21 January 1998
OPINION OF THE EUROPEAN MONETARY INSTITUTE
at the request of the United Kingdom under Article 109f(6) of the Treaty establishing the
European Community (the “Treaty”) and Article 5.3 of the Statute of the EMI concerning a
Bank of England Bill
(CON/97/27)
Introduction
1. On 31 October 1997 the EMI received from the Chief Secretary to H.M. Treasury a request for
an opinion on a Bank of England Bill (“the bill”).
2. The EMI’s competence to deliver an opinion is based on Article 1.1, s econd and fifth indents, of
the Council Decision of 22 November 1993 (93/717/EC) (“the Council Decision”) on
consultation of the EMI by the authorities of the Member States on draft legislative provisions, as
the bill contains inter alia provisions concerning the status and powers of the Bank of England
(“the Bank”), instruments of monetary policy and rules applicable to financial institutions in so far
as they influence the stability of financial institutions and markets.
3. The EMI has been informed that  it may be of assistance to the process of public scrutiny of the
bill within the UK if its opinion were to be available before the debate in parliamentary
Committee on the bill. Whilst the EMI wishes to be helpful in this regard, it notes the provisions
of the Council Decision that Member States shall ensure that the EMI is consulted at an
appropriate stage to enable the consulting authority to have the EMI’s opinion before taking its
decision on the substance of the draft legislation and that any time limit imposed upon the EMI
may not be less than one month. The EMI therefore proposes to issue its general comments in
time for the UK parliamentary Committee debate, and to finalise its opinion by the addition of
more detailed comments at a later date.
4. Pursuant to notification given by the United Kingdom on 30 October 1997 that it does not intend
to move to Stage Three, certain provisions of the Treaty and the ESCB/ECB statute set out in
the third protocol to the Treaty (“the Statute”) do not apply to the United Kingdom, including
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Article 107 (dealing with the independence of national central banks) and Article 108 (dealing
with the compatibility of legislation). In consequence, there is no current legal requirement to
ensure that, by the time the ESCB is established, national legislation, including the statutes
establishing the Bank, has become compatible with the Treaty and the Statute, nor that the Bank
satisfies the requirements for central bank independence.
5.  Article 109e(5) of the Treaty provides that during the second stage each Member State shall, as
appropriate, start the process leading to the independence of its  central bank, in accordance with
Article 108. While Article 109e(5) applies to the UK, Article 108 does not. Although the EMI
understands that the bill is not intended to comply with the provisions of the Treaty, it considers
that the bill is a step in the process towards the independence of the Bank, and welcomes it
accordingly.
6. In this opinion the EMI will divide its comments in to those which relate to central bank
independence, which the EMI hopes may be helpful in clarifying the requirements for central
bank independence established in the Treaty, and those which relate more widely to integration
within the ESCB, which will be of most relevance if the UK intends to join the single currency.
7 The background to the views of the EMI is set out in its reports on the adaptation of national
legislation (in particular the statutes of national central banks) the most recent of which is the
report entitled “Legal Convergence in the Member States of the European Union as at August
1997”, published on 27 October 1997. The EMI noted in that report that further legislation would
be required if the United Kingdom intended to join the single currency. The EMI notes that the
bill embodies most of the reforms announced by the Chancellor of the Exchequer on 6 May 1997
and as referred to in the EMI’s report.
Central bank independence.
8. The EMI notes that the bill provides for a higher degree o f autonomy of the Bank. It welcomes
this step. However, the provisions of the bill fall short of the level of independence required by
the Treaty.
