Upon entering, it feels a little like a mausoleum. The ceilings are high and there are mosaics on the floor. People speak quietly and walk with a measured tread. The corridors and stairwells form an intricate maze, in which staff sometimes get lost. It is not hard to see why some of the 2,200 people who work here fondly refer to it as Hogwarts.
Take one of the lifts below ground and the atmosphere is different, more like a nuclear bunker: the endless identical corridors, thick security doors, and the rumbling of passing tube trains make it faintly claustrophobic. This is where the gold is kept – all 400,000 bars of it, each weighing 13kg and worth £300,000 apiece. (The Bank is careful about who it lets down to the vaults, so it has its own full-time locksmith, known affectionately as Bob the Lock.)
In the wake of the worst financial and economic crisis to befall the UK in a century, the Bank of England has acquired more power than it has ever had in its 321-year history. Before 2008, it was responsible for setting interest rates, keeping gold in its vaults, and deciding what our physical currency looked like. However, in the past seven years, it has undergone a radical transformation. These days, it can affect the terms on which a household can obtain a mortgage, it is responsible for overseeing individual insurance companies and ensuring that the big banks do not go bust again.
These new responsibilities were granted by the chancellor, George Osborne, who, in July 2013, appointed a new governor, Mark Carney, to sweep the City clean. The Treasury had to pay around £900,000 a year to woo Carney away from the Bank of Canada to take up the most powerful non-elected job that the UK has to offer. The chancellor’s remit for Carney was simple: make sure there is not a repetition of the near-meltdown of 2008 and address the public perception that the financial sector has become a cesspit of venality and corruption.
It is a big task for the Bank, which is now heavily exposed should things go wrong. It could make a hash of setting interest rates. It could let another bubble inflate in the housing market. It could miss the next crisis in the financial markets by looking in the wrong place for the source of the problem.
There are already some warning signs. The Bank has been havering over the timing of its first interest-rate rise in eight years, the Swiss bank UBS has described the London housing market as an accident waiting to happen, and the Bank itself has acknowledged that half the business that goes on in the City is opaque and needs closer monitoring.
While the Bank had long been known for its secrecy, Carney’s tenure has been marked by a more open approach. In the past two and a half years, there have been more on-the-record interviews with the governor than there were with his two predecessors, Eddie George and Mervyn King, in two decades. Carney is keen to show that the modern Bank of England is more than a bunch of economists sitting above a bullion vault. The Bank has even given the public a say in the choice of which visual artist should be the face on the new £20 note, to enter circulation in 2020. Back in 2013, it responded to a public campaign to put Jane Austen on the next £10 note. This time it has run a formal consultation, during which 29,701 nominations were made for 590 eligible artists.
The fact that the Bank is now more powerful has not gone unnoticed or uncriticised. It too has been caught up in the scandals that have ripped apart the City’s reputation – the rigging of the currency markets and interest rates – and it too needs to win the trust of the public. With the scars of one crisis still livid and the outlines of the next dimly visible, the Bank is keen to explain what it does and why it does it. Its reputation – and the fate of the British economy – is on the line if things go wrong.
There is a paradox about the way the Bank of England acquired its new responsibilities. It was the result of two colossal failures, both of which the Bank was heavily involved in. Each time, it avoided most of the blame. And each time, when politicians looked for ways to repair the damage, they decided to hand more power to Threadneedle Street.
The first occasion, 16 September 1992, became known as Black Wednesday. Two years earlier, Britain had joined the European exchange rate mechanism (ERM) – the forerunner to European monetary union – in the hope that pegging the pound to the German mark would be a way to keep inflation low. But in the weeks prior to Black Wednesday, pressure had been mounting on the pound. On 16 September, the crisis came to a head when the Bank was forced into emergency action to defend sterling against speculative attack. The Bank sold Britain’s foreign exchange reserves to protect sterling, but was cleaned out in a morning of frenetic trading. As a result, the UK was forced to leave the ERM because the cost of defending sterling would have deepened an already painful recession.
Black Wednesday was a humiliation for the Bank of England. It left the Treasury and the Bank with no option but to build an entirely new framework for controlling inflation. They did so by setting an official inflation target, through monthly meetings between the chancellor of the exchequer and the governor of the Bank of England to discuss interest rates, and in the publication of a quarterly assessment of the state of the economy, from the Bank.
