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Bank of England’s Culture Attacked

Excessive deference and hierarchy is damaging the Bank of England's effectiveness, according to three independent reviews that criticize the central bank's culture.

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The reviews into BoE operations during the financial crisis found that officials in Threadneedle Street had learnt "rapidly" and handled the crisis "effectively", but were also critical of the Bank's governance culture.

The findings echo public criticisms by former chancellor Alistair Darling, many former BoE staff and some Treasury officials, who say privately that they hope the next governor will shake up the Bank.

The three reviews – commissioned in May and published on Friday – cover the BoE's handling of emergency lending to HBOS and Royal Bank of Scotland in late 2008, its current liquidity operations and its economic forecasts.

Bill Winters, the veteran banker who wrote the liquidity review, concluded that the BoE was too "centralized and hierarchical".

"Less senior staff undertake analysis of a wide range of policy options, and are often willing to challenge their superiors," Mr. Winters said. "But there appears to be some tendency for them to filter recommendations in such a way as to maximize the likelihood that senior staff will find the recommendation palatable."

David Stockton, a former U.S. Federal Reserve official, investigated the BoE's traditionally over-optimistic growth and inflation forecasts. He called on senior officials to examine "more deeply and more systematically ... the lessons that can be gleaned from episodes of large forecast errors".

Mr. Stockton's review of the Monetary Policy Committee's forecasting also criticized the Bank for its opacity and a culture that discourages independent thought.

Senior BoE insiders have told the Financial Times they found some of the reviews difficult reading, but would act on their recommendations.

The BoE's court, the governing body which itself has been criticized as ineffectual, promised to investigate these cultural issues but delayed a detailed response, probably until a new governor is appointed to succeed Sir Mervyn King.

While the reviews ranged outside their tightly-drawn remits to address wider cultural issues at the Bank, the conclusions did not satisfy those who have sought a wholesale review of its conduct before and during the crisis. Andrew Tyrie, chairman of the Treasury Select Committee, said a comprehensive review should have been undertaken long ago "not just to enable the Bank to learn from its past mistakes but also to inform the legislation currently before Parliament".

"The fact that it took so long to obtain even these reports illustrates the Bank's defective governance," he added. The Treasury and Financial Services Authority have already undertaken wider reviews into their conduct before and during the crisis.

Mr. Winters' report called on the BoE to to put less emphasis on preventing moral hazard and more on being the "market maker of last resort".

Both Mr. Winters and Ian Plenderleith, who reviewed the BoE's provision of emergency liquidity to RBS and HBOS during the crisis, called on the Bank to extend its emergency programs beyond banks to other financial institutions, such as central counterparties and clearing houses.

The court welcomed the reviews, which they said provided "options for future consideration". Any reforms are likely to be introduced after a new governor is announced, probably at the chancellor's Autumn Statement on December 5.

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