(Removes earlier incorrect statement by Winters on BoE gilt
cash transfer affecting BoE capital, recasts with new statement
* BoE structure blamed for governor circumventing deputies
* New structures may not make crisis response easier
By David Milliken
LONDON, Nov 20 A Bank of England decision to
hand over interest payments on the central bank's gilt holdings
should not lead people to assume it is immune from future losses
from other programmes, the author of a report into the BoE said
Bill Winters, a former co-CEO of J.P. Morgan Investment
Bank, addressed the decision during an appearance before a
parliament committee, where he was presenting one of three
independent reviews published earlier this month into the BoE's
readiness for another bank crisis.
Some economists and opposition politicians have already
criticised the Nov. 9 decision by finance minister George
Osborne and BoE governor Mervyn King to return more than 35
billion pounds ($56 billion) of interest from the BoE's gilt
holdings, purchased as part of its quantitative easing programme
to spur the economy.
"The decision on the appropriate level of capital for the
Bank ... should be a conscious decision. It shouldn't be backed
into by the profits that happen to be there at a point in time.
At another point in time there could be losses," he said.
Winters also said that he hoped that the BoE's supervisory
board, known as its court, would be consulted on future
decisions to transfer funds to the government.
Answering a legislator's question, Winters said that the
money to be transferred to the Treasury was the BoE's capital,
but in a later statement issued via the central bank, Winters
said this was incorrect.
"I did not think the question of the appropriate level of
capital of the Bank of England should be judged on the basis of
the cash flow position of the APF," he said.
"In my more detailed responses to questions, my language may
have given the impression that the decision to transfer cash
from the APF reduced the Bank of England's capital. I did not
intend to convey that, and in fact, the transfers decision has
not affected the Bank of England's capital position."
The BoE and government say the decision brings BoE practice
into line with the U.S. Federal Reserve and the Bank of Japan,
but critics say the move is aimed at boosting the government's
chances of meeting politically sensitive debt reduction targets.
Although the Treasury has indemnified the BoE against future
losses on its quantitative easing programme, Winters said the
BoE may need to look more closely at other exposure from other
programmes that is not similarly protected.
"Funding for Lending is a very innovative programme, but
exposes the Bank to real risk. It is not indemnified by the
Treasury, and the Bank has not increased its capital on the back
of a much more substantial increase in its riskiness," he said.
MORAL HAZARD MISTAKE
Separately, Winters said King's strong concerns about the
moral hazard created by helping banks had slowed the BoE's
response to Britain's first bank run in a century in 2007, when
Northern Rock collapsed.
The BoE's unusual governance structure - where deputy
governors are appointed by the finance minister, not the
governor - also encouraged King to ignore them in favour of
managers a level below, Winters said.
However, he rejected lawmakers' suggestion that King's
management style had left the central bank "paralysed" in a
crisis, or that too little dissent was voiced.
British financial regulation is changing in response to the
crisis, with many responsibilities returning to the BoE next
But Winters said a future BoE governor would face a big
challenge coordinating three internal bodies setting monetary
policy, financial conditions and day-to-day supervision, as well
as relations with external bodies.
"It's more complex operationally and managerially," he said.
This view was shared by former policymaker Ian Plenderleith.
"It is extremely important to be clear about precisely who
is responsible for what well ahead of a crisis," Plenderleith
said. "Whether it will work in practice, we can only see."
* For details, see
($1 = 0.6284 British pounds)
(Additional reporting by Olesya Dmitracova; Editing by Ruth
Pitchford, Ron Askew)