The Government has proposed the Chancellor should have a power of direction over the Bank of England in times of crisis. The power was added to the Financial Services Bill as a response to criticism that earlier plans were not clear enough about who would be accountable for decisions involving the use of public money.
Taking on board recommendations from Parliamentary committees, the bill gives the Chancellor of the day a power of direction over the Bank in matters requiring the use of public funds. This might include emergency liquidity assistance to individual firms or sectors, partial bailouts or taking firms into temporary public ownership.
The powers will be triggered when the Bank, through the governor of the day, informs the Chancellor there is a “material risk” that public funds might be required.
But, one of the main problems in dealing with the crisis was that the governor of the Bank and the Chancellor disagreed over the nature of the crisis and the necessary remedial action.
So, apart from the woolly nature of what exactly a material risk is, what if the Chancellor wants to act but the governor says there is no risk to public money? What if other senior regulator’s disagree with the governor? As it stands, the Chancellor could be left relying on a general power of direction from the 1940s that has never been used.
During a debate on the bill last night, Shadow Chancellor Ed Balls said Bank deputy governors and other senior regulators might feel a threat poses a material risk to public funds when the governor does not but they have no official channel to raise it with the Chancellor. He said this represents a “deeply confused and highly dangerous” hole in the power.
He said: “The head of the PRA or the head of the Financial Conduct Authority could have a different view and say, in their judgment, the threat to the company and to the system is so great it justifies action, even if the governor judges the moral hazard risks from intervention override that threat, and therefore there should not be a request for public funds.
“In the current system, the Chancellor would hear from the head of the FSA whereas under the new system and the memorandum of understanding he will not hear, other than from the person of the Governor.”
Chancellor George Osborne ducked the point on the heads of the PRA and the FCA but said allowing deputy governors to bypass the governor would be a “recipe for division” in the Bank and risks blurring lines of accountability.
Conservative MP and member of the joint committee on the draft financial services bill David Mowat said allowing Bank deputies to act as whistle blowers could create confusion within the Bank.
It seems that unless future governments resort to the “nuclear option” of a more general power of direction over the Bank from the Bank of England Act 1946, Chancellors wanting to take action could be left sitting on their hands waiting for the nod from the Bank to get involved. However, the Treasury aiming nukes at Threadneedle Street is unlikely. Even Alastair Darling refused to do it when he was hamstrung by disagreements with the Bank over how to deal with crisis. Last night Osborne said: “That general power of direction has never been used, so it is a nuclear option that might blow up anyone who tries to use it.”