Bank of England's trust in banks 'badly mistaken', says former official

Friday 21 March 2014 12.32
Bank of England needs to abandon culture of cosy chats, says former policymaker
Bank of England needs to abandon culture of cosy chats, says former policymaker

The Bank of England needs to abandon a culture of cosy chats and too much trust in banks after the latest financial scandal to hit London, former policymaker Adam Posen said.

Governor Mark Carney unveiled a major shake-up of its management this week, in part to tackle complaints from lawmakers that the central bank had been too slow to spot signs of financial misconduct in the past. 

Posen, who served on the central bank's Monetary Policy Committee from 2009 to 2012, said BoE staff had had too much confidence that banks would regulate themselves and would root out bad behaviour by their own traders.

"What is really most important is to see the Bank of England get away from being so trusting of the banks. That was the culture for a long time. It was not corrupt, it was just badly mistaken," he told the BBC.

Earlier this month the Bank of England suspended an official as part of an ongoing investigation into whether the central bank had turned a blind eye to the alleged rigging of exchange rates in London's $2.1 trillion-a-day currency market. 

The bank has also been criticised by lawmakers for failing to spot the rigging of Libor interbank interest rates sooner.

Carney's shake-up of the BoE's management included the surprise appointment of the top British official at the International Monetary Fund, Nemat Shafik, to a new position of deputy governor for markets.

Posen welcomed Shafik's appointment, and the promotion of his MPC colleague, Ben Broadbent, to become deputy governor for monetary policy.

But he said that it would be more important to change a culture of too much trust in banks, which had also afflicted other central banks, including the US Federal Reserve.

"There has to be a top-down explicit statement that our bias is towards having market solutions, not cosy conversations with individual bankers, that the Bank of England is neither the friend nor the enemy of the banks," he said.

Posen also criticised the forward guidance policy on interest rates which Carney launched in August, calling it "irresponsible" for encouraging the public to focus on a single economic indicator - unemployment - as a guide to when interest rates would rise.

He welcomed a change to the policy last month, when the bank said it would look at a wider range of data after unemployment fell to the 7% threshold set in August.

Posen, who now heads the Washington-based Peterson Institute for International Economics, also praised the open discussion at MPC meetings and joked that the biscuits served to policymakers were "cheap but fattening".