King Said to Have Faced Revolt on U.K. Credit Plan Talks
Bank of England Governor Mervyn King faced a revolt this year from policy makers he kept out of the loop on an emergency plan to spur U.K. economic growth, said two people with knowledge of the matter.
Monetary Policy Committee members Ben Broadbent, David Miles, Adam Posen and Martin Weale wrote to King after finding out he and key aides were privately designing the Funding for Lending Scheme, said the people, who declined to be named because the matter is confidential. The letter was written in the days before the plan to boost credit was announced June 14, the people said.
The complaint of the four so-called external MPC members, who are part-time officials appointed by the government, was that failing to inform them undermined the committee’s legitimate control over monetary policy and their ability to gauge and manage the economic outlook, one of the people said. King then shared information on the program before unveiling it, the people said.
The letter’s existence provides a glimpse of the factors at play when policy makers were torn on whether to expand stimulus amid questions over the potency of quantitative easing, three years after the bank began buying bonds and as the economy was in the throes of a double-dip recession.
It also follows recent criticism in probes of the central bank ordered by its governing panel, known as the Court, which questioned its governance. The confrontation over the FLS highlights the management challenge Bank of Canada Governor Mark Carney, 47, will inherit when he succeeds King, 64, in July.
Comment to Lawmakers
When asked for a comment, a Bank of England spokesman referred to a remark by Broadbent to lawmakers on June 26, in which he said that the externals were first informed at a meeting of the nine-member MPC on June 6-7.
“This was a policy, as I understand it, in its infancy at best, if not yet born at all,” Broadbent said. “So there was little to be done, except to inform the committee that there were discussions. There was nothing else to be discussed or said of it.”
Broadbent, Miles and Weale were unavailable for immediate comment, the spokesman said. Posen, who has since left the bank, declined to comment when contacted by e-mail.
King and Chancellor of the Exchequer George Osborne used speeches at the same event on June 14 to announce the FLS, which aims to stimulate the economy by giving banks access to cheaper funding in return for increasing credit to companies and households.
It was devised as the economy slumped again even after the central bank cut its key interest rate to a record low 0.5 percent and had spent 325 billion pounds ($525 billion) buying gilts. In July, the committee increased its asset-purchase program to 375 billion pounds.
The Treasury estimated in June that a 5 percent increase in lending would inject about 80 billion pounds into the economy. Data on Dec. 3 showed banks drew 4.4 billion pounds from the program in the first two months of operation. Banks have 18 months to tap the program.
“Exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times,” King said in his speech at the Mansion House in London’s financial district.
The plan marked a departure for King’s central bank, which had previously resisted calls for targeted measures to boost lending to the non-financial sector. He joined the central bank in 1991 and has been governor since 2003.
With his retirement pending in June, he has faced criticism for his management of the bank during the financial crisis. A review of the central bank’s framework for providing liquidity to banks released last month described governance as “centralized and hierarchical.”
The author, Bill Winters, a former JPMorgan Chase & Co. executive, said junior officials had a tendency “to filter recommendations” to senior staff based on what they assumed would prove palatable. Asked by lawmakers on Nov. 27 about the culture described by Winters, King said: “I don’t recognize it to be honest.”
Former BOE Executive Director Ian Plenderleith, who wrote a separate report on the central bank’s emergency liquidity, told lawmakers that two MPC members serving during the financial crisis in 2008 expressed concerns to him about being inadequately informed on the provisions.
Still, Plenderleith said in the report it was “understandable” that the full MPC wasn’t briefed at the time “given the extreme sensitivity” of the operations and it’s “not clear that the lack of information” had a “material impact” on the MPC’s decisions.
The government appoints four external members of the committee to three-year terms to ensure the bank benefits from outside expertise. The remaining five members of the panel are full-time staff, consisting of the governor, the deputy governor for monetary policy, Charlie Bean, the deputy governor for financial stability, Paul Tucker, the chief economist, Spencer Dale, and the markets director, Paul Fisher.
Miles, the longest-serving external member, having begun his term in June 2009, was previously chief U.K. economist at Morgan Stanley.
Posen, an American who led the charge for more stimulus, stepped down in August after three years to return to the Peterson Institute for International Economics in Washington as president. Weale was director of the National Institute of Economic and Social Research prior to joining the bank in July 2010. Broadbent is a former economist at Goldman Sachs Group Inc. who joined the central bank in June 2011.
Tension between the central bank executives and the external MPC members predates King’s time as chief. In 1999, when Eddie George was governor and King his deputy, some outsiders complained they weren’t allocated the staff necessary for their research projects. They were later assigned researchers.
“There was tension for a time on the resource side,” Charles Goodhart, an external member at the time, said in an interview. On the whole, not being included in discussions was “extremely rare and relatively unimportant,” he said.
The job of managing the committee will fall to Carney, who replaces King in July after being appointed by Osborne last month. He will become the first foreigner to run the Bank of England in its 318-year history.
“Mr. Carney will have to prioritize public engagement and open debate in the BOE, rather than closed international discussions and CEO-style decision making,” Posen wrote in the Financial Times on Dec. 1.
Asked about Carney on Dec. 10, King told the Economic Club of New York: “I think he’ll do a great job and they won’t miss me at all.”
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