Bank of England: A good start but not enough

Bank of England to review its performance during financial crisis Photo: Reuters/Toby Melville

The Bank of England has just announced a trio of reviews into its performance during the financial crisis. The focus, as the Governor of the Bank makes clear in the announcement, is "... to [help] ensure that all the important lessons for the future have been learned.”

This bout of self-examination is good news: the Bank is a key institution dealing with a continuing financial crisis of historic proportions and the results of the reviews will be useful in shaping how it deals with crises yet to come (and yes there will be more).

Bank of England governor Mervyn King Credit: Reuters/ Toby Melville

But many observers think there are two serious problems with the reviews. The first is that they come too late. Sir Mervyn King has been resolute, until now, that it's unnecessary to commission a report into the Bank's handling of the crisis, following the Treasury's and the Financial Services Authority's reports into their own record.

He has changed his mind, which is an embarrassing u-turn, but Andrew Tyrie, chairman of the Treasury select committee (and a critic of the Bank) told me this evening he thinks the report should have been commissioned in 2009 or 2010 when the FSA produced its report and before the euro crisis deepened.

The second issue is that their scope is too tightly defined: only covering

  • "The provision of Emergency Liquidity Assistance in 2008/9.
  • The Bank’s framework for providing liquidity to the banking system as a whole.
  • The Monetary Policy Committee’s forecasting capability."

I gather the Bank thinks these are the areas most likely to produce lessons for the future. Indeed, the third investigation, into the Bank's forecasts, is the most straightforward: the forecasts have consistently over-estimated growth and under-estimated inflation for years so an examination of these will be helpful.

But the investigation into Emergency Liquidity Assistance, for example, specifically excludes an investigation into why it didn't provide liquidity to Northern Rock (which collapsed so spectacularly).

Northern Rock collapsed in 2008 Credit: Reuters/Darren Staples/Files

Furthermore, the trio of investigations don't look at the broader structure and governance of the Bank, something which is much in debate as Sir Mervyn stands ready to assume more powers in financial stability and banking supervision which will make him arguably the most potent central bank governor in the world. Nor do the investigations look at the culture and approach of the Bank which some say led to 'groupthink': not enough healthy debate and exchange of ideas.

The Bank says it can only investigate areas over which it alone has control (and not areas involving the Treasury or the FSA) but I think there is room even within these limits for a broader examination of its performance.

It matters because the Bank is developing into an extraordinarily powerful body in the UK with little control by parliament (apart from the Chancellor appointing the Governor). Just as independence is a treasured principle of effective central banking, so transparency is a vital principle of good governance.