought to introduce to jolly his staff through the crisis.
Letter in response to this report: