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)
Date: 1998-01-21
Institutions: European Monetary Institute
Subjects: United Kingdom, central bank, convergence criteria, financial stability, monetary integration, national law

OPINION OF THE EUROPEAN MONETARY INSTITUTE

21 January 1998

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, second 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  into  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 of 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.

- 6 -

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 made public.

21 January 1998.