{"id":42277,"date":"2018-06-22T08:45:03","date_gmt":"2018-06-22T07:45:03","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=42277"},"modified":"2018-06-22T08:45:03","modified_gmt":"2018-06-22T07:45:03","slug":"the-new-funding-structure-for-the-bank-of-england-suggests-that-the-treasury-thinks-the-proverbial-is-going-to-hit-the-fan","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2018\/06\/22\/the-new-funding-structure-for-the-bank-of-england-suggests-that-the-treasury-thinks-the-proverbial-is-going-to-hit-the-fan\/","title":{"rendered":"The new funding structure for the Bank of England suggests that the Treasury thinks the proverbial is going to hit the fan"},"content":{"rendered":"

Philip Hammond sprung a surprise by announcing a new era in the relationship between the government and the Bank of England last night. The details are here<\/a>. The Guardian, and many others,\u00a0 comment on the story in a way that is not apparently related to the documentation published, saying<\/a>:<\/p>\n

The\u00a0Bank of England<\/a>\u00a0will be allowed to provide more than \u00a3500bn in lending to the economy without seeking the Treasury\u2019s permission, in a move that reinforces the strength of the UK financial system as Britain prepares to leave the EU.<\/p>\n

Announcing the plan at the annual Mansion House dinner for bankers in the City of London on Thursday,\u00a0Philip Hammond<\/a>, the chancellor, said the changes would help to improve the resilience of the central bank. It would also help with its \u201cability to meet its monetary and financial policy objectives in the future\u201d, he said.<\/p>\n

Hammond said the government would give the Bank \u00a31.2bn, a sum that would underwrite the \u00a3500bn lending pot, but the move would not impact public borrowing because the money would remain in the public sector.<\/p><\/blockquote>\n

I have scanned all three documents published by the government and Philip Hammond's speech, and the source for this story is not apparent, so it must have come from an independent briefing.\u00a0 The new arrangements that the documents refer to are also less than transparent in some respects, and so anything I say here is, I stress, provisional.\u00a0 Some initial thoughts do, however, emerge.<\/p>\n

First,\u00a0 the supposed aim of these reforms is to make the Bank of England more like a bank. It has an enhanced capital base, can retain more of its profits, and has more operational freedom.\u00a0 That said, this appears to be a charade almost certainly designed to get around\u00a0government accounting requirements.\u00a0 It would seem to me as if the increase in risk that the Bank is meant to bear and the supposed right it has to retain profit within certain boundaries is all an attempt to shift the Bank of England's operations off the central government balance sheet post-Brexit.\u00a0 That may just be the cynic at play, but I doubt it.<\/p>\n

Second, no bank should be running a \u00a3500 billion loan book with any risk within on a\u00a0capital base of \u00a31.2 billion,\u00a0 meaning that the chance that this money is going to be released into the productive seems very low indeed. I think the intention is instead to bolster the balance sheets of commercial banks if they suffer significant risk post-Brexit.\u00a0 No other interpretation appears possible to me.<\/p>\n

Third,\u00a0 there are signs that the Treasury and the Bank of England think that things will be extremely difficult post-Brexit.\u00a0 There are provisions in the new arrangements for 'collateral\u00a0haircuts<\/a>'. In other words,\u00a0 if this new lending is asset-backed,\u00a0 as is likely, then the Bank is anticipating falls in asset prices.<\/p>\n

Fourth, it would seem as if the Bank is being given more opportunity to decide when, and if, quantitative easing will be unwound. The interest rate at which it may consider beginning this process has been reduced from 2% to 1.5%.\u00a0 In my opinion that suggests it is very unlikely that this will happen any time soon.<\/p>\n

Fifth,\u00a0 the coincidence between \u00a3435 billion of QE\u00a0funding and a new \u00a3500 billion lending pot backed by \u00a31.2 billion of new capital suggest to me that the new lending is almost entirely dependent upon realisation of QE bonds now held by the Bank. In other words,\u00a0 all that is being said is that if there is substantial demand for bonds post Brexit as\u00a0 the saving community head for safety during the course of an economic crisis then the Bank will be allowed to sell\u00a0 its bonds held under the QE\u00a0 programme to meet that demand\u00a0 and will then be allowed to lend back the proceeds into the commercial banking system to make good the liquidity crisis that would otherwise arise.<\/p>\n

I stress, this is a\u00a0 first reaction to a quite complex set of new measures which superficially, and as reported on all the media, make no sense at all.\u00a0 Unpacked as I present the above they do, however, have a coherent logic,\u00a0 albeit that the logic in question very clearly suggests that the Treasury and Bank of England are in practice planning for a hard Brexit and a consequent credit crisis for which they are creating the possibility of emergency liquidity funding for commercial banks.<\/p>\n

If I am right then I also offer three other ideas. The first is that the Treasury so lacks confidence in the government that it is outsourcing the saving of the economy. Second, this is dangerous: the Bank will, no doubt,\u00a0 deliver another emergency package that will favour the City and those who are associated with it.\u00a0 Thirdly, democracy is imperilled once again.<\/p>\n

My summary is you should worry: the Treasury clearly is. And they may be right to do so, even if it looks to me as if they are delivering the wrong solution.<\/p>\n","protected":false},"excerpt":{"rendered":"

Philip Hammond sprung a surprise by announcing a new era in the relationship between the government and the Bank of England last night. The details
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