Appointment of Dr Mark Carney as Governor of the Bank of England - Treasury Contents

1  Introduction

1.  On 7 February 2013 Bank of Canada Governor Dr Mark Carney, chosen by the Government as the next Governor of the Bank of England, gave evidence to the Treasury Committee in what amounted to a pre-appointment hearing. This was an unprecedented event: no Governor of the Bank of England had previously given evidence to Parliament in advance of taking office.

The role of the Governor of the Bank of England

2.  The Financial Services Act 2012 has entirely reformed UK financial regulation and places the Governor of the Bank of England at the centre of the financial system. The Cabinet Office described the formidable extent of the role as follows when advertising for applicants:

The Governor leads the Bank of England, and plays an important role in setting monetary and regulatory policy, chairing the Monetary Policy Committee, the Financial Policy Committee and (from next year) the board of the Prudential Regulation Authority. The Governor represents the Bank in important international fora, such as the G7, G20, the European Systemic Risk Board and the Bank for International Settlements in Basel. The Governor is an executive member of the Bank's Court of Directors.

The Governor will work closely with the Chancellor of the Exchequer and HM Treasury, which is responsible for setting the framework under which the Bank operates.

The new Governor will lead the Bank through major reforms to the regulatory system, including the transfer of new responsibilities that will see the Bank take the lead in safeguarding the stability of the UK financial system.[1]

The process of appointment of the Governor

3.  When Mervyn King was appointed Governor in 2003, the then Treasury Committee did not feel it necessary to hold a hearing with him before he took up his duties, as he was already a member of the MPC—the Committee had held a hearing with him in 1998 after his appointment as Deputy Governor. It did, however, hold a hearing with Mervyn King in July 2003, shortly after he took up the post, on the prospects for his term of office.

4.  The Treasury Committee recommended in 2007 that the posts of Governor and the two Deputy Governors should be recruited by open advertisement.[2] When Mervyn King was reappointed for five years with effect from July 2008, the Committee held a hearing with him in April and subsequently published a Report. In June 2008 the then Chancellor of the Exchequer, the Rt Hon Alistair Darling MP, told the Treasury Committee that "In future, the Government will advertise vacancies for the Governor and Deputy Governors of the Bank of England".[3]

5.  Sir Mervyn King's second five year term as Governor of the Bank of England ends on 30 June 2013. In September 2012 the Government for the first time openly advertised the post of Governor of the Bank, seeking applications by 8 October 2012. The candidate the Government sought was described as follows:

The successful candidate must demonstrate that they can successfully lead, influence and manage the change in the Bank's responsibilities, inspiring confidence and credibility both within the Bank, throughout financial markets and in the wider public arena.

Prior Experience

The successful candidate will have substantial experience in one or more of the following:

working in, or involvement with, central banking (for example a central bank, the Bank for International Settlements, the International Monetary Fund, or similar institutions);

working at the most senior level of a major bank or other financial institution.

Role requirements

Financial market and economic knowledge. The successful candidate will have extensive knowledge and experience of financial markets and the risk cultures therein, and be credible on both micro- and macro-economic issues domestically and internationally.

Leadership and management skills. The ability to be an effective leader of the senior management team, to encourage teamwork and to develop talent; given the breadth of the Bank's responsibilities, the ability to delegate will be particularly important. The successful candidate will have led a large organisation and will demonstrate personal effectiveness, determination and resilience.

Communication, influencing and interpersonal skills. The ability to build good relationships with colleagues within the Bank of England and with other partners, such as the Chancellor of the Exchequer and HM Treasury, market participants, and international counterparts. To be able to communicate with authority and credibility to Parliament, the media, the markets and the wider public.

Policy skills. The ability to design frameworks and develop policies that will be appropriate for multiple scenarios, and the ability to implement those new policies in a fast-moving environment. This will require significant understanding of the workings of government and regulators—gained through membership of relevant public sector boards, industry bodies or working groups if not through direct experience in policy leadership roles. Acute political sensitivity and awareness will be crucial.

Undisputed integrity and standing. The ability to maintain discretion and engender trust in staff, peers and stakeholders. A willingness to abide by necessary conflict of interest constraints.[4]

6.  The recruitment panel was chaired by Sir Nicholas Macpherson, Permanent Secretary at the Treasury. Sir David Lees, Chairman of the Court of the Bank of England, assisted in conducting the process. Nine candidates were shortlisted.[5]

7.  The Chancellor himself interviewed the six candidates "deemed appointable" by the panel.[6] He then made his recommendation to the Prime Minister, who made the same recommendation to the Queen, who approved the appointment. The Chancellor announced to the House on Monday 26 November that Dr Mark Carney, at present Governor of the Bank of Canada, would be the next Governor in succession to Sir Mervyn King.[7]

Special arrangements for Dr Carney

8.  Dr Carney had said to the BBC in August 2012 that he was not considering the job of Governor of the Bank of England.[8] He told us the reasons that he did not want the job at that stage:

[...] there was a series of conversations over the course of last year that I had with the Permanent Secretary and with the Chancellor related to this position. My view in the summer of last year and right up and including the 8 October deadline for an application was to not proceed with an application for a few reasons. One was my current responsibilities at the time as Governor of the Bank of Canada. The second was the personal aspects of the job or the personal aspects that would be associated with the move. I have a young family and the transition of countries and schools here and then back was in the end decisive. It was a finely balanced decision, as I think I outlined in my written response, given the immense challenges that are associated with this opportunity.[9]