Until 1997, the chancellor still had the final say when it came to deciding the cost of borrowing, but in one of its first moves after sweeping to victory in the May election, Tony Blair’s Labour government handed operational independence to the Bank of England’s newly created monetary policy committee (MPC). The idea was that the politicians would set a target for inflation, and the technocrats at the Bank would move interest rates up and down to hit it. The MPC has nine members, five work for the Bank full-time – including the governor himself – and four are independent, appointed by the chancellor.
Along with granting the Bank the right to set interest rates, the new Labour government made another momentous decision. It stripped the Bank of its prized powers of banking supervision, which were handed to the new Financial Services Authority. For a time, this seemed relatively unimportant, since the first decade after independence was marked by steady growth, low inflation and an absence of nasty financial shocks. Mervyn King, governor from 2003 to 2013, called it the “Nice” decade – a period of non-inflationary continual expansion.
The first signs that the Nice decade was at an end came in the summer of 2007, when the City and Wall Street began to realise that all was not well with the US housing market. But it took another year for the crisis to develop into the near-meltdown of the global financial system that led to the Bank of England getting back the banking supervision powers it had lost in 1997 – plus some extra responsibilities.
The turning point was the collapse of the American investment bank Lehman Brothers on 15 September 2008. Although Lehman was small by Wall Street standards, its bankruptcy led to immediate panic, as investors fretted about which bank would be next to fail. In the UK, the two most vulnerable institutions were seen as Royal Bank of Scotland and HBOS. Less than a month after the failure of Lehman, the Treasury stepped in with £65bn to bail them both out.
The affair highlighted weaknesses in the British regulatory system, which was seen in retrospect as too fragile and too fragmented. Reports into the debacle questioned whether the Bank could have acted more efficiently. However, Ben Broadbent, the Bank’s deputy governor for monetary policy, who was working for Goldman Sachs at the time of the crisis, says the Bank was operating “on the hoof” and did the best it could.
After becoming chancellor in 2010, George Osborne concluded that reform was needed. First, he set up a new body inside the Bank of England: the financial policy committee (FPC), which would monitor developments in banks, hedge funds, and markets. The new FPC has powers to intervene directly in the mortgage market in order to prevent bubbles from developing.
Second, Osborne scrapped the Financial Services Authority that had been given responsibility for policing the City. He created the Financial Conduct Authority, which is not part of the Bank of England, to regulate the way financial firms and their employees behave. At the same time, he reversed Labour’s decision to take banking regulation away from Threadneedle Street and set up the Prudential Regulation Authority (PRA), which was charged with making sure that banks are financially sound and competently run. The PRA has the power to hold bankers to account in a way that they have not been before. It can interview board directors of banks and insurance companies in a more forensic fashion than in the past and can even force companies to change their business plans if it considers them too reckless.
The broad message of Osborne’s reforms was clear: be careful, the Bank of England is watching you – the days of light-touch regulation are over.
The Bank knows it is under scrutiny as never before. In June, Carney used his annual address at the Mansion House to announce the Bank’s first “open forum”, which will take place tomorrow. The idea behind the forum is to bring together experts and the public to discuss the future of financial markets. Carney has lined up some high-profile guests, including George Osborne and Mario Draghi, president of the European Central Bank.
Half the 400 places have been allocated to the public through an open ballot, although attendees will get no closer to the Bank than Guildhall, a medieval building 400m down the road, where the all-day sessions will take place. Within the walls of the Bank itself, it will be business as usual.
Among its many roles, the Bank is a cash depository. Below ground, chief cashierVictoria Cleland oversees dozens of strong rooms with crates full of notes stashed for emergencies, such as a run on the banks. The crates are kept in wire cages stacked from floor to ceiling in long aisles. Also kept in the vaults are 40 supersized notes, known as titans, each worth £100m, which exist to underwrite the value of notes issued by the Banks of Northern Ireland and Scotland. Visitors to Cleland’s underground hideout are stripped of their wallets before they enter, and in these hallways, the sour smell of printer’s ink on paper is unmistakable and strong.
Above ground, there is a bank within the Bank. Some 4,500 current and former staff have accounts at the Bank of England, which come with the distinctive sort code 10 00 00. (However, a consultation is now under way to examine cost and practicality, which could herald the end of the accounts.) The bank within the Bank is also a place where the public can exchange old notes that are out of circulation for new ones. Sarah de Bunsen, head of the public cash desk, says that once someone came in with a wheelie suitcase packed with £400,000 of notes that were no longer legal tender, and wanted the cash back. “We weren’t geared up for an exchange of that size,” says de Bunsen. “We had to go the vaults and get it. It took three days to do two counts.”