9. The EMI notes as a general matter that effective central bank independence cannot be
restricted to operational aspects. In this regard it notes that, although the priority of the Bank’s
monetary policy objective is clear, the requirement on the Treasury to set inflation targets and
specify what the economic policy of the government is to be taken to be does not necessarily
separate monetary policy from political decisions. This would be particularly so if there are
frequent revisions of what price stability is to be taken to consist of or of the inflation target in
the specification of economic policy. The EMI notes that such specifications are to be made by
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the Treasury at least once a year. The EMI would emphasise that account should be taken of
the time delay involved in the transmission of monetary policy impulses. The EMI understands
that the Bank has traditionally identified a lag of 18 to 24 months before monetary policy
becomes fully effective. Any alteration to the inflation target each year (a possibility not
excluded by clause 12) might not allow for the existence of such lags. (In this context the EMI
understands further that the UK government will monitor the UK’s inflation target and inflation
measure in the light of the practices of the ECB.) Further assessment in relation to independence
(including functional independence) would be required as regards other ESCB-related tasks.
10. (Clause 1 of the bill ) The arrangements proposed in the bill for the court of directors of the
Bank continue to exclude from eligibility those who are in the service of the state. However, the
arrangements do not meet the requirements for personal independence that derive from the
Treaty and the Statute and which apply to the performance of ESCB-related tasks. Such tasks
are not limited to the formulation and implementation of monetary policy. The EMI notes that the
tenure of directors other than the Governor and the two Deputy Governors is to be three years,
or in some cases even less, where the Treaty requires five; and that the possibility that conflicts
of interest might arise is not excluded (indeed, an arrangement is made to resolve them at
schedule 1, paragraph 13). The EMI would prefer for bodies making decisions on ESCB-related
tasks an arrangement which would preclude any such conflict.
11. (Clause 7 of the bill ) The power of the Treasury to require the Bank to publish additional
information in relation to its accounts may not be consistent with the ESCB’s confidentiality
regime.
12. (Clauses 10 and 19 of the bill ) Article 107 of the Treaty prohibits any national central bank or
any member of any of their decision-making bodies from seeking or taking instructions from,
amongst others, any government. Whilst the bill removes from the Treasury the power to give
directions to the Bank in relation to monetary policy, it also establishes a reserve power enabling
the Treasury to give the Bank directions for limited periods if such are required in the public
interest and by extreme economic circumstances. This would not be compatible with the
requirements of the Treaty, in which the prohibition against giving such directions is absolute.
13. (Clause 13(2) of the bill ) The provisions for the members of the Monetary Policy Committee
do not comply with the requirements of the Treaty and the Statute in that their tenure is to be for
three years, or in some cases even less, instead of at least five (schedule 3, paragraphs 1 and 2
of the bill).
Integration within the ESCB.
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14. The EMI notes that no provision has been made as regards the integration of the Bank into the
ESCB.
15. (Clause 6 of the bill ) The provisions set out in schedule 2 to the bill relating to cash ratio
deposits are established as part of the arrangements for financing the Bank. Whilst the EMI
acknowledges that they are not intended to be used as a monetary policy instrument, it notes that
the holding of minimum reserves might be a monetary policy instrument in Stage Three and that
such cash ratio deposits would need to be reviewed accordingly.
16 (Clause 7 of the bill ) The proposed financial arrangements would have to be modified to take
account of the financial provisions of the ESCB as set out in Chapter VI of the Statute.
17. (Clauses 11 and 12 of the bill ) The Treaty requires that the primary statutory objective of the
ESCB shall be the maintenance of price stability. The EMI notes that the bill provides that the
primary objective of the Bank shall be to maintain price stability. However, this objective is
qualified  by relating only to monetary policy and by being subject to the power of the Treasury
to specify what price stability is (a point which also affects independence). Whilst the general
statement of the objective of price stability represents a welcome move towards the requirement
of the Treaty, the EMI notes that the existence of the qualifications and, in particular, the power
for the UK government to specify what price stability is would not be compatible with the
requirements of the Treaty regarding national central banks becoming an integral part of the
ESCB.
18 (Clauses 11 and 12 of the bill ) The Bank’s secondary objective, again only in relation to
monetary policy, is to support the economic policy of the UK government, including the
government’s objectives for growth and employment. These provisions would not be consistent
with the secondary objectives required by the Treaty, which include (Article 2 of the Statute) the
support of the general economic policies of the Community with a view to contributing to the
achievement of the Community’s objectives as laid down in Article 2 of the Treaty.
