Financial Stability Board sees dangers in Bank of England 'group-think'

The Bank of England must guard against "group-think" as it shoulders formidable new powers over Britain's financial sector, according to a report published by global watchdog the Financial Stability Board.

In its latest healthcheck of the UK, the FSB – which is chaired by the Bank's governor, Mark Carney – praises the overall thrust of the reforms introduced by the coalition to prevent a future financial crisis, which included bringing the job of supervising the financial sector back to Threadneedle Street. But it warns that the crossover in membership between the Bank's financial policy committee, tasked with spotting future bubbles, and the interest rate-setting monetary policy committee, risks creating "group-think".

"Centralising the supervisory and systemic roles within the BoE may improve information flow, co-ordination, and a shared sense of purpose. On the other hand, such an arrangement increases the potential of creating a 'group-think' mentality, particularly since a large scope of responsibility is vested in a small number of senior executives," it warns.

Carney, and his deputies Paul Tucker and Charlie Bean, all sit on both of these key committees; though they are joined by independent members, which the FSB acknowledges will help to mitigate the risks.

The FSB is also concerned about how the fledgling FPC will exercise its authority to make recommendations to the new banking regulator, the Prudential Regulation Authority – also an arm of the Bank.

In his first setpiece speech last month, Carney promised to keep a close eye on the risks of a new housing bubble emerging, and use "tools other than interest rates", to clamp down on lending.

If its members spot a bubble emerging, one new tool at the FPC's disposal is to issue a so-called "comply or explain" directive to the regulator, asking it to control the availability of credit across the economy, for example.

But the FSB warns that it is unclear, "whether this steer should be expressed in general terms by leaving the details of the response to the agencies, or whether the recommendations can set out specific regulatory details that should be changed".

If the FPC's instructions to bank regulators end up being too detailed, the FSB says, "the FPC may end up having substantial influence over the details of the prudential framework - an outcome that may create tensions between the relevant agencies and confusion in the marketplace." It calls on the Bank to "publicly clarify the FPC's approach". Helping the public to understand how the FPC works may also be a challenge, the FSB warns, especially since it has more levers to pull than the MPC.

"The FPC will need to better develop understanding and acceptability of the new framework and policy among market participants and the public. This is a more challenging task than for monetary policy decisions given the broad remit of possible policies that can be employed (or recommended) by the FPC and their more complex transmission mechanism." It suggests the Bank might want to use, "targeted public speeches, meetings with industry representatives and the public, website development)," to get its message across.

The Basel-based FSB was established in the wake of the Great Crash to co-ordinate the work of central banks and regulators around the world in strengthening the international financial system.

Its "peer review" of the UK was carried out by an international team of senior central bankers, headed by Luiz Pereira da Silva, deputy governor of the central bank of Brazil.

Carney said: "The Bank of England welcomes the final report of the FSB's Peer Review of the UK's financial sector standard and policies, and looks forward to working with other relevant UK authorities to review and assess the Report's recommendations."

Powered by article was written by Heather Stewart, for on Tuesday 10th September 2013 18.13 Europe/London © Guardian News and Media Limited 2010


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