(Updates with comments on chancellor’s power during a financial crisis in seventh paragraph.)
Nov. 8 (Bloomberg) -- The Bank of England governor should be appointed for a non-renewable eight-year term to ensure stability and safeguard the central bank’s independence, a panel of U.K. lawmakers said.
The Treasury Select Committee, whose role is to scrutinize the central bank, also recommended that lawmakers have a veto over the appointment or dismissal of a governor and called for changes to the composition of the rate-setting Monetary Policy Committee and the bank’s governing board.
“The independence of the governor from political control must be upheld,” it said in a report, Accountability of the Bank of England, published in London today. “The present provision for the renewal of the term of office after five years could cause instability and at least the perception of political interference in the bank.”
The proposals would change the current system of allowing Bank of England governors to serve two five-year terms to match the practice at the European Central Bank. The U.K. central bank, where Mervyn King is due to serve until 2013, isn’t alone in having renewable terms -- the Federal Reserve chairman is appointed for four-year periods and the Bank of Canada governor serves for seven years, which is also renewable.
The Treasury committee conducted the inquiry to improve governance as the Bank of England takes over control of financial regulation, adding to its monetary-policy powers. King said in a statement that with its enhanced powers, “new arrangements for the governance and accountability of the bank would be necessary.” The central bank will “study the report carefully before responding,” he said.
The report comes two months after former Chancellor of the Exchequer Alistair Darling said his efforts to tackle the financial crisis in late 2007 were hampered by disagreements with King, who he considered not reappointing for a second term.
The TSC said that in times of crisis, “where public money is at risk,” the chancellor should be able to take responsibility for regulation and have the power to “direct the bank to act.”
The committee’s report said that because the appointment of a governor is “in the hands of the government means that the independence of the bank may be perceived as being compromised.” The Bank of England gained independence over monetary policy in 1997.
“It also distorts the perception of any decisions or public statements of the governor or the bank in the period up to the decision,” it said. “People will look for whether they may have been affected by the views of the government.”
Committee Chairman Andrew Tyrie said some aspects of the central bank’s governance “appear antiquated” and need to be improved to reflect its news supervisory powers. He criticized the Court of Directors last week for refusing to disclose details of its discussions during the financial crisis. Lawmakers said earlier this year the court responded inadequately to King’s comments in 2010 on the government’s fiscal plans.
The parliamentary committee recommended increasing the number of external members on the Monetary Policy Committee to five from four, which would leave internal full-time staff members in a minority on the nine-person rate-setting panel. It also wants a majority of members on the new Financial Policy Committee to be external. It said that the Court of Directors should be renamed the Supervisory Board, and that the board chairman act as a “silent observer” at MPC and FPC meetings.
“As part of its process and management overview function, the new supervisory board must ensure not only that internal and external members (and the Treasury observers) of the bank’s committees have the information they need,” the committee said in the report. The board must “also seek confirmation that all members feel free to express their views and do not perceive themselves constrained by groupthink or by the dominance of internal bank members.”
--Editors: Fergal O’Brien, Craig Stirling
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