The Chancellor will have a power of direction over the Bank of England during future financial crises, under new Government proposals.
The draft financial services bill proposed the Chancellor be responsible for all decisions involving public money or liabilities. The Treasury would also have been able to veto any bank resolution plans put forward by the Bank of England once its governor had informed the Chancellor of a “material risk” to public funds.
The Treasury select committee and the joint committee on the draft bill were both concerned that the powers were not clear enough on who was in charge during a crisis.
In guidance to the financial services bill, published today, the Government accepts the recommendation from both committees that the Chancellor should have a power of direction over the Bank.
It says: “The Chancellor may deploy the power following notification by the Governor of a material risk to public funds. Although the Government does not consider it likely that this power would ever be needed in a crisis, it recognises the force of the argument that such a change will enhance accountability for the use of public money in a crisis by putting beyond legal question where ultimate responsibility lies – with the Chancellor and the Treasury, accountable to the wider public through Parliament.”
The Bank will continue to have operational autonomy when managing threats to stability in which public funds are not at risk.
Although the Government says the power is unlikely to be needed, there were occasions at the height of the 2008 banking crisis when the Government and the bank were at loggerheads over whether it was a crisis of liquidity or capital. The Treasury highlights that the power of direction includes the provision of liquidity to an individual firm or the wider market.
In his memoirs, former Chancellor Alistair Darling slammed Bank governor Mervyn King for being “slow to recognise the nature” of the banking crisis. While Darling believed that it was a crisis of liquidity as well as low capital, King considered it one of just capital levels. Darling slammed the Treasury’s inability to direct the bank as this argument raged. “The core problem at the Bank is the way it is run as an autocratic fiefdom of the Governor,” he wrote.
He added: “My frustration was that I could not in practice order the Bank to do what I wanted. Only the Bank of England can put the necessary funds into the banking system; indeed, that is one of the core purposes of a central bank. The Bank was independent and the Governor knew it.”
The bill will also see the Treasury and the Bank have a statutory duty to co-ordinate their actions in times of crisis.