Bank of England Governor Mervyn King’s response to the financial crisis will be scrutinized after lawmakers pushed for an inquiry as the central bank prepares to take over financial regulation.
The Court, the Bank of England’s governing body, ordered a review of some central bank actions, including its conduct after the collapse of Lehman Brothers Holdings Inc. The investigation will cover the Emergency Liquidity Assistance program in 2008 and 2009, the framework for providing liquidity to banks, and the Monetary Policy Committee’s forecasting capability, the Court in London said yesterday.
The move follows a push by a cross-party committee of lawmakers for an examination of the central bank’s performance as Parliament debates a bill to give it new powers. While King told the panel in January that reviews have been carried out of all the Bank of England’s responsibilities, he said last month he would “welcome” another one if it was deemed necessary.
“It didn’t seem reasonable that we’ve had a massive financial crisis that required the bank to respond across a number of fronts, and that its decisions and decision-making process shouldn’t be reviewed in some independent way,” said David Tinsley, an economist at BNP Paribas SA in London and a former central bank official. “Critics of the bank will say this isn’t enough.”
Andrew Tyrie, who chairs the Treasury Select Committee that oversees the central bank, said as recently as May 3 that an examination of the handling of the financial crisis was still needed because lawmakers “still do not have firm and agreed conclusions about the mistakes that were made and which the legislation is, presumably, seeking to address.”
He said yesterday that an inquiry should have been done “much earlier, before the euro crisis deepened” to aid lawmakers debating the bill to expand the central bank’s powers.
Tyrie has also criticized the Court, saying in October that its refusal to disclose its discussions during the financial crisis was “unsatisfactory” and prevented Parliament from holding the central bank to account. He also said that he was “very concerned” on their grasp of funding provided to the bank’s financial-stability functions.
His panel’s inquiry into accountability at the central bank included calls for lawmakers to have veto power over the appointment or dismissal of the governor. Chancellor of the Exchequer George Osborne, who will appoint King’s successor when he retires in June 2013, rejected the recommendation.
The reviews will be led by former Bank of England policy maker Ian Plenderleith; David Stockton, a former head of U.S. research and forecasting at the Federal Reserve; and Bill Winters, chief executive officer of Renshaw Bay LLP and a member of the U.K.’s Independent Commission on Banking.
The Court said it expects to receive the report in October and will publish it “soon” after that. It ordered the inquiry because it is “important for the bank to learn practical lessons from past experience in order to improve the way it operates,” Chairman David Lees said.
“In the end, the chair of Court does have powers,” said Jens Larsen, chief European economist at RBC Capital Markets in London and a former central bank official. “The governor is not someone who would change his mind easily, but pressure from Court might have changed his view.”
The inquiry will address the “most intense period of the financial crisis,” which included the bailout of Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc along with the U.K.’s slide into recession, according to the court.
It will only cover areas where the bank had “sole responsibility” and will set aside events involving the so-called tripartite authorities that included the U.K. Treasury and the Financial Services Authority. It also won’t address the run on Northern Rock Plc in 2007 as these were covered in the TSC’s report “The Run on the Rock.”
“I welcome this set of reviews,” King said in the statement. “Major changes to the operations of the bank have already been made in the light of the financial crisis. These detailed, independent reviews will help to ensure that all the important lessons for the future have been learned.”