More support for breaking link between RoE and pay
Andy Haldane, the Bank of England’s executive director for financial stability, is considered one of the most original thinkers in any central bank.
Mr Haldane, to his credit, not only picks holes in existing practices, but also suggests possible fixes.
His call for regulators to lower capital and liquidity buffers has, however, largely fallen on deaf ears, with the majority of the interim Financial Policy Committee against it. But another of his ideas appears to be more popular.
A mixed message from the FPC
The Bank of England’s Financial Policy Committee statement, out today, has left a lot of people scratching their heads.
The first of two recommendations calls on banks to “take any opportunity they had to strengthen their levels of capital and liquidity so as to increase their capacity to absorb flexibly any future shocks, without constraining lending to the wider economy”. The second warns that “some actions taken to raise capital or liquidity ratios could potentially worsen the feedback loop between the financial sector and the wider economy, and so should be avoided”.
At first glance, the recommendations appear contradictory. They are not. But they are conflicting.
BoE minutes: The other policy options
The minutes of the September Monetary Policy Committee meeting make QE2 a matter of when, not if.
However, as FT Alphaville’s Neil Hume writes, the MPC also discussed three other options. From the minutes:
The Committee also discussed a range of other possible policy options including: changing the maturity of the portfolio of assets held in the Asset Purchase Facility; revisiting the earlier decision not to lower Bank Rate below 0.5%; and providing explicit guidance about the likely future path of Bank Rate beyond the information about the Committee’s judgement of the medium-term outlook for inflation contained in the Inflation Report and the MPC minutes. At the current juncture, none of these options appeared to be preferable to a policy of further asset purchases should further policy loosening be required.
FPC: Bank ‘insider’ unlikely to make the final cut
The appointment of Alistair Clark to the interim Financial Policy Committee raised a few eyebrows among the Treasury Committee.
It was not because they thought he lacked experience. Rather, it was that Mr Clark, who worked at the Bank of England for 36 years and was seen as one of the governor’s closest advisers during the crisis, was named one of four “external” members.
The committee, already concerned that there are too few external voices on the FPC, indicated that it was none too keen on an “insider” such Clark being appointed as one of the externals once the interim body becomes statutory.
“It is odd that the new regulatory structure makes an unrepentant BOE even more powerful with respect to regulatory matters,” writes former MPC member Sushil Wadhwani in The Future of Finance, a collection of essays. “In my time at the MPC at the Bank, I was surprised by the lack of interest in issues relating to financial markets. Indeed there seemed to be a deliberate policy to run down resource in the Financial Stability wing.”
Strong words. But the argument against giving regulatory powers to the Bank of England is not, however, that they don’t deserve them. Rather, Dr Wadhwani argues that monetary policy and macro-prudential policy need to be able to work against each other, or, as he puts it, “the use of monetary policy to ‘lean against the wind’ is critically important in its own right and to the success of the ‘macroprudential’ policy to be adopted by the [Financial Policy Committee].”
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Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Ralph Atkins, Frankfurt bureau chief, has been writing about European economics and politics for the Financial Times for more than 20 years following an economics degree from Cambridge. He has been watching the European Central Bank and eurozone economies since 2004. He has previously worked in London, Bonn, Berlin, Jerusalem and Brussels. RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
James Politi is US economics and trade correspondent for the Financial Times, based in Washington DC. He joined the Washington bureau in January 2008 following four and a half years as US deals correspondent covering M&A and private equity. James Politi joined the FT in London in 2000 with an MSc at the London School of Economics, and undergraduate degrees from Georgetown University and the University of Florence. RSS
