Mark Carney: One mission. One bank. Promoting the good of the people
of the United Kingdom
Text of the 30th Mais Lecture by Mr Mark Carney, Governor of the Bank of England and
Chairman of the Financial Stability Board, at Cass Business School, City University, London,
18 March 2014.
* * *
It is a great honour to be invited to give the 30th Mais Lecture. This lecture series has
charted the evolution of UK macroeconomic policy through the eyes of leading policymakers,
including my four predecessors as Governor.
The Mais Lectures span a period during which the focus of macroeconomic management
was firmly on monetary policy. They helped establish a broad consensus for the primacy of
price stability as well as the institutional framework necessary to deliver it.
This focus initially made sense since one of the greatest challenges for macroeconomic
policy in the late 1970s and 1980s was the fight against inflation.1 That fight culminated in the
adoption of an inflation target, which helped secure 15 years of price stability and sustained
economic growth.
However, with time, a healthy focus became a dangerous distraction.
The financial crisis that exploded the Great Moderation was a powerful reminder that price
stability is not sufficient to maintain macroeconomic stability. Words which had alluded to
such risks were not followed by actions that might have prevented them being realised.
Lessons have since been learned. In the wake of the crisis, the Bank of England would be
promised enormous new powers and responsibilities. In the past year those promises have
become realities with the statutory Financial Policy Committee (FPC) and the Prudential
Regulation Authority (PRA) formally joining the Bank.
The question now is how we use our powers to fulfil our responsibilities.
In response, the Bank of England is today launching a transformative strategic plan to fulfil its
broader mission. We have a new leadership team. We are setting out fifteen initiatives to
reshape the institution. Behind that plan is a vision for the Bank that I want to set out this
evening. It is:
A Bank with many and varied responsibilities, but a single timeless mission;
An institution that works as One Bank to exploit the synergies and complementarities across
our policy functions;
A Bank that draws on its long history of intellectual leadership and international engagement
to shape an open, resilient global system;
And a Bank that builds on the immense successes of the past quarter century in combining
clear objectives, good governance and constructive transparency.
A single timeless mission
Let me begin by asking a simple question: what is the Bank of England for?
The Bank's founding charter of 1694 explains that its original purpose was to "promote the
publick Good and Benefit of our People...". What that meant in practice at the time was
pithily summarised by the diarist John Evelyn, who recorded the event 320 years ago in the
following terms: "A publick bank... set up by Act of Parliament... for money to carry on the
war". The war in question was against France, and in return for the monies raised the Bank
received both income and banking privileges: it was soon the only bank allowed to be
constituted as a joint stock company, and had an effective monopoly of the note issue in the
London area.2
Its size - partly resulting from its unique joint stock status - meant that, by the first half of the
19th Century, the Bank had become the dominant part of the financial infrastructure. Its
notes had become an accepted means of settlement between banks, and as the provider of
those notes the Bank acted as banker to other banks. Commercial banks held Bank of
England notes in place of gold, relying on the Bank of England's credibility for ultimate
convertibility.
Despite the Bank's founding aim of public service, criticism persisted until after the middle of
the 19th Century that it was acting in its own rather than the public interest by protecting its
gold reserves at times of financial stress, to the detriment of its customers. That criticism
faded as the Bank gradually assumed the role of lender of last resort, adopting Bagehot's
principle that it should lend freely against good collateral at penalty rates in times of crisis.3
By the end of the 19th Century the Bank of England had informal responsibility for a broad
range of policy areas. It remained the fiscal agent for the government. It maintained
monetary stability through the operation of the Gold Standard. And it promoted financial
stability through its role as the effective lender of last resort, and more generally - through
the judicious exercise of the Governor's eyebrows - as the institution which managed and
resolved financial crises.4
While the Bank's responsibilities varied over the following century they remained broad and
largely informal until 1997. The transformative changes that year gave birth to a modern
Bank with a narrower focus on price stability grounded in clear statutory objectives, and with
the operational independence to pursue them. Independence was the solution to the time
inconsistency problem, which causes policymakers who promise low inflation - but then go
for faster growth - to get neither. Removing political considerations from the conduct of
monetary policy made possible a credible commitment to low inflation. Strong accountability
mechanisms and transparency were put in place to legitimise that independence.
