Lord Myners unfair to Bank of England
SO Lord Myners, the City minister, believes the Bank of England to be too bookish, too rarefied almost, to take on the regulatory functions currently controlled by the Financial Services Authority. As he told us in an interview yesterday, he sees it as an academic institution imbued with a culture at odds with that required to regulate banks, which he presumably sees as more akin to hand-to-hand combat.
I’m afraid I must disagree on this (and most other points) with Myners. The Bank is more academic than it once was – governor Mervyn King hailed from the London School of Economics, after all – but it is far from being an ivory tower. Its staff are well aware that they are working in the real world, with real financial institutions, not the disaggregated agents you read about in advanced macroeconomic textbooks. However, it is true that it has lost a lot of skills and institutional knowledge since the creation of the FSA – but that is exactly why the Tory reforms would actually help.
It makes sense, as the Tories are proposing, for academic economists, City economists, practitioners and regulators to work closely together, to talk to each other and to be in constant conversation. This sort of interaction would probably have helped, even if marginally, the authorities spot the credit bubble. It would be no panacea, and clearly it could easily backfire and lead to regulatory capture. But in the main the Tory plan makes sense, at least in the slightly vague form that we have been presented with.
Myners’ points, by contrast, are unconvincing. To say the Bank does not actually do things goes against all the evidence. Witness, for example, the special liquidity scheme, which was entirely devised and executed by the Bank, its aggressive interest rate cuts, its policy of quantitative easing, the action over the Dunfermline Building Society (executed with minimal disruption) and the introduction of the discount window. All of these were actual hands-on, real world policies taken in just over a year.
BCCI and Barings were one-off bank failures as a result of fraud. They had nothing to do with systemic breakdown or the Bank’s supposedly defective culture. Last but not least, Myners’ accusation that the Tories have misjudged the “competence and culture” of the Bank is nonsense: it supervised banks for years until 1997 and in retrospect it is now obvious that system worked better.
None of this is to say that the Bank has performed perfectly: I happen to believe that its defence of consumer prince index targeting (which of course it was forced to follow by Gordon Brown) was misplaced and wrong. I also think some of its hints about banks being too big have been unfortunate. The Tories, for their part, have not given enough detail of their plans and have thus allowed panic to set in at the FSA. There are plenty of unanswered questions. Take the Takeover Panel: at the moment it is self-financing through document fees and a levy on deals. This might have to change if new costs are incurred or if they were to have to start having to review prospectuses.
But we should be having a rational, grown-up debate about what to do next. Either we keep the current system and reform it; or we scrap it and give the job to the Bank. The politicans need to put their case; and the public will have a year to decide. [email protected]