9.  Dr Carney told us that his mind was changed for two reasons:

What changed was that, subsequent to that decision, the Chancellor suggested to me that the position could be for a period of five years. That was the first point. Secondly, I was informed that Charlie Bean, Deputy Governor for Monetary Policy, had agreed that he would extend his term for an additional year from the time of the selection of the new Governor.[10]

Dr Carney added that this conversation with the Chancellor took place at the Mexico G20 on 4 or 5 November 2012.[11] Dr Carney had by that time been aware for about three weeks that a process had been devised by Sir Nicholas Macpherson for sitting governors of central banks. He had heard this in the period after the deadline for applications had passed on 8 October.[12]

10.  Following the Chancellor's announcement, it emerged publicly that special arrangements had been made for Dr Carney to apply for the job. Sir Nicholas Macpherson told us in writing that:

I decided that a special process was necessary for serving Governors. It became clear that it was impossible for a serving Governor to apply to the timeframe and thus open their own position to uncertainty for two months (on professional, political and economic grounds).

Therefore I devised a process whereby serving Governors could apply at the same time as being interviewed, to limit the risk of potentially destabilising speculation. Since no other serving Governor expressed an interest in the job, this special process only applied to Dr Carney.[13]

In response to a further letter from the Committee Chairman, Sir Nicholas gave more details:

I was in contact with Dr Carney from February 2012 onwards, as I was with a number of other potential candidates. No other central bank governor expressed an interest in the job, following the advertisement, and so this part of the process was designed with Dr Carney in mind. And given the lack of interest from other governors, I did not see any merit in publicising it. The process was exceptional, reflecting the importance and sensitivity of the appointment. Although I would not want to rule it out for the future, I would expect such a process to be necessary only in exceptional circumstances.[14]

Dr Carney told us that the interview took place around 17 November, on a Sunday.[15]

Term of office

11.  Until the passage of the Financial Services Act 2012, the Governor of the Bank of England was able to serve two five year terms. Following a recommendation from this Committee, the Government agreed that in future the Governor of the Bank of England should serve for a single, non-renewable, eight-year term, and this is now in statute as a result of the Financial Services Act 2012. However the Chancellor told the House when announcing the appointment that Dr Carney had indicated that he wished to serve as Governor for five years. This, the Chancellor said, would "align with the timing of his role at the [Financial Stability Board], and reflects the fact that by then he will have served for 10 years as a central bank governor".[16] Dr Carney himself told us of several reasons for his preference for a five year term:

The role comes during a unique period in the Bank's illustrious history as it takes on new responsibilities. The next five years will span a period that will be critical for the future development of the Bank of England itself, for the development of the British, European and global economies, as well as decisive for domestic and international financial reform.

My tenure will oversee a significant transition at the Bank. To be most effective, transitions need to be sharp, sustained and finite. A five-year term is the right managerial timeline to relaunch the Bank of England with its broader responsibilities, and to develop considerable talent, undertake targeted external recruitment, and build a succession plan. Over the five years, we can establish the full potential of the new institutional structure, which combines monetary policy, macroprudential and microprudential regulation. I can also give life to the crucial governance reforms promoted by the Treasury Committee and incorporated in the Financial Services Act.

As an outsider I can—for a period—bring different experiences and perspectives to help catalyse the necessary changes within the Bank to achieve these goals, and I look forward to working with employees of the Bank, the Court, the Government and the Treasury Committee to ensure that the full potential of all of these reforms is realised.

The next five years will also be a decisive period for domestic financial reform. By 2018, the ring-fencing of core banking activities recommended by the ICB should be well on the way to completion and, following agreement of the European Recovery and Resolution Directive, the UK's Special Resolution Regime will have been developed to allow bail-in of banks' unsecured creditors. We will have done much to solve the problem of banks that are too big to fail.

Over the next five years, the Bank has the ability to extend and broaden its position as a global leader (intellectually and effectively) amongst central banks. The next five years will be the decisive period for international financial reform after the crisis. By 2018, all elements of the Basel III reforms will be agreed and implemented, with capital requirements and the Liquidity Coverage Ratio supplemented with the Net Stable Funding Ratio and a common leverage ratio. A wide range of reforms to OTC derivatives trading will also have been introduced, including capital and margining requirements, measures to impose mandatory exchange trading and centralised clearing of standardised derivatives, and new transparency requirements. In addition, the framework that is being constructed for systemic institutions will have been extended to global insurers and key shadow banks.

Importantly, a five-year term corresponds with my maximum possible term as FSB Chair (terms are 3 years once renewable). Simultaneously serving in both roles will maximise intellectual, managerial and work process synergies at the Bank of England during the critical period for reform.

Finally, from a personal perspective, there are two considerations. First, at the end of a five year term, I will have served as a Governor of a G7 Governor central bank for over a decade. In my experience, there are limits to these highly rewarding but ultimately punishing jobs. Second, the five year term has advantages given the ages of my children and the disruption that is involved in moving schools and countries.[17]

In oral evidence, he gave the impression that personal reasons were highly significant:

[...] for me, given the