Last week’s news that the Labour Party is thinking about moving most of the Bank of England to Birmingham may best be approached, not through the prism of party politics, but in the context of the wider relationship between party politics and the Bank.
This relationship has changed dramatically in the last 25 years, and its implications affect not only the Bank but the FCA and the firms they regulate. They are going to need some careful navigating by all concerned.
The shift is most apparent in monetary policy, where it used to be Chancellors who decided on changes to interest rates. This altered after Black Wednesday in 1992, Ken Clarke instigating formal meetings between HMT and senior Bank staff, but the decision was still the Chancellor’s. But then, after the 1997 election, Gordon Brown put the Bank in charge setting of interest rates independent, via the Monetary Policy Committee, where it has remained since.
On the regulation side, the opposite trend can be observed, with politics becoming steadily more involved, starting with the Banking Acts of 1979 and 1987 and the City’s Big Bang in 1986. A decade later, in the same letter that gave the Bank responsibility for monetary policy, Gordon Brown explained he was taking banking supervision away from the Bank and creating the FSA as a separate independent regulator.
Although the legislation that then set up the FSA (FSMA 2000), was a huge cross party effort, it quickly began to become party political, with some Conservatives seeing the FSA as having too much power, and regulation as being too heavy. The financial crisis was inevitably followed by a swathe of legislation and – among other changes - responsibility for the prudential regulation of banks was passed back to the newly created PRA, part of the Bank of England.
There are a few ironies implicit in this story, but the main point for here is that the result left the Bank both more and less independent. It has many more responsibilities and considerable discretion in how it exercises its authority, but has also become much more the focus of party political interest.
In this climate, the Governor today makes one of his increasingly frequent appearances in front of the TSC, to talk about the Brexit stress test on banks, a subject that brings together two areas where the Bank has perhaps been most criticised in the last 30 years.
In the period before the FSA, its reputation suffered serious damage from the regulatory failures that led to Johnson Matthey, BCCI and Barings , while the current Governor has received severe criticism for setting out the Bank’s view of the risks associated with Brexit. This latter criticism was significantly more strident and personal than the former, symbolic of the Bank’s still evolving new position in public life – more powerful but politically less trusted.
Central banks and regulators have become more independent since the 1980s, but with this has come more political scrutiny and more party political scepticism about what they say and do. Few central bankers or regulators are comfortable operating in the bear pit of adversarial party politics but this seems increasingly to be the reality.
This matters for several reasons. One is because it means the next regulatory failure, no matter how small, is less likely to be accepted in a measured, impartial way by politicians. We should all worry about this and the pressure and instability it would probably cause - poorly targeted/disproportionate regulation is only one of a number of potentially negative results. If this transpires, it will not be the central bankers and regulators predominantly responsible but the environment in which they are now obliged to operate.
Against this background, Labour’s idea of moving the Bank to Birmingham becomes harder to assess objectively, a problem in itself. What does seem likely, however, is that the next time the Bank expresses a view that can be interpreted as for or against Labour policy it will be seen by some as less objective than it is.
That would be a shame for firms and for financial markets, all of which have a critical interest in central banks and regulators being widely respected and seen as politically impartial.
Labour is considering relocating most of the Bank of England to Birmingham if it wins power at the next general election, a move that would shake up more than three centuries of association between the Old Lady and the City of London.