19. (Clause 13(1) of the bill ) The bill establishes a Monetary Policy Committee which shall have
responsibility for formulating monetary policy. All the members of the committee will be in the
service of the Bank and will have relevant expertise. However, the existence of this
responsibility would not be consistent with the monetary policy competences of the Governing
Council of the ECB in Stage Three.
20. (Clauses 14 and 15 of the bill ) The regime for the publication of information concerning
discussions and decisions would not be consistent with the transfer to Community level of control
over such publication.
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Collection of statistical information.
21. (Clause 17 of the bill) The Bank’s power to obtain information mentions some but not all
categories included in the reference reporting population as set out in Article 2 of the draft EU
Council Regulation concerning the collection of statistical information by the ECB. Thus the
category of (non-monetary) financial institutions included in Article 2(a) of the draft regulation is
wider than in clause 17(3) of the bill; the bill does not mention economic entities holding cross-
border positions, undertaking cross-border transactions, and issuing pre-paid cards. Moreover,
the bill at 17(4) empowers the Treasury to determine which “financial affairs” of an undertaking
should be reported on and at 17(5) to amend the categories of undertaking to which clause 17
applies. In particular, it should be noted that the EMI/ECB is not listed among the organisations
which the Treasury must consult before doing so. This omission may be inconsistent with Article
5 of the Statute, which applies to the United Kingdom (whether or not it joins the single
currency).
Stability of financial institutions and markets.
22. (Part III of the bill ) The EMI notes that the bill foresees a change in the organisation of
prudential supervision. Parts III and IV of the bill concern inter alia rules applicable to financial
institutions which influence the stability of financial institutions and markets.  The EMI notes the
proposed transfer of supervisory responsibility to the Financial Services Authority and trusts that
the process of reorganisation will not affect the stability of the banking system and the financial
markets. In this context the EMI notes that the Bank of England has already been party to a
Memorandum of Understanding negotiated with the Treasury and the Financial Services
Authority which accompanies the process of reorganisation of prudential supervision and in
which the prudential supervisory functions in the new regime are explained. The EMI notes that
the Bank will continue to be concerned with the stability of the banking system and that the
Deputy Governor of the Bank responsible for financial stability will be an ex officio member of
the Deposit Protection Board (clause 29 (2) (c) of the bill). The EMI considers these
arrangements to be in conformity with Article 3.3 of the Statute, which states that the ESCB
shall contribute to the smooth conduct of policies relating to the prudential supervision of credit
institutions and the stability of the financial system.
23. The EMI recalls that this is the general part of its opinion, and that more detailed comments are
to be added at a later date. The EMI has no objection to this part of its opinion being made
public.
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On 10 November 1997 the EMI issued the first part of its opinion, containing the general
comments it wished to make. This second and final part of the EMI’s opinion repeats above
without amendment the first part and supplements it with the addition of the more detailed
comments set out below.
Central bank independence.
24. (Schedules 1 and 3 of the bill ) Schedule 1, paragraph 3 and schedule 3, paragraph 2
respectively provide that a person appointed in place of a person who ceases to hold office
before the end of the term for which he or she was appointed shall be appointed only for the
remainder of that person’s term of office. The EMI notes that this may result in appointments of
a very short length, in consequence of which the independence of those so appointed may be
subject to influence which affects the level of independence required by the Treaty and Statute.
Integration within the ESCB.
25. (Clause 18 of the bill ) As noted at paragraph 20 above, the regime for publication of
information concerning the discussions and decisions of the Monetary Policy Committee would
not be consistent with the Treaty and Statute. In particular, the publication on a quarterly basis
by the Bank of a report which contains a review of monetary policy decisions and an indication
of the expected approach to meeting monetary and economic policy objectives in the future
could, depending on the content of the report, be incompatible with the information provisions
contained in the Statute and, possibly, with Article 10.4 of the Statute which states that the
proceedings of the ECB Governing Council shall be confidential and that the ECB Governing
Council may decide to make the outcome of its deliberations public.
26. The EMI has no objection to the totality of its opinion being ma de public.
21 January 1998.