Mutilated notes – brought in or posted – are sent off to the Bank’s Leeds office for security checks. “You would be amazed at what people do with their notes,” de Bunsen says. “They bury them in the garden. They keep them in the microwave, they put them in the loft and forget about them.” This is one of the reasons why her colleague, Cleland is pushing to replace the paper bank note with a smoother, cleaner polymer variety, which will be more resilient and harder to fake.
This is all part of Cleland’s job, which, in her words, exists “to maintain public confidence in the physical currency, to make sure we have enough notes of the right denomination of the right quality, to give the public confidence they are genuine and not counterfeit”. When Cleland gives talks in schools, children call her “the money lady” because it is her signature that appears on banknotes.
For the past few years, though, the really serious money that the Bank of England has dealt with has not been the stuff stashed below ground, but that which it has created itself through its quantitative easing programme. The cash vaults contain hundreds of millions of pounds and the gold is valued at around £120bn, but that is almost nothing compared to £375bn the Bank pumped into the economy to prevent the most serious recession in 100 years turning into a second Great Depression.
The banking, payments and financial resilience division helped make this quantitative easing programme become a reality. Headed by Andrew Hauser from a modern office overlooking the old banking hall, the department oversees the electronic system that makes payments for home-buyers, banks and governments. In just three days the entire value of the UK’s GDP moves around the financial system. “This is the engine room of the decisions that are made everywhere else,” says Hauser.
At the centre of the Bank’s daily operations, of course, is Mark Carney himself. Most days, Carney holds a morning meeting with his four deputies to discuss what has been going right and, more importantly, what has the potential to go wrong. They assemble at 8.30am in his cavernous office, a routine Carney established when he became governor.
Last month, sitting at the neat, uncluttered table where he holds his meetings, Carney admitted that being new to the Bank is to his advantage. “Things had been difficult during the crisis, the Bank had responded well, given its limited powers and handcuffs and shackles. As I showed up [the Bank] got new powers, a new organisation, doubled in size and tripled in powers. There was a natural management challenge of how do we make it work. I benefited from the ignorance.”
One of Carney’s aims has been to make the place less stuffy and hierarchical. Authors of papers, even junior officials, are now encouraged to attend the meetings where their ideas are discussed, rather than having them presented by their superiors. Staff admit that this “author in the room” concept is slowly gaining acceptance. Other small changes include an instruction that staff are allowed to call Carney by his first name. In the past, the preferred form of address was “Mr Governor”.
But Carney’s informality should not be overestimated: like his predecessors, he is not a man to suffer fools gladly. He has an easy charm, but his tongue can have a sharp edge. He wasted no time in creating his own team at the top of the Bank, bringing in Charlotte Hogg from the private sector in the newly created role of chief operating officer and moving staff to new roles. Andrew Haldane, one of the Bank’s high-fliers, became chief economist, a position he has used to express views that do not always accord with the governor’s.
Carney guards his private life as carefully as the Bank guards its gold. He will happily talk about the Bank’s guidance on interest rates or whether high-street banks are too big to fail – often in long, complicated sentences – but can be terse when asked about himself. When pushed, he will talk about his support for Everton (he has cousins in Liverpool), how he likes the Great British Bake Off (he wanted Tamal to win), how he likes indie music (as a Canadian, he is partial to Arcade Fire), and how he sometimes runs into work from his north London home. The governor completed the London marathon this year in a little more than three and a half hours – about the time it took the speculators to take the Bank to the cleaners on Black Wednesday.
There are four main criticisms of the Bank: that it is old fashioned and stuffy, that it loses all its best people to the City, that too much power is vested in the office of the governor, and that it is delving into political matters that threaten its independence.
Charlotte Hogg’s appointment as chief operating officer was designed to address the first point. A bigger bank with more powers cannot be left to run itself, so she has been hired as full-time manager. Carney wants Threadneedle Street to operate as a single institution rather than divisions that never speak to each other, and it is Hogg’s task to implement this “One Bank” vision. She is also keen to promote diversity: the preponderance of white men walking the corridors of power has not been good for the Bank’s image. In addition to appointing women, such as Cleland and deputy governor for financial markets Minouche Shafik, to the top jobs, the Bank now offers university scholarships and placements to people of African-Caribbean backgrounds. The Bank has also signed up toOUTstanding, the professional network for LGBT executives.
