Among those responsible for UK regulation during the financial crisis, the Bank of England came out of it rather well. The Treasury had to bail out the banks (and unlike its US counterpart, it hasn’t yet been paid back). The Financial Services Authority was disgraced and dismantled. The BOE on the other hand, emerged with an enlarged balance sheet and increased regulatory powers. It wasn’t until the Libor rigging scandal a couple of years ago that the record of the Bank’s senior management (former governor Mervyn King and his deputy Paul Tucker) was seriously questioned.
Part of the reason might be the BOE’s traditional lack of transparency. While its output of speeches and reports looked plentiful enough, what we never saw was an objective record of the Bank’s thinking and decision making at critical points. Yes, we had the Monetary Policy Committee meeting minutes, but these skirted round the key developments in terms of BOE lending programmes, let alone self-examination of the Bank’s judgement.
Commendably, the Bank’s current governor, Mark Carney, has sought to address this deficiency. Former US Fed governor Kevin Warsh has been brought in to study the potential for releasing full transcripts of MPC meetings, as is done by the Fed after a six year delay. In the meantime, the BOE has released minutes of its board meetings (called the ‘Court’ in the Bank’s quirky style) from the crisis period of 2007-2009.
I have gone through these minutes and selected extracts which I have combined with relevant data into an interactive visualisation (see above). The data consist of daily CDS prices of four banks that required bailouts (Northern Rock, RBS, HBOS and Lloyds – data provided by Markit) along with Libor-OIS spreads and the weekly size of the BOE’s own balance sheet. Try zooming into a three-month time window, then click on the annotations on the right as you scroll down, to see the time series evolve.
What can we learn from this disclosure? As minutes, they are less than a full transcript ““ so while it is possible to tell when King, Tucker and a few other senior Bank execs are speaking, the identity of non-executive directors is concealed. Yet at the same time the Court minutes go much further than FOMC transcripts because they provide insights into the Bank’s actions and strategy as a whole, as opposed to the setting of a monetary policy rate.
We see King in the summer of 2007, smug in the illusion that he had got the best deal in Britain’s fateful Tripartite arrangement. We see the Bank stumble into its first major blunder with Northern Rock, which it compounded with the error of mistaking solvency problems for those of liquidity. We see King stubbornly defend the indefensible idea of stabilising banks without regulating them.
As the crisis deepens, glimmers of disquiet appear. Why had the Bank’s warnings about financial instability been so timid? Why was the Bank so unprepared for the job of providing emergency liquidity and managing collateral? Wasn’t the market’s refusal to provide liquidity to banks a rational, rather than an irrational response?
The numbers in the visualisation chart show events continuing to run ahead of the Bank during 2008. First, emergency liquidity fails to work, then capital injections from rights issues fail to work, leading up to the bailouts and wholesale guarantees of late 2008. King, reacting to events as he squirms to maintain his closeted status quo, does not come out of this well.
To be fair, the decision to stop the BOE regulating UK banks was not King’s ““ it was made a decade earlier by then-chancellor Gordon Brown. Yet King internalised this handicap so much that his splendid isolation from banks became a problem ““ as highlighted by Brown’s successor Alistair Darling in his autobiography Back From the Brink. Instead, the Bank was forced to seek information about the banks from the FSA in an atmosphere of mutual distrust and loathing.
In the financial markets, the Bank did have a very good information gatherer in the form of Paul Tucker. Reading the minutes, it’s interesting to contrast the informed commentary Tucker provides with his institution’s groping attempts to understand what was happening in banks themselves. For example, he mentions AIG in February 2008, long before that firm’s name appears in FOMC transcripts. Having interviewed Tucker twice during the crisis ““ in late 2008 and early 2009 ““ it reminds me how well versed he was and his interest in hearing my perspective.
Yet for all Tucker’s ability to converse fluently about the alphabet soup of ABCP, CPDOs, CSAs and the like, he could not compensate for the BOE’s blindness towards banks. Indeed, Tucker’s own blind spot regarding Libor rigging within these institutions (something he was warned about) would end up torpedoing his chances of succeeding King to the governorship.
The release of the Bank minutes is instructive because it shows how the worst kind of risk errors are what the philosopher Gilbert Ryle called category mistakes: when your worldview makes something invisible to you when it should be obvious. Perhaps by releasing the minutes, Mark Carney wanted show that the UK’s regulatory framework is now immune to such mistakes. Let’s hope he is right.