The Bank

20 February 2012 | By Samuel Dale

Bank of England governor Mervyn King is arguably about to become the most important man in UK financial services.

He chairs the Monetary Policy Committee that sets interest rates and heads the Financial Policy Committee, with responsibility for ensuring financial stability. That would be enough for most people but later this year he will take ultimate control of financial regulation, both prudential and conduct.

The Financial Conduct Authority and the Prudential Regulatory Authority will come under the Bank’s umbrella as part of chancellor George Osborne’s twin peaks system. This shake-up of financial regulation can only be fully understood by studying the Bank’s history.

In The Bank: Inside the Bank of England, Dan Conaghan examines the history of Britain’s central bank since 1997. He provides a fascinating insight into the corridors of this secretive institution and the individuals who have wielded power and changed it.

It begins before the 1997 general election, when the Labour opposition began floating ideas about Bank independence to de-politicise the setting of interest rates. Before 1997, interest rates were set by the chancellor and only under Ken Clarke in the 1990s did the Bank even provide a consultative role.

When Gordon Brown became chancellor, he created the MPC and handed financial regulation to a new body, the Financial Services Authority.
Independence had been a long-held goal of then-governor Eddie George, who wanted to set rates without political interference. For King, an economist and academic from the Midlands, the MPC was far more important than financial regulation. In fact, Conaghan believes King’s dislike of banks meant he was happiest without its responsibility.

It also, helpfully for King, created a deputy governor position as Howard Davies, previous occupier of the post, left to set up the FSA.
Davies opted to create a modern institution in stark contrast with the formality and traditionalism of the Bank. This was reflected in the glass building and modern interior of its Canary Wharf headquarters.

Fast-forward to 2010, when the Conservatives were on the brink of government with their own ideas about regulation. The financial crisis trashed the FSA’s reputation as an effective authority, leading Osborne to abolish it within months of becoming chancellor.

It has caused huge upheaval, with brokers seeing the effects in the repeated delays to individual registration. It also puts incredible power in the hands of King over huge swathes of economic and financial policy.

Conaghan offers interesting insights on how this power translates into the Bank’s relationship with government. He reports that Osborne and King have an un-minuted, secretive meeting once a week, accompanied by a good English breakfast. They update each other on the state of the economy and the way the political winds are blowing.

King is on to his third chancellor since he became governor in 2003 and he will have to step down next year, when his two five-year terms come to an end.

Nobody has experienced more change than King in the Bank’s 317-year history. This book provides a compelling account of those modern changes and how they affect today’s decisions.

If you are interested in finance and want to understand why regulatory changes are being made, you can do no better than to read this book.

Book review by Samuel Dale

If you enjoyed this article, sign up here to receive daily email updates from Mortgage Strategy and Follow @mortgagestrat