Bank of England gets long to-do list for overhaul

LONDON Fri Nov 2, 2012 6:42pm GMT

A man walks past the Bank of England, in the City of London June 15, 2012. REUTERS/Paul Hackett

A man walks past the Bank of England, in the City of London June 15, 2012.

Credit: Reuters/Paul Hackett

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LONDON (Reuters) - The Bank of England needs to overhaul its internal structures to address a patchy forecasting record and open up to a broader range of views on the economy, three independent reviews of the central bank's operations recommended on Friday.

The Bank Governor Mervyn King and his deputies signalled qualified support for a number of the suggestions and pledged to evaluate the recommendations, and some of his former colleagues agreed there was work to be done.

Just five weeks before the announcement of a new governor, the reviews of the BoE's forecasting capabilities, its liquidity framework and its provision of emergency assistance to banks gave an extensive list for improvements.

One report said that due to the central bank's "centralised and hierarchical" structure, less senior employees seemed to "filter" recommendations to make them more palatable to senior staff, reducing the range of views and effectiveness.

Former central bankers also stressed the need to allow alternative views room to breathe as part of a close look at the architecture of the central bank, which will swell in size and importance with its new role as the financial watchdog from 2013.

"We need to redouble efforts to challenge the orthodoxies within these institutions," said former the Bank deputy governor John Gieve.

All three reviews raised the issue of clarifying the roles and cooperation of the rate-setting Monetary Policy Committee, bank watchdog the Prudential Regulation Authority and the new Financial Policy Committee, in charge of securing stability of the financial system as a whole.

The BoE's oversight body, the Court, launched the three reviews -- unique among major central banks -- in response to criticism of the bank's forecasting record as well as its role in the run-up to and during the financial crisis of 2007-08.

The head of Britain's parliamentary Treasury Committee kept up his call for an even wider review into the central bank's role during the crisis.

"The decision to commission these reviews fell well short of what was required," Andrew Tyrie said.

GROUP THINK

The reviews acknowledged the wide range of changes the central bank had gone through already.

The review of the forecasting record -- conducted by former Fed official David Stockton -- focused on how to avoid "inertia" that all regular forecasting exercises were prone to.

"An over-arching theme that cuts across many of the options offered below is the objective of increasing the number of 'entry points', both internally and externally, for alternative points of view about economic developments and their relation to the forecast and to policy," Stockton wrote in his report.

The nine policymakers prepare a consensus forecast for the quarterly inflation report, which provides the basis for policy.

Former external policymaker Charles Goodhart rejected the notion that "group think" was more dominant at the Bank then elsewhere.

"If people think that the present governor, or the governor's position, is that of a Sun King, what do you make of (former U.S. Federal Reserve chairman) Alan Greenspan for god's sake? Alan Greenspan would then be a Sun King to the power of three," Goodhart said.

Stockton said the MPC's recent forecasting performance had been noticeably worse than prior to the crisis, and somewhat worse than that of outside forecasters, persistently over-predicting growth and under-predicting inflation.

Among the 21 suggestions in his 59-page review are the introduction of staff forecasts, more exchange with researchers, improved participation and promotion of highly qualified staff, and an openness about the details of individual forecasts.

MPC CONCERNS

The 148-page review of the BoE's liquidity framework by former co-CEO of JPMorgan Investment bank Bill Winters said the system was in general "robust and broadly fit for purpose".

Winters suggested ways of removing any remaining stigma for banks seeking liquidity through the discount window facility.

He also stressed that governance of the framework and the coordination between all parties involved could be improved, something the BoE's Court should ensure.

"It should be informed of the implications for monetary conditions of other liquidity operations, and have the opportunity to express views on such operations if those implications were likely to be material," he said.

The view chimes with concerns voiced by external policymaker Martin Weale, who has noted that the Funding for Lending Scheme, put in place by the Bank and the chancellor, had an impact on monetary conditions.

(Additional reporting by Steve Slater and Olesya Dmitracova, editing by Mike Peacock)

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Comments (6)
DR9WX wrote:
Why do we need inflation?

Inflation is a wealth transfer mechanism from the people to the owners of assets.

I can dumb this down to ‘millions of poor people funding the dozens of Financial Elites.’

Oops, I have answered my own question.

Seriously, we have lots of intelligent men in Banking / Central Banking / Government. Do they not understand counterfeiting and fraud? Or do they believe it is for the general good of us all?

Let us see how this ends, 60 men versus 60 million people.

As always, do please carry on. This is absolutely fascinating.

Nov 02, 2012 12:51pm GMT  --  Report as abuse
DR9WX wrote:
Put this on your to do list.

Your target is :-

£100,000 for 3 bed detached homes with garages
(The wooden frame homes that are incredibly energy efficient.)

1% interest, fixed rate for 25 years
5% deposit
No fees

Nov 02, 2012 1:15pm GMT  --  Report as abuse
GlobalFamily21 wrote:
1. Affordable houses to the masses than free homes
2. Control and regulation of the banking and financial institutions
3. A new Global Economic System replacing the downtrodden former systems
4. Transparency than hidden agenda with respect to the dealings with the customers
5. Financial Discipline than Cuts
6. Growing Government sector enterprises as an alternative source of income and employment
7. Control and regulate the pricing strategies of the corporate sector
8. Regulation of the unscientific bonus Culture
9. Cap on the payment to the Corporate Executives
10. Reduce the gap between the top and bottom level employees
11. Insist statutory reserve for the banks until it reaches deposits and capital
12. More incentives to the cooperative banks than high-street banks
13. Unscientific credit rating should be replaced by systematic credit rating
14. Regulate the insurance sector
15. More power to the Central Bank

Nov 02, 2012 9:26pm GMT  --  Report as abuse
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