Quis custodiet ipsos custodes? Who will guard the guards themselves? The question is as old as the ancients. Yet even now it hangs over the Governor of the Bank of England, who will receive unprecedented powers under the next Financial Services Act. How and to whom will he or she be accountable?
Now the whole approach to regulation has changed, and the big winner is the Bank of England. The onus for systemic regulation falls squarely onto the Bank, through its new Financial Policy Committee. Meanwhile the FSA is to be split up and the part dealing with large institutions reconstituted as an operationally independent subsidiary of the Bank, the Prudential Regulation Authority. Finally, the Bank will gain full control of all systemically important clearing, payment and settlement infrastructure. The Bank already sets interest rates through the Monetary Policy Committee. So the effect of these changes will be to locate a colossal amount of power within it.
Yet with power must come accountability, and the question of who guards the guards has yet to be properly addressed. In theory, the answer is simple: the Bank is and should ultimately be accountable to Parliament through the Treasury Select Committee, of which I am a member. But the reality is that Parliament’s ability to scrutinise Bank decisions is always after the event and of its nature heavily constrained: by lack of resources; by other commitments; and by the quite proper need to maintain confidentiality over certain aspects of its work, such as market operations or contingency plans for a possible Euro break-up. Moreover, parliamentary scrutiny inevitably focuses on processes, such as whether a given policy was properly implemented, and less on substantive managerial or policy decisions and the performance of key individuals.
In other organisations, the board of directors or trustees would be empowered to ensure effective supervision of the management. Not at the Bank of England, however. Instead, the Bank has operated since its foundation in 1694 under a group of the great and the good known as the Court, presently chaired by Sir David Lees.
The Court is charged by statute with supervision of the Bank, in particular as regards financial stability. But at a hearing of the Treasury Committee last year none of four members of the Court seemed to have more than a hazy grasp of the resources deployed on this function. Not only that: they were unaware that under Sir Mervyn King the Bank had actually reduced its commitment to financial stability in the run-up to the financial crash—just when it should have been redoubling its efforts. This fact undermines Sir Mervyn’s repeated assertions that he had been ringing the alarm bell before the crash. For if so, why did he cut the Bank’s own work in this area?
For its part the Court had not commissioned, and apparently saw no need to commission, an external report into why this had occurred, or why the Bank had underperformed during the country’s greatest financial disaster for 60 years. In short, it seemed unable to exercise the supervisory responsibilities with which it had been charged.
In response, the Treasury Committee has made a simple proposal: that the Court should become a supervisory board in the true sense. It should deliberately recruit members with experience of prudential regulation and bank stability. The powers and expectations of its Chairman should be enlarged. It should regularly scrutinise and publicly approve or disapprove the Bank’s budget, and changes to its budget. It should be smaller, to make it more effective, with a majority of independent members. It should be properly resourced, and have wide-ranging access to official papers. It, and not simply the Governor, should be responsible for providing information to the Treasury Committee.
At present the Bank seems to be resisting many of these changes, indeed almost fighting a rearguard action to prevent proper supervision being exercised. Remarkably, its 18-page response to the Committee’s report in November was provided to Parliament just one sitting day before Sir Mervyn gave testimony on this issue. But the question of accountability, Quis custodiet?, is too important to be brushed aside.
[A version of this article first appeared in The Times]