Those changes reflected the belief that price stability was the best contribution a central bank
could make to macroeconomic stability and by extension to the broader public good. This
represented a deconstruction of the old model of central banking.5
In my view, while there were enormous innovations of enduring value during this period, the
reductionist vision of a central bank's role that was adopted around the world was fatally
flawed.
In particular, it failed to recognise that financial stability is as important an objective of
macroeconomic policy as price stability, and it downplayed the interrelationships between the
two.
And it failed to recognise that central banks have a vital role to play in maintaining financial
stability because of the deep underlying connection between it and monetary stability. Both
are fundamentally about maintaining the public trust and confidence in money and financial
intermediation that are essential for them to oil the wheels of commerce. That trust and
confidence can be undermined through a loss of certainty about the future value of money, a
loss of confidence in financial intermediaries, or ultimately a loss of faith in the financial
system.
Central banks have a primordial responsibility to act as guarantors of trust and confidence in
money because of their status as monopoly issuers of currency. This naturally gives them
control over the quantity of money and interest rates - monetary policy. It also means that a
core part of financial stability policy - acting as lender of last resort to private financial
institutions at times of financial stress - falls naturally to central banks.
Other instruments of financial stability policy seek to prevent the build-up of vulnerabilities in
the first place. Microprudential supervision aims to maintain the safety and soundness of
individual financial institutions by ensuring they are adequately capitalised and have
sufficiently resilient funding and liquidity. Macroprudential policy seeks to safeguard the
stability and resilience of the financial system as a whole both by using prudential policy for
macroeconomic ends - for example in managing the financial cycle - and by addressing
risks related to structural features of financial institutions and markets. In the latter regard,
the priorities range from ending too big to fail to improving the resilience of financial market
infrastructure.
The Bank of England has now been tasked by Parliament with operating these prudential
tools. Our broad range of responsibilities now include: supervision and regulation of financial
market infrastructures; acting as lender and market maker of last resort; the design and
operation of macroprudential tools; recommendations on core elements of financial reform;
and the resolution of failing financial institutions.
A return to a broad role is welcome.
The best answer to the question of what the Bank of England is for is given by the original
1694 founding charter: promoting the good of the people of the United Kingdom.
That mission is timeless. The understanding of what we should do to achieve it has evolved.
In 1694 promoting the good of the people meant financing a war with France. During the
Great Moderation, it meant price stability. Today, reflecting the lessons of the ensuing
financial crisis, it means maintaining both monetary and financial stability.
We don't intend to fail.
Going back 320 years to refresh our purpose is part of building on the best of our history, but
we are not seeking to reconstruct the central bank of the past. Instead through our strategic
plan we are building the 21st Century central bank.
Here's how.
One Bank: complementarities, synergies and economies of scope
The broad range of responsibilities we have been given creates the potential to exploit the
complementarities and synergies between them.
It is our duty to do so because the effectiveness of each function influences that of the
others. In other words, we have to maximise our impact by working together.
That imperative is the core of our new strategic plan which stresses that our contribution to
the public good will be greatest if we work as One Bank.
Complementarities might be operational, arising when putting two functions together is more
efficient by allowing faster decision making in a crisis, improving the coherence of
communication, or taking advantage of the common skills, information or analyses required
to operate the policies.6
Or they might be economic, arising when there are strong interactions in the way the policies
have their effect, or when one policy affects another. It then makes more sense to have them
operated by one institution so that shared analysis and information leads to consistency of
decision making and so that trade-offs between objectives can be managed effectively, and
in a timely manner, to achieve better outcomes.
There are strong complementarities between all four of the core functions of the Bank:
monetary policy, markets, macroprudential policy and microprudential regulation.7 Each
affects overall monetary and financial conditions and therefore has the capacity to affect the
achievement of both monetary and financial stability. They in turn help maintain confidence in
the currency, which we also support by issuing high-quality banknotes that people can use
with confidence. More generally we are conscious that everything we do affects the trust and
confidence in the Bank and by extension the financial system.
