7th January 2015
The Bank of England’s lack of awareness of the impending financial crisis has been laid bare in the newly-published minutes of meetings between senior staff in 2007.
A month before the run on Northern Rock top-secret meetings among officials at the helm of the Bank of England congratulated themselves on their handling of the economy to date.
While they did highlight liquidity as a central concern, the Bank’s directors admitted that they would not be able to prevent a flight of money from a lender should public and investor confidence in an institution collapse.
Officials at the Court of the Bank of England were only in the preliminary stages of work to prevent such an occurrence when Northern Rock’s difficulties emerged.
The Bank used code names to refer to the institutions it believed were in trouble. Royal Bank of Scotland (RBS) was known as “Phoenix”, and Lloyds TSB as “Lark”.
Andrew Tyrie, Chairman of the Treasury select committee , said: “The minutes show that during the crisis the Bank of England did not have a board worthy of the name. This mattered. And it still matters. It is why the reforms announced on 11 December 2014 by the Bank are a valuable step in the right direction.
“The Court’s job should not have been to second guess the Bank’s executive or policy-makers. But it should have been able to provide effective challenge to the executive, and to make clear that, where appropriate, it would conduct retrospective reviews of Bank policy and performance.
He said that there are many examples of the failures he describes in the minutes.
“As late as July 2007, just before the crisis, the Court’s priority in relation to financial stability was ‘focus’. It was seeking to prevent the Bank engaging in too wide a range of issues—in other words, it sought cost reduction and minimisation of Bank involvement.
” When it became evident that there was a deep financial stability problem, the non-executive directors demanded more information, apparently in order to give themselves the assurance that they had discharged their fiduciary duty.”
He said that the non-executives appeared to be particularly anxious about their own positions in June 2008 when they considered how they might respond to a Treasury Committee request for a paper on the Court’s role in relation to financial stability
“Understandable though these instances of back-covering may have been, the non-executive directors appear to have done little thinking of their own about financial stability and to have added little or no substantive value to the Bank’s work on it,” said Tyrie.
“They may have achieved the opposite: before the crisis, they reinforced the Bank’s mistaken decision to downgrade financial stability; during the crisis they consumed the Bank’s time with their demands for more information in an attempt to cover themselves.”
Tyrie added: “Taken as a whole, these minutes make the clearest possible case for radical reform of the Bank’s governance and the need to address the manifest inadequacies of the archaic approach upon which the Bank were relying during the crisis. The Treasury Committee has consistently pressed its views since the publication of its Report in 2011, with support from the Joint Committee on the Draft Financial Services Bill in 2011 and from the Parliamentary Commission on Banking Standards in 2013.”