“The release of these minutes—which the Treasury Committee has been calling for since 2011—is very welcome.
“The minutes show that during the crisis the Bank of England did not have a board worthy of the name. This mattered. And it still matters. It is why the reforms announced on 11 December 2014 by the Bank are a valuable step in the right direction.
“The Court’s job should not have been to second guess the Bank’s executive or policy-makers. But it should have been able to provide effective challenge to the executive, and to make clear that, where appropriate, it would conduct retrospective reviews of Bank policy and performance. There is little evidence that the Court attempted either. 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. There are many examples from these minutes:
Financial stability
“As late as July 2007, just before the crisis, the Court’s priority in relation to financial stability was ‘focus’. It was seeking to prevent the Bank engaging in too wide a range of issues—in other words, it sought cost reduction and minimisation of Bank involvement.[1] When it became evident that there was a deep financial stability problem, the non-executive directors demanded more information, apparently in order to give themselves the assurance that they had discharged their fiduciary duty.[2] The non-executives appeared to be particularly anxious about their own positions in June 2008 when they considered how they might respond to a Treasury Committee request for a paper on the Court’s role in relation to financial stability.[3]
“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. They may have achieved the opposite: before the crisis, they reinforced the Bank’s mistaken decision to downgrade financial stability; during the crisis they consumed the Bank’s time with their demands for more information in an attempt to cover themselves.
The performance of and relationships among the ‘Tripartite’ (Treasury, Bank of England, Financial Services Authority)
“The minutes reveal that the Bank executive completely reversed its position on the Tripartite framework: at the start of the Northern Rock crisis the Court was told by the Bank executive (and by the then Chairman of the FSA) how well it was working.[4] Soon, though, it was told that tensions were evident.[5] But before long the Governor was telling the Court that the Tripartite arrangements were “not sufficiently workable or relevant to managing a crisis”.[6] The executive did not give a full explanation for this transformation in view. Nor did the non-executives ask for one. It appears that the executive did not take the Court fully into its confidence as to what was really going wrong with the Tripartite. Nor does the Court appear to have taken the initiative to examine the crucial issue of how strong and effective the Tripartite relationships were proving to be. Those relationships were later found to be seriously wanting.
Lack of challenge to a monolithic executive
“There is very little sign from the minutes of any differences of view among the senior executives of the Bank who were informing the Court about what was happening. Nor did the non-executive directors attempt to examine the different policy positions that might have been considered. The Bank appears to have been a very hierarchical organisation, with clear signs of ‘groupthink’ among its leadership. The executive rarely acknowledged possible weaknesses in its views or, other than grudgingly, admitted that it might have been unprepared for the crisis.[7] For example, it barely acknowledged the Bank’s dependence on the swap line provided by the Federal Reserve, which enabled it to lend much-needed dollars in the autumn of 2008. Nor did it discuss with the Court what might have happened had the swap line not been made available.[8]
“The Court does not seem to have challenged the executive strongly. Even after the crisis, the Governor’s view (in the draft strategy for his second term) that monetary policy should remain the main purpose of the Bank, and that financial stability work should be merely ancillary to monetary policy, was examined only mildly, with a suggestion that the Bank’s financial stability role be given more emphasis.[9] The non-executives acted on occasion more as cheerleaders for the executive’s views, and accepted its policy priorities. For example on 12 September 2007, just before the run on Northern Rock, the Governor’s expression of his view that the risk of moral hazard should be paramount was accepted and applauded, with only a single query about the alternative risk of severe damage to the financial system. Little or nothing appears to have been done to ensure that the risks associated with the emphasis on moral hazard had been thoroughly examined and understood by the Bank.[10]
“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. Both should have been the bread and butter of a meaningful board. On occasion individual directors did ask searching questions. But the executive tended to swat them away. There is little evidence of persistence by the non-executives on such points.
Curious priorities
“The non-executive directors were very sensitive in 2008 about an apparent leak from among their number about a Deputy Governorship appointment, and when a further leak occurred it considered recruiting a QC to conduct an inquiry.[11] But it apparently did not have the same level of concern about the leak that allowed the BBC journalist Robert Peston to report on 13 September 2007 that Northern Rock had applied for emergency liquidity assistance. This leak was much more serious. The Court could not be certain at the time that it had not come from within the Bank. But it took no action.
“These minutes describe the Court of seven years ago. The Treasury Committee identified chronic weaknesses in the Court in its Report on ‘Accountability of the Bank of England’ in 2011. It recommended that the role of the Court be substantially enhanced. The Committee argued that it needed fewer, more expert members. It recommended that the Court should take the initiative to conduct retrospective reviews of Bank policies and performance and thereby give assurance to the public and Parliament about an institution whose workings, even in the best of economic times, can be opaque.
“The Court needs also to be able to elicit the best performance from the senior people in the Bank, and to act as a restraint on the risk—inherent in the structure and powers of the institution—of the emergence of an over-mighty Governor. Even when a Governor is committed to proceeding by consensus, as Dr Carney promised before his appointment, there remains the risk of executive ‘groupthink’—and the governance structure needs to be capable of addressing it.
“Taken as a whole, these minutes make the clearest possible case for radical reform of the Bank’s governance and the need to address the manifest inadequacies of the archaic approach upon which the Bank were relying during the crisis. The Treasury Committee has consistently pressed its views since the publication of its Report in 2011, with support from the Joint Committee on the Draft Financial Services Bill in 2011 and from the Parliamentary Commission on Banking Standards in 2013.
“This pressure has now borne fruit with the radical and welcome reforms that were announced by the Governor of the Bank on 11 December 2014. This provides the Bank with the opportunity to develop an organisational structure more recognisably that of a modern institution, in keeping with its greatly expanded powers and responsibilities.
“The saga of obtaining and publishing these minutes demonstrates the determination and capacity of the Treasury Committee to secure much higher levels of transparency from the Bank. Awareness of the likelihood of publication in future will change behaviour, largely for the better. Publication of these minutes represents a major development in the way Parliament scrutinises this super-quango.”
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