Monetary and macroprudential policy
The interaction between macroprudential and monetary policy is central to the Bank's
success in achieving its dual objectives of monetary and financial stability.
The case for discharging these responsibilities in a coordinated way is very strong.
I am delighted that Ben Broadbent has today been appointed as the next Deputy Governor
for Monetary Policy. In that role, he will be central to co-ordinating these functions and his
experience in academia, financial markets, and as an external Monetary Policy Committee
(MPC) member, makes him extremely well qualified to do so.
The transmission channels of monetary and prudential policy overlap, particularly in their
impact on banks' balance sheets and credit supply and demand - and hence the wider
economy.8 Monetary policy affects the resilience of the financial system, and macroprudential
policy tools that affect leverage influence credit growth and the wider economy.
In turn, financial stability is a pre-requisite for monetary stability - for example systemic
banking crises are likely to be deflationary. In reducing the frequency and severity of financial
crises, macroprudential policy therefore helps to preserve the role of money as a store of
value.9
While price and financial stability are clearly connected, achieving both can be difficult. As we
saw so clearly in the run-up to the financial crisis, the credit and business cycles operate on
different time horizons, with the former as much as twice as long and twice as big.10 In
pursuing price stability, monetary policy can contribute to the gradual build-up of financial
vulnerabilities through its effect on the degree of risk-taking in the economy.11 For example
the period of low and predictable interest rates before the financial crisis helped drive a
"search for yield" and leverage cycle, even with inflation subdued.
It doesn't take a genius to see that similar risks exist today.
That tension between monetary and financial stability is best managed in a coordinated way
in a single institution. The use of macroprudential tools can decrease the need for monetary
policy to be diverted from managing the business cycle towards managing the credit cycle.
This enhances the credibility of the inflation target. That in turn may reduce the need for
sharp or persistent moves in interest rates, which themselves might threaten financial
stability.
Similarly, macroprudential policy can more effectively focus on its primary goal of systemic
stability by recognising that, while it affects the economic cycle, it is not suited to managing it.
Instead its effects on the economic cycle should - like fiscal policy - be taken into account in
setting monetary policy, which is the primary and most effective tool of demand
management.
Taken together with the synergies from sharing information and analysis, these are strong
arguments for operating monetary policy and prudential policy in the same institution. In the
short time the Bank has been responsible for both, we have already seen the benefits of
operating them in a coordinated way.
For example, our forward guidance framework for monetary policy reflects a clear division of
responsibilities. Although monetary policy has an important role to play in mitigating financial
stability risks, it does so only as a last line of defence.
This is important because vulnerabilities can emerge from a long period of unusually low
interest rates, as complacency sets in about the future path of policy and asset prices. There
have been signs of such behaviour across the housing markets in advanced economies. In
anticipation of similar risks arising in the UK the Bank's MPC and FPC have met jointly to
review them. The FPC has identified a graduated range of macroprudential tools available to
it for a coherent, proportionate response to these risks, and has taken initial, prudent steps.
As the housing market evolves and macroprudential policy responds the FPC and MPC will
continue to work together to understand the collective impact of measures on residual
vulnerabilities and macroeconomic outcomes.
That co-ordination, the shared monitoring of risks, and clarity over the FPC's tools allows
monetary policy to keep Bank Rate as low as necessary for as long as appropriate in order to
support the recovery and maintain price stability. For example expectations of the future path
of interest rates - and hence longer-term borrowing costs - have not risen as the housing
market has begun to recover quickly.
Macroprudential and microprudential policy
There is also a natural complementarity between macro and microprudential policy because,
in essence, macroprudential policy uses prudential policy tools for macroeconomic ends,
specifically the mitigation of risks that could in time undermine price and financial stability.12
So the two will often operate through the same channels - albeit towards different objectives.
Those objectives are themselves generally mutually reinforcing. While ensuring the safety
and soundness of individual institutions is not sufficient for systemic stability, it surely helps.13
Meanwhile macroprudential policy seeks to reduce systemic risks and in doing so is likely to
improve the resilience of individual firms.14
At times there may be a conflict. This is most likely to arise at a turning point in the cycle
when macroprudential policy - perhaps in pursuit of its secondary objective to support
growth and employment - may mandate a loosening of capital requirements in order to
support credit supply and broader economic conditions. A microprudential supervisor at the
same time may understandably be more concerned to maintain large capital buffers. The
question best answered in a single institution is which dominates - risks from a paradox of
thrift or those from weakened institutions?
