LONDON—Bank of England Governor Mervyn King will be held to account by a new Financial Stability Committee as the central bank faces its biggest shake-up since it was made independent by the Labour government in 1997.
In his first Mansion House speech to City of London bankers, finance minister Alistair Darling on Wednesday outlined plans to boost the BoE's financial stability remit in the wake of the credit crunch and the collapse of mortgage lender Northern Rock.
"The challenge for us is to ensure that the authorities can act quickly and decisively where necessary to support financial institutions," Darling said, according to a copy of his speech.
Central to plans to give the BoE a legal responsibility for keeping markets on an even keel will be a panel drawing on outside expertise and BoE insiders to oversee the central bank's actions in protecting financial stability, Darling said.
There had been widespread criticism of King and the BoE's reactions to the global credit crunch, which struck last August, with many commentators wondering why the central bank did not respond quicker and with more force.
Darling said the Financial Services Authority would remain the sole banking supervisor and said he would set out full details of the plans in a letter to parliament's Treasury Select Committee on Thursday.
He is also expected to announce BoE chief economist Charles Bean as the new deputy governor at the central bank on Thursday.
"In future, we will also advertise the posts of the Governor, the Deputy Governors and also for external members of the Monetary Policy Committee, consistent with the principles of open competition to inject more openness and transparency to the process," he said.
"These measures represent a major reform equipping us to deal with the challenges we face."
Held to Account
As part of the BoE reforms, Darling will reduce the number of people on the central bank's Court of Directors to 12 from 19, most of them will be non-executive.
The Financial Stability Committee will consist of Court members and will be chaired by King, maintaining a regular open dialogue with the government.
The FSC will be able to hold King to account and, in turn, will be answerable to parliament's Treasury Committee.
Speaking a day after inflation leapt to its highest level since Labour came to power in 1997, Darling admitted the economy was facing a challenging time and that inflation would probably remain well above the two percent target for some time.
He blamed world commodity prices and said that continued pay restraint was needed.
"To return now to inflationary pay settlements would undermine rather than raise people's living standards with a damaging circle of wage increases eroded by steadily rising prices," Darling said.
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