Large Says BOE’s New Powers Need Not Overwhelm Policy Makers
Former Bank of England Deputy Governor Andrew Large said the expansion of the bank’s powers to include financial regulation may be manageable, and keeping them in a separate institution presents its own problems.
Lawmakers are considering a new bill that will give the central bank tools to promote financial stability as it absorbs the Financial Services Authority’s oversight functions. The breadth of responsibilities led Labour Party lawmaker Ed Balls to say in April that the person who replaces Governor Mervyn King after he retires next year “will face a near-impossible task” to manage it all.
“Systemic policy and supervisory policy do interact, there’s no question about it,” Large said in an interview in London yesterday. “Managing the process of how they work together may be easier than if the activities were in two separate entities. There’s no panacea.”
Chancellor of the Exchequer George Osborne said this month he will further expand the bank’s goals by making it a “legal requirement for the Financial Policy Committee to report, for every action it takes, how that action is compatible with economic growth as well as stability.” The panel will present the results of its latest policy meeting, and its semi-annual report on Financial Stability, on June 29.
“There’s little doubt the bank is being given very wide- ranging powers,” Large said. “As an unelected body in any democratic process, questions are going to be asked about how accountability can be assured.”
Speaking at a conference hosted by the Official Monetary and Financial Institutions Forum, Large said it was “entirely sensible” to give the FPC a secondary objective concerning growth, modeled on the goals for the Monetary Policy Committee. However, giving the two objectives equal footing may allow policy to get “hijacked” by those looking to aid expansion.
“That would be a recipe for disaster,” he said. The skill sets needed for both goals are different, and with a dual mandate, “things tend to fall between the cracks,” he said.
Large, who became deputy governor in 2002 and left in 2006, also said that officials in heavily indebted countries need credible fiscal plans to keep “bond vigilantes” at bay. Still, some types of spending may be acceptable, such as infrastructure projects.
“Certain types of infrastructure expenditure, if well thought through, will be regarded by bond vigilantes as providing a return on investment and therefore justifiable,” he said. “To the extent that people are involved in those projects it can have an impact on confidence, demand and supply.”
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