Former Bank of England policy makers Willem Buiter and Kate Barker said ownership of financial stability should be with the U.K. Treasury rather than Governor Mervyn King, criticizing a government overhaul of regulation.
“The Bank of England is greatly overburdened and too powerful in this proposed construction, especially the governor and the two deputy governors,” Buiter said at a U.K. parliament hearing in London late yesterday. “The obvious solution is to remove prudential supervision from the bank.”
Britain’s government is planning the biggest shakeup of regulation since 1997, scrapping the current banking regulator and handing the powers to a new authority within the Bank of England. The plan will also create a Financial Policy Committee chaired by King, entrenching his responsibility for financial stability as well as monetary policy.
“The reform of financial-stability management in this country is disastrously misconceived,” Buiter told the Treasury Select Committee, which scrutinizes the Bank of England. “The first mistake is that the Treasury should be at the center of financial stability. It is now on the sidelines.”
He said the FPC should be chaired by Chancellor of the Exchequer George Osborne, in a model similar to that in the U.S.
Kate Barker, whose term as a policy maker at the central bank ended last year, agreed that responsibility for financial stability should lie more with Osborne rather than King, proposing that a “lot of the onus” should be on the Treasury.
“I think I would add to Willem’s proposal that the responsibility isn’t moved away from Treasury as much as today,” Barker told the committee. A separate body could provide “independent challenge and commentary” on policies such as capital requirements, she said, adding, “You could ask the bank to perform that role, they seem very well placed.”
Another former policy maker, Sushil Wadhwani, said the central bank’s governing board should have more power as policy makers get control over financial stability.
“It’s important to make sure that the court is given more powers, especially if” the central bank is “becoming more powerful, to prevent an accountability deficit,” Wadhwani said at the hearing. “We must do everything in our power to make sure there are sufficient checks and balances.”
Buiter, who is Citigroup Inc. chief economist and said he was speaking in a personal capacity, told the hearing that the Bank of England’s board is “irrelevant and should be abolished.” He said the bank’s shareholder is the U.K. Treasury and that the “board of directors is you,” referring to the committee chaired by lawmaker Andrew Tyrie.
Asked by lawmakers what areas the committee should focus on in any inquiry into the central bank, Wadhwani said they should look at issues such as the collapse of Northern Rock Plc and whether monetary policy should have “leaned against the wind” before the crisis.
He also noted questions about the bank’s economic forecasting models.
“It was very odd that they were running a forecasting model with no role for bankruptcies and no role for credit constraints,” he said. “That certainly belongs” in an inquiry.
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