Employees are members of Unite and the Bank pays the London living wage to all its staff, including contract cleaners and caterers. Staff say it has a family feel. Security guard Reg Shaw’s daughter works on the reception desk. Javi Onder, an 18-year-old school-leaver with a role in IT, is in her first few months at the Bank where her mother, in the markets and payments division, has worked for 20 years.
Given the enormous salaries on offer elsewhere in the City, the Bank is naturally concerned about the second charge – that it loses too much of its top talent, but Gareth Ramsay, head of the monetary analysis division, says the idea of a brain drain to the City is not correct. He sees the first five years as a key cut-off point for the postgraduate economists the Bank hires. “After about five years they are properly trained, they know about how to do analysis quickly. At that point there is a career choice and investment banks start to try and cherry pick them,” Ramsay says. However, Hogg points out that the attrition rate is low – annual staff turnover is 8.3%.
The third criticism – that the role of governor has grown too powerful – was brought up at a recent meeting of the Treasury select committee, the powerful body of MPs that holds the Bank to account. At the meeting, Steve Baker, Conservative MP for High Wycombe, focused on the power vested in the governor. Baker noted that in committee meetings, Carney tended to dominate the conversation, at the expense of the independent members of the MPC. “Are you satisfied,” Baker asked Carney, “that you receive adequate, robust challenge so that we can feel confident that the whole institutions [the key committees that Carney chairs] are not exclusively dependent on your own thought?”
In response, Carney cited Bank Underground – a blog where Bank of England staff can air their views in public – as one of the ways free thought is encouraged. If MPs directed questions at the governor rather than his colleagues, he said, that was their problem not his.
The explanation failed to convince the chair of the committee, Conservative MP Andrew Tyrie. “The risk in any institution with a powerful figure chairing all the Bank’s key policy committees is that you end up with groupthink. Groupthink is a considerable risk in any organisation at the best of times. I can’t think of a financial crisis that has not had groupthink as a major contributory cause,” says Tyrie.
It’s a point that hits home. In the run-up to the financial crisis, the Bank was so concerned with keeping inflation low that it failed to spot the bubble in the housing market. Nor is this simply a reputational issue. The Serious Fraud Office is looking into the way the Bank provided emergency funding for the markets during the crisis in 2007 and 2008.
Having granted the Bank independence in 1997, Labour is now reconsidering its powers. Jeremy Corbyn, the party’s leader, has tasked former MPC member, David “Danny” Blanchflower to look at whether inflation should be the sole focus of interest-rate decisions. Blanchflower, who is not one of Carney’s biggest fans, believes that the Bank should be like the US Federal Reserve and add growth and employment to its remit.
This leads to the fourth area of concern: that the extra responsibilities could become too much of a burden. David Marsh, who runs the independent thinktank, the Official Monetary and Financial Institutions Forum, talks about the “myth” of central bank independence. The more powers the bank receives, the more likely it is to upset politicians, who will then be tempted to take the powers back again.
Tyrie makes a similar point: “Having been given all these powers, the Bank is now grasping that if it strays too far from what might be acceptable to the government, it could be uncomfortable. The government is discovering that this very high level of Bank independence means it can’t always get done some of the things it feels are essential.”
Hanging on the wall of the office of Ramsay – the official responsible for helping the MPC decide whether to raise interest rates – is the cartoon, drawn in 1797 by Gillray, that gave the Bank its nickname. The image depicts the Old Lady of Threadneedle Street being ravished by William Pitt the Younger. Gillray’s message was that the Bank – then a private company – was turned into a political institution by providing the money to allow the government of the day to fight another war with France. Ramsay explains why he sits beneath it: “That challenge of keeping our independence and keeping our neutrality, but maintaining accountability that goes with that, runs through everything here.”
Over the past 40 years, there has, on average, been a recession or crisis once every seven or eight years. It has been six years since the British economy was last in recession, so one is due around now. Concerns have been raised about the overheated London housing market. There have been warnings from the Bank for International Settlements, the body that represents central banks, that global debt levels are getting too high. Another concern is that, under pressure from the City, the government is watering down some of the new rules intended to constrain banking excess. So Carney, his governors and top officials, have been travelling the length of the country to show their faces outside the City of London, and listening to ideas.
Members of the MPC go on regular regional visits to take the temperature of the economy. In mid-October, Carney’s deputy, Ben Broadbent, who is responsible for monetary policy, went by train to Ipswich to meet one of the Bank’s 12 agents, who provide economic intelligence. Phil Eckersley, the local agent, had arranged a meeting with three executives from the estate agency Fenn Wright at the Ipswich and Suffolk private members club. Broadbent wanted to know what was happening locally to commercial property (not much) and buy-to-let (growing strongly). He asked whether people were ready for interest rates to rise, although he was at pains to say that they are not about to. The Bank has kept interest rates at 0.5% since March 2009, lower than they have been in its history. If it raises rates too sharply, the MPC could push the economy into deflation. If it waits too long, inflation will pick up.
Broadbent started his life in the Treasury in the late 1980s and on the train journey to Suffolk he recounted his debut in the annual cricket match between the Treasury and the Bank of England. “First ball was a bouncer aimed at my head from Haldane A.” Andrew Haldane is the one member of the Bank’s MPC who thinks the next move in interest rates might be down rather than up.
In the same week that Broadbent was testing the mood in East Anglia, Andrew Bailey, the deputy governor responsible for regulating the banks, went to the Mansion House to address the annual City Banquet, a black-tie gathering of the financial industry’s senior figures. After guests were summoned to dinner by the banging of a gong and the slow handclap that traditionally greets the top table at these formal dinners, Bailey took his seat beside John McFarlane, the chairman of Barclays.
A former chief cashier of the Bank – the vaults are stacked with notes bearing his signature – Bailey is head of the Prudential Regulation Authority, the body at the forefront of the attempts to prevent another taxpayer bailout of the financial system. The banks are pushing back against new rules. Next month, after conducting what have now become annual health checks on the biggest lenders, the PRA will decide whether the banking system is strong enough to withstand a global financial crisis. The onus is on the Bank to make the system safe.
That evening, in his speech, Bailey wanted to make clear that the new rules being put in place to try to prevent another crisis are not being watered down. The speech was finely tuned for those assembled on the long, white-clothed tables. It covered the ways senior executives will be held to account, the amount of capital banks must hold, and it addressed a lingering worry about new rules coming into force in 2019 that require banks to protect their high-street customers from troublesome investment banks. “If you think we have watered down the regime, please let me know,” Bailey said.
Carney is aware there will be no hiding place if things go wrong. “We are much more fit for purpose than we used to be,” he says. “We can’t have the defence that we didn’t have enough powers or that we weren’t responsible for this issue, which was the case in 2008.”
The broader powers mean that Carney is also straying into new areas for a governor of the Bank of England. His views on global warming have enraged critics who feel he is overstepping the bounds of his mandate. (In September, he warned insurers in a speech at Lloyd’s of London that “the challenges currently posed by climate change pale in significance compared with what might come”.) More recently, Carney’s views on the EU have also whipped his opponents into a frenzy.
In late October, Carney returned to Oxford, where he obtained his doctorate in economics, to deliver his first major speech about how EU membership affects the Bank of England. As he walked on stage at the Sheldonian theatre – which was completed in 1669, 25 years before the Bank was founded – Carney was greeted with thunderous applause. The audience comprised a mixture of students, suited alumni and lecturers wearing jeans. His delivery was fluent, and the event was streamed live on the Bank’s website. Carney said membership of the EU had been good for Britain, but that it had left the UK more exposed to the recent debt crisis in the eurozone. In future, EU rules would have to be flexible enough to cope with countries, such as Britain, that were not part of the single currency.
While Carney was still on his feet, the speech was already making headlines along the lines of “Carney says EU is good for Britain”. Deep underground in Threadneedle Street’s briefing room, Sir Jon Cunliffe, another deputy, had spent 90 minutes before the governor started speaking, explaining the Bank’s position to economic journalists.
In response, Conservative chancellors past and present leapt up to have their say. Nigel Lawson, who ran the Treasury in the 1980s, said on the BBC: “I can’t think of any previous governor who would wade in a political way on an issue such as this.” George Osborne, whose views on this subject chime with those of the governor, told the House of Commons Treasury committee that Carney’s speech was a “welcome addition to the debate”.
At the Sheldonian, Carney had been careful to argue that whether Britain is in the EU or not has implications for interest rates and for the safety of the country’s banks, for which the Bank is responsible. He spelt out that he was not making a comprehensive assessment of the pros and cons of the United Kingdom being in Europe – but he knew the backlash was coming. His mission is summed up by a Latin inscription at the entrance to the Bank’s parlours: “Sic vos non vobis” (Thus we labour for others not ourselves). His critics would say that another piece of Latin would be appropriate in view of the Bank’s new powers: Quis custodiet ipsos custodes – Who guards the guards themselves?