RegulationJan 7 2015

Tyrie attacks Bank of England crisis conflicts

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Tyrie attacks Bank of England crisis conflicts

Bank of England executives and non-executive directors on its Court failed to adequately respond to the financial crisis due to hierarchical ‘groupthink’, widespread conflicts of interest and self-interested back-covering, Andrew Tyrie has said.

Responding to the publication today (7 January) after a six-year wait of the minutes from the Court of the Bank of England covering the period 2007 and 2009, Mr Tyrie stated that they show that during the crisis the Bank of England did not have a board worthy of the name.

In its own statement to go alongside the minutes, the Bank admitted during the period it was operating within a limiting statutory framework which has since been revised, with the court much larger than at present.

In particular it cited “a number of members had standing conflicts of interest” and that there was no provision for a non-executive chairman.

The notes show the bank was apparently unaware of the impending crash up to a month before it happened, revealing that while liquidity was identified as a “central concern” in July 2007, no action was taken.

According to FTAdviser parent paper the Financial Times, the minutes also reveal that former governor Lord King kept the Bank’s governing body in the dark on key matters of internal dissent and denied non-executive directors information about financial stability.

Lord King told the FT: “What matters to the country are the decisions we took, and those decisions prevented a repetition of the Great Depression and made it possible for the recovery that is now underway.”

In addition to the comprised nature of the board, the Bank also said in its statement it was restricted and had no powers to take actions to manage macro-prudential risks as it was not responsible for banking supervision following the establishment of the Financial Services Authority.

“The roles, in a crisis, of the bank, the Treasury and the Financial Services Authority were ill-defined.

“These deficiencies were rapidly identified during the period covered by the minutes, and were addressed both by the 2009 Banking Act and subsequently by the 2012 Financial Services Act, which radically changed both the role of the bank and the structure of its governance.”

The Treasury Committee has been calling for the minutes to be released since 2011, so its chairman Andrew Tyrie welcomed the move, but also levelled strong criticism of executives and the role of the court in particular.

“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.”

Mr Tyrie stated that even when questions were asked by individual non-executive directors, the executive usually presented a unified front to the Court, apparently rendering it of little or no use as a forum for creative discussion and constructive challenge.

The minutes reveal several examples of this, with Mr Tyrie accusing the Bank of being a very hierarchical organisation, with clear signs of ‘groupthink’ among its leadership. He also sought to criticise the court for not challenging the executive strongly.

“The executive rarely acknowledged possible weaknesses in its views or, other than grudgingly, admitted that it might have been unprepared for the crisis.

“The Court was almost entirely reactive: there is hardly any sign of its non-executives coming forward with suggestions or constructive challenges to the assumptions of the executive.”

Mr Tyrie stated 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.

“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.”

The chairman of court Anthony Habgood said that the minutes highlight the importance of the role of Court in ensuring the Bank is robustly governed.

“While successive reforms in recent years have significantly enhanced Court’s capability to hold the Bank’s executive management to account, there is scope to go further, with a simpler structure and a clearer commitment to accountability.

“As chairman of the Bank’s board, I will do my utmost to ensure that the bank is open, accountable, trusted and above all, well-governed.”

peter.walker@ft.com