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BOE independence ‘at risk’ from change to funding model
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BOE independence ‘at risk’ from change to funding model

2 min. 08.02.2022 From our online archive
Currently, the cost of the BOE’s economics and financial stability functions is met by a charge on financial institutions, set once every half decade
The Bank of England located in London
The Bank of England located in London
Photo credit: Shutterstock

The Bank of England’s independence is being put at risk by Treasury plans to switch its funding model from a five-year settlement to an annual levy, according to two former senior officials. 

Andrew Tyrie, a former chairman of both the House of Commons Treasury Committee and the Parliamentary Commission on Banking Standards, and Charlie Bean, a former BOE deputy governor, told Bloomberg that multi-year funding is vital to protect the BOE’s operational independence.

Currently, the cost of the BOE’s economics and financial stability functions is met by a charge on financial institutions, set once every half decade.

Within the central bank, the arrangement is considered an essential part of the independence framework by limiting the opportunities for the Treasury to meddle in its affairs. Bean and Tyrie said an annual levy could give the Treasury the power to link BOE resources to the UK’s annual budget.

“A levy that, in practice, developed into a requirement on the Bank to engage in an annual renegotiation could prejudice the perception of independence, whatever the reality or the Treasury’s intentions,” Tyrie, now a member of the House of Lords, said. 

“Ring-fenced multi-year funding is probably necessary to underpin the Bank’s operational independence in any new arrangement.”

Bean called for multi-year funding to be maintained, saying an annual arrangement provides “more scope for the government or the chancellor to put pressure on the Bank to take politically favourable actions in return for a better financial settlement.”

The BOE and the Treasury declined to comment.

The BOE’s independence was called into question during the pandemic as its £ 450 billion (€534 billion) quantitative-easing program roughly matched the extra government borrowing in 2020 and 2021 to fund Covid rescue schemes. That sparked accusations of deficit financing.

The review into the BOE funding is being led by a joint Treasury-Bank steering group. A consultation paper from September made it clear that an annual levy was the preferred option. An announcement is scheduled for “early” this year.

The BOE’s funding is under review because it has had to dip into its capital reserves to meet running costs. It had previously been profitable, under a complex charging arrangement on banks and insurers. 

Surplus annual profits, which have averaged around 50 million, were passed over to the Treasury in a dividend. Last year was the first time no dividend was made in living memory.

©2022 Bloomberg L.P.