The obvious overlaps in tools and objectives mean that combining the two arms of prudential
policy in one organisation makes sense. That will also help to share knowledge and
expertise, and to help avoid conflicting messages to firms. And, to the extent conflicts occur,
they are likely to best be resolved within a single institution through shared analysis and
mutual understanding of reaction functions.15
Our strategy will be to conduct supervision as an integrated part of the central bank and not
as a standalone supervisory agency that happens to be attached to a central bank.
The benefits that close cooperation can bring were demonstrated in 2013 as the PRA and
the FPC worked closely together to bring clarity both to banks' existing capital positions, and
the standards expected of them. The FPC mandated the exercise with a view to establishing
a system-wide, transparent standard of resilience that would boost confidence and allow the
banking system to contribute to economic recovery. The PRA - under Andrew Bailey's
leadership - delivered the recommendation for each of the major institutions. The resulting
increase in capital ensured the core of the financial system was on a sound footing and
made an important contribution to securing economic recovery.
There were clearly lessons to learn from that exercise, most notably the importance of clarity
of early communication by the Bank to financial institutions about the standards to which they
would be held. Those lessons are being applied now in the first of the Bank's annual
stresstesting exercises, which will bring together the microprudential standards for banks with a
macroprudential assessment of the risks to which they must be resilient.
As with monetary policy, expectations matter and the system will be more resilient if the
Bank's moves can be anticipated.
Market operations and prudential policy
The synergies I have identified so far explain why it makes sense for monetary policy and
prudential policies to be operated by a single institution, but there are also complementarities
between prudential policy and the way a central bank uses its balance sheet and controls the
supply of high-powered money.
The design and operation of our liquidity facilities have important synergies with prudential
policy. The terms on which we supply liquidity in times of stress affects the level of
selfinsurance banks choose. If we are too strict, banks have to over-insure at significant cost by
holding an excess of low-yielding liquid assets rather than loans, and markets will freeze too
quickly in crises. But overly permissive terms create a moral hazard risk in the form of banks
running excessive liquidity mismatches in normal times.16 Prudential supervisors can mitigate
the moral hazard risk by imposing minimum liquidity requirements. But there is no point in
setting those requirements at a very high level when the central bank is prepared to lend
freely against good collateral to solvent institutions.
So it is important to coordinate liquidity requirements and banks' reliance on liquidity
insurance from the Bank of England. Striking an efficient balance is most likely when
responsibility for prudential policy also lies with the central bank.17 And it explains why we are
announcing management changes today to enhance that coordination, with Paul Fisher - the
Bank's Executive Director for Markets - moving to become Deputy Head of the PRA.
The Bank exploited those synergies in August 2013 when, recognising the greater availability
of liquidity insurance provided through our facilities, and banks' improved capitalisation, we
reduced the required level of banks' liquid asset holdings to help support lending to the real
economy.
And in October last year we overhauled our facilities, offering money and collateral for longer
terms against a wider range of assets, at lower cost. We could do so because, as both
supervisor and provider of liquidity insurance, we can manage any resulting moral hazard
risk.18 More importantly these changes recognise and support the evolution of markets and
the growing importance of collateral that in turn stems from financial reform. We have the
opportunity through the design of our facilities to help support more diverse forms of finance
and more resilient markets - to the benefit of financial stability.
There is another important operational complementarity. The Bank can use supervisory
information and insight to make quicker, better informed judgements about whether to lend to
banks at times of crisis.19
It is clear that there is a strong case for central banks to have a broad role. Monetary and
financial stability are core objectives of macroeconomic policy, and central banks are
uniquely well positioned to contribute to their achievement. There are significant
complementarities between the broad range of the Bank's policy responsibilities, and that
has already translated into significant mutually reinforcing support to the UK economic
recovery.
Our strategic plan cements our commitment to work as One Bank to exploit those synergies.
