By Simon Miller
The Bank of England (BoE) is to examine its performance in regards the provision of liquidity to the banking system and the Monetary Policy Committee’s (MPC) forecasting capability.
Three reviews have been set up by the Court of the Bank of England to cover the provision of emergency liquidity assistance in 2008/2009, the framework for providing liquidity to the banking sector as a whole and the MPC’s forecasting capabilities. The reviews will be headed by Ian Plenderleith, Bill Winters and David Stockton respectively.
Although there has already been a reviews into the response to the crisis – most notably the Treasury Select Committee Report, The Run on the Rock – the reviews will concentrate on areas where the bank hand sole responsibility as “any wider inquiry would need to consider the actions taken by all the authorities together and would therefore need to be initiated and conducted by an independent body”.
The chairman of Court, Sir David Lees said: “The Court of the Bank of England believes it is important for the Bank to learn practical lessons from past experience in order to improve the way it operates in the future. These reviews will be undertaken by leading experts and will focus on three key areas of the Bank’s responsibilities.”
BoE governor Mervyn King added: “I welcome this set of reviews. Major changes to the operations of the Bank have already been made in the light of the financial crisis. These detailed, independent reviews will help to ensure that all the important lessons for the future have been learned.”
Scope of the reviews:
1) Provision of Emergency Liquidity Assistance in 2008/9
Specifically, the review will examine:
• The basis of the decisions to provide Emergency Liquidity Assistance (ELA) to each firm concerned.
• The governance arrangements within the Bank for making those decisions.
• The structure and terms of each ELA operation.
• The effects of those operations on the institutions concerned and on overall financial stability.
• The capability of the Bank to plan, implement and manage those operations.
Overall, the review will examine how the Bank discharged its responsibilities as lender of last resort in a crisis and make recommendations for the conduct of any such operations in the future.
2) The Bank’s framework for providing liquidity to the banking system
The review will examine:
• The operation of the Special Liquidity Scheme, established in 2008.
• The structure and terms of the Bank’s facilities, as set out in the ‘Red Book’.
• The operation of the reformed framework since its introduction in 2008.
Specifically, the review will consider:
• The effectiveness of the framework in implementing monetary policy decisions.
• Whether the framework is sufficiently flexible, and the range of collateral sufficiently broad, to satisfy demands for liquidity in times of stress.
• Whether a system of voluntary reserves targets is appropriate.
• Whether the price at which liquidity is available to the system is appropriate.
• Whether the framework deals adequately with the issue of ‘stigmatisation’.
• The capability and governance arrangements in the Bank to support the facilities in its framework.
Overall, the review will make recommendations to inform the future development of the Bank’s operations, consistent with its objectives to implement the MPC’s decisions and to provide liquidity insurance to the UK banking system.
3) The Monetary Policy Committee’s Forecasting Capability
The review will examine:
• The performance of the MPC’s projections for growth and inflation since 2008.
• The analysis presented to the MPC in the production of those projections.
• The processes followed by the MPC to produce projections.
• The capability of the Bank to support the production of the MPC’s projections.
Overall, the review will examine whether the MPC’s forecasting procedures allow it to take full account of the relevant risks and uncertainties, and thus support the MPC’s monetary policy decisions in order to meet the inflation target. The review will be used to inform decisions about the Bank’s forecasting procedures and methods.