Central Bank Reform and the Politics of Blame Avoidance in the UK

ABSTRACT

Following the financial crisis, the UK central bank gained important new prudential powers for upholding financial stability. Yet the reforms diverged significantly from the government’s original plans and arguably produced a suboptimal institutional design. Drawing on theories of blame avoidance, we argue that the changes were motivated primarily by the need to manage reputational risk. Prior to the 2010 election, the two main parties tried to deflect blame for the crisis by putting forward competing proposals for agency reconfiguration. In response, the Bank of England pursued a strategy of agency subversion aimed at reshaping the reforms to minimise future reputational damage. This involved pushing for ‘hard’ delegation to maximise control of new macroprudential powers, while using ‘fuzzy’ delegation to shift microprudential supervision down to subordinate agencies. The article sheds new light on the drivers of post-crisis reform and the importance and limits of delegation as a strategy of blame avoidance.

KEYWORDS:

• Central banks
• blame avoidance
• macroprudential regulation
• bank supervision

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Harpal Hungin is a doctoral research student at European University Institute. His research examines the transformation in the role and power of central banks since the global financial crisis.

Scott James is a Senior Lecturer in Political Economy at King's College London. His main research interests include post-crisis financial governance, business power and lobbying, and the future of UK–EU relations.

ORCID

Scott James http://orcid.org/0000-0002-4632-9288

Notes

1 The ECB distinguishes between three main supervisory models: (i) sectoral model: each sector (banking, securities and insurance) is supervised by one authority; (ii) ‘twin peaks’ model: responsibilities are allocated on the basis of the supervisory objectives, with prudential supervision and conduct of business regulation attributed to two different authorities; and (iii) single authority model: all the supervisory functions are allocated to a single authority, which covers both prudential supervision and investor protection (ECB 2010).

2 Interview with former senior Bank of England official (January 2015).

3 Interview with financial industry lobbyist, UK bank (December 2014).

4 Interview with former senior Bank of England official (January 2015).

5 Interview with former No. 10 senior official (November 2014).

6 Interview with HM Treasury official (January 2015) and former HM Treasury Special Advisor (November 2015).

7 Interview with former senior Bank of England official (January 2015).

8 Interview with senior Bank of England official (November 2013).

9 Interview with former senior Bank of England official (January 2015).

10 Interview with senior Bank of England official (November 2013).

11 Interview with former Bank of England official / financial industry executive (December 2013).

12 Interview with former No. 10 senior official (November 2014). Puzzlingly, the FSA Chairman, Adair Turner, remained relatively open-minded about their location. Our interviews suggest that this was because ‘he might have had half a chance’ at being given a senior role in the Bank in the near future. Moreover, in the run up to the election, the FSA received assurances that the changes would not necessarily be implemented: ‘They were given a strong indication … that the [Conservatives] wouldn’t go ahead with [the Sassoon Report] … It came as a bit of a shock to them when the new government decided it was going to go ahead’ (Interview with senior HM Treasury official, November 2014).

13 Interview with former senior Bank of England official (January 2015).

14 Interview with senior Bank of England official (November 2013).

15 Interview with former No. 10 senior official (November 2014).

16 Interview with former No. 10 senior official (November 2014).

17 Interview with senior HM Treasury official (June 2015). See also Conaghan (2012: 239-41).

18 Interview with former HM Treasury Special Advisor (November 2015).

19 The Treasury–Bank negotiations were overseen by a committee composed of the Chancellor of the Exchequer (George Osborne), the Treasury Permanent Secretary (Nick Macpherson) and Second Permanent Secretary (Tom Scholar), the Bank Governor (Mervyn King) and Deputy Governor (Paul Tucker), the FSA Chairman (Adair Turner) and Chief Executive (Hector Sants), which met every few months. The day-to-day negotiations were handled by a working group of senior officials. (Interview with senior HM Treasury official, November 2014).

20 We find no evidence that the financial industry had strongly-held preferences on central bank reform. There was little lobbying against the proposed changes, not least because many banks were quietly supportive:

The City banks always preferred dealing with the Bank as opposed to the FSA. They wanted a powerful Bank who speaks for them. Now though you have a powerful Bank that also kicks them about. But nonetheless I think they favoured this move. (Interview with former senior Bank of England official, January 2015)

From industry’s perspective, how the new powers would be used was a more pressing concern than where they were to be located: ‘I think most banks realised that regulation was going to get tightened, irrespective of the structure. So I don’t remember them being massively unhappy with this’ (Interview with former No. 10 senior official, November 2014).

21 Interview with senior HM Treasury official (June 2015).

22 Interview with former No. 10 senior official (November 2014).

23 Interview with senior HM Treasury official (June 2015).

24 For example, it was stipulated that the FPC should receive all its briefings from the MPC, ensuring that its decisions are made on the basis of information received from the latter (Interview with member of the Financial Policy Committee, April 2016).

25 Interview with senior Bank of England official (November 2013).

26 Interview with senior Bank of England official (November 2013).

27 Interview with senior HM Treasury official (June 2015).

28 Interview with former senior Bank of England official (January 2015).

29 Interview with senior Bank of England official (November 2013).

30 Interview with HM Treasury official (January 2015).

31 Interview with senior FSA/PRA official (November 2015).

32 Interview with senior FSA/PRA official (November 2015).

33 Interview with former senior Bank of England official (January 2015).

34 Interview with financial industry lobbyist, UK bank (December 2014).

35 Interview with former senior Bank of England official (January 2015).

36 Further evidence for this comes from the fact that under Governor Mark Carney, these institutional structures have undergone further revision. In particular, the Bank of England Act (2016) abolishes the PRA’s status as a subsidiary with its own board. This is designed to streamline decision making, and strengthen governance and accountability, as part of Governor Mark Carney’s ‘One Bank’ strategy (Reuters 2015). The changes, coming just two years after the original reforms were agreed, points to the suboptimality of the institutional compromise insisted upon by King. Notably, however, the blurred division of labour between the PRA and FCA for microprudential supervision remains in place.