It breaks down barriers between areas within the Bank through a reorganisation that puts
greater emphasis on joint working and moves key senior staff between areas; it aids staff
movement between areas by promoting a unified culture; it sweeps away a proliferation of
internal committees that held up decision-making; and it gives responsibility to the new Chief
Economist and Governors both for a coordinated research agenda spanning all aspects of
central banking and focusing in particular on the intersections between policy areas, and for
ensuring the Bank makes better use of the data we have across the organisation in tackling
all of the policy challenges we face.
International engagement to shape an open global system
In an era of renewed globalisation securing monetary and financial stability requires more
than a purely domestic focus. To realise globalisation's promise and deliver strong,
sustainable and balanced growth, policymakers must re-build an open, integrated and
resilient global financial system. As the leading global financial centre, the UK will be central
to this task. There are two elements that are particularly important.
First, the Bank of England's actions will help shape the functioning of core markets. The
combination of the eventual exit from Quantitative Easing and new liquidity regulations will
shape demand for central bank reserves. A host of financial reforms, such as those to
derivative markets, will fundamentally change the role of collateral, to which the Bank of
England's facilities must respond. And most fundamentally, given the serious issues raised
by the Libor and foreign exchange scandals, changes must be made to both the hard and
soft infrastructure of core markets to ensure they are fair, effective and efficient.
These are massive issues which require focus, discipline and innovation. Those are some of
the reasons why we have created a new Deputy Governor role for Markets and Banking and
why my colleagues and I are thrilled that Minouche Shafik has accepted this extraordinarily
important task. Minouche brings immense international, managerial and economic
experience from a career that has spanned academia, the public service and the IMF. She
will help lead the Bank's efforts to reshape core markets and the Bank's relationship to them.
Second, through its intellectual leadership and international relationships, the Bank can help
complete the G20's ambitious programme of financial reform including building resilient
financial institutions, ending too big to fail, making derivative markets safer and transforming
shadow banking to market based finance. Sir Jon Cunliffe, one of the original architects of
the Financial Stability Board, is leading this effort. The job is too big for one person and
requires a well-resourced and focused international strategy that draws on all areas of the
Bank. That is why we are pooling our prudential policy teams in a single directorate and
bringing together our international teams to increase insight and impact.
By acting as One Bank we can increase our international impact and ensure that the UK's
financial sector can be both a global good and a national asset.
Building on the success of the past 25 years
On the face of it the recent enlargement in the Bank's responsibilities represents a return to
the broader role of the Bank of the past. If there are some similarities in roles, how we will
discharge them will be fundamentally different. The age of informal responsibilities, nods,
winks, secrecy and instinct is long past.20
In no small part due to the Mais Lectures of my predecessors, particularly Mervyn King, we
have today a regime for monetary policy that is both democratically legitimate and highly
effective. It rests on clear ultimate objectives delegated by Parliament, on sound governance
arrangements to support independence, and on transparency of policymaking.
We are extending this sound framework with our strategic plan. We will reinforce these
foundations in monetary policy. And we will broaden them to financial stability.
The case for the independent operation of monetary policy is firmly established around the
time-inconsistency of governments with horizons dictated by the electoral cycle. That
timeinconsistency argument applies even more strongly to both microprudential and
macroprudential policy given the large potential size and long duration of credit cycles. The
avoidance of potentially unpopular measures to boost the resilience of the financial system
today can have disastrous consequences many years later. Moreover, being tough and
avoiding crises has no obvious reward. It is hard to be given credit for a counterfactual.
The Bank's independence must be supported by good governance arrangements. Now that
Parliament has developed them, we must make them work. The model used for monetary
policy of decisions being made by a committee made up of both Bank of England executives
and independent experts has been expanded to financial stability with the creation of both a
Financial Policy Committee and a Board of Prudential Regulation. As I have argued, those
policy committees will be more effective if they have access to the broadest range of the
Bank's analysis and information and are as well informed as possible about each other's
reaction function.
The now very wide range of the Bank's responsibilities also creates a need to strengthen the
oversight arrangements for the Bank as a whole. For delivery of our statutory objectives, the
Bank is accountable to the public, through Parliament's Treasury Committee. That
accountability is being reinforced.
Parliament has created an Oversight Committee of 8 non-executives who are in the Bank but
not of the Bank. The Government has today announced the appointment of Anthony
Habgood to lead the Bank's Court of Directors and the Oversight Committee. I welcome the
appointment of someone of his depth and breadth of corporate experience. Independent
oversight by the committee he will chair can strengthen the Bank's legitimacy and
effectiveness.
The Oversight Committee has access to internal papers, is able to observe meetings of
policy committees, and is responsible for reviewing all aspects of the conduct of the
Executive of the Bank, including the delivery of policy, the design of and adherence to
rigorous processes and procedures, and the monitoring of our transparency and openness.
Modelled on the Independent Evaluation Office of the IMF, we will create a unit to support
this, with a director reporting to the Chairman of the Oversight Committee.
It is not just our governance but also our commitment to transparency and openness that
must be further enhanced.
Transparency and openness are central not just to our legitimacy to perform these new tasks
on behalf of the citizens of the United Kingdom. They are also central to our effectiveness in
performing them. Just as Governor King described in his Mais Lecture 9 years ago,
openness about what policy is seeking to achieve can make it more effective.21
In monetary policy, that helps to anchor inflation expectations and to support countercyclical
movements in the policy setting. To that end, we have introduced forward guidance to reduce
uncertainty about the way monetary policy will be set as the recovery gains pace. Our
Inflation Report has evolved in the past year to contain more information about the key
judgements underlying our forecasts and to widen the set of economic indicators for which
we publish forecasts to include the labour market, components of GDP, the world economy
and household incomes and saving.
It will evolve further, including using our new organisational structure to draw stronger
distinctions between staff and MPC forecasts. We will also review the case for releasing
transcripts of our policy meetings after some years, and report publicly to the Oversight and
Treasury Select Committees on the outcome of that review.
Through our strategic plan, we will also increase the transparency of our work on financial
stability. We will publish the results of regular bank stress tests. As with monetary policy, we
also intend to publish more of the research and analysis underlying our policy choices. Over
time, the financial sector will be better placed to anticipate our responses and as with
monetary policy, increased transparency will make us not just accountable, but also more
effective.
Conclusion
The first Mais Lectures launched the fight against inflation. With time and increased
confidence policymakers would win that war only to lose the peace.
As a consequence, George Osborne's 2010 lecture heralded the return of prudential
supervision and the introduction of macroprudential policy to the Bank of England. Today's
challenge is to create a macroeconomic environment that provides the basis for strong,
sustainable and balanced growth, the economist's equivalent of a land fit for heroes.
This evening I have sketched how the Bank of England intends to makes its contribution. I
am in no doubt that those who come after me will add to our collective knowledge of how
best to coordinate the Bank's vast array of policy levers to achieve our fundamental mission.
An open and confident Bank will welcome such advice and criticism.
Why? Because the need for broad macroeconomic management is not just an intellectual
curiosity, but rather a reality that will persist for years to come.
As the MPC has signalled, a low for long interest rate environment will likely be with us for
some time. The MPC's new guidance that any adjustments in rates, when they come, will be
limited and gradual helps provide confidence to households and businesses that the MPC
won't take risks with the recovery. This in turn helps make the attainment of the inflation
target more likely.
At the same time, policymakers across the Bank's statutory committees are fully aware that
an environment of relatively low and predictable interest rates could encourage excessive
risk taking in financial markets and by households.22 This puts a tremendous burden on both
microprudential supervision and macroprudential management.
Moreover, the nature of a rapidly evolving global economy reinforces these pressures.
Sustained imbalances across countries, intense capital flow volatility and powerful
disinflationary forces driven by the integration of the other half of humanity into the global
economy will buffet our economy and financial sector for years to come.
The Bank can help turn those challenges into opportunities. Through the coordinated use of
the Bank's tools, risks to monetary and financial stability can be mitigated. Through changes
to the hard and soft infrastructure of markets fair, open and competitive markets can be
re-built. Through ideas and engagement, the global financial system can be reformed to
secure an open, resilie