The Government agrees that a limited statutory power of direction for the Chancellor over the Bank in a time of financial crisis would be helpful in clarifying lines of responsibility and accountability…
Or — an interesting power-shift in the UK’s Financial Services bill, just published by the Treasury at pixel time.
Essentially the Chancellor will be able to pull rank on the Bank of England on deciding what to do with stricken banks when there is a risk that “public funds” (read: taxpayer’s money) might go down the toilet. You can see why this has been done — there’d be a concern over democratic consent to use of the public purse, etc.
The juicy details are in a memorandum of understanding between the Treasury and the Bank… inclusive of the thorny subject of Emergency Liquidity Assistance (ELA):
The Bank has primary responsibility for financial stability and operational responsibility for managing financial crises. But consistent with the Treasury’s overall responsibilities, the Chancellor may, in some circumstances during a financial crisis, use additional powers to direct the Bank. This is provided for in Section [57] of the Act, which allows the Chancellor to direct the Bank to:
• conduct special support operations for the financial system as whole, in operations going beyond the Bank’s published frameworks;
• provide ELA in a support operation going beyond the Bank’s published frameworks to one or more firms that are not judged by the Bank to be solvent and viable;
• provide ELA in a support operation going beyond the Bank’s published frameworks to one or more firms on terms other than those proposed by the Bank; and
• implement a particular SRR stabilisation option
(SRR = Special Resolution Regime. It lets the Bank wind down lenders that have gone bust.)
We also found some of the operational plans interesting:
Where the Chancellor directs the Bank to conduct a support operation, either to the financial system as a whole or to one or more individual firms, the Bank will act as the Treasury’s agent. The Bank will set up a Special Purpose Vehicle (SPV), separate from the Bank’s balance sheet, to effect the support operation. The Bank and the Vehicle will be indemnified by the Treasury. Where the Treasury has determined that the operation needs to be carried out covertly, the Bank will execute the operation in a way which best ensures that the existence of the operation does not become public.
The Treasury will decide whether the Vehicle shall be financed through the issuance of government securities, by a loan from the Bank with share capital provided by the Treasury or via another mechanism. When the Vehicle is financed by a loan from the Bank or would otherwise affect the Bank’s balance sheet, the Bank will decide, consistent with its operational independence in monetary policy, whether and how to offset the resulting expansion of central bank reserves.
It’s not a million miles from how the Bank does QE at the moment — the Asset Purchase Facility is technically a subsidiary company of the BoE and receives a government indemnity.
The MOU has the usual ‘supreme emergency’ justification you see in public policy regarding extended government powers (“This is a backstop power, and it is not anticipated that its use will be considered in the majority of crisis situations” etc). The Bank of England seems pretty happy with the arrangement:
Though is this banks-to-government-to-central bank entwining, or what?
Related link:
No tail risk please, I’m a bank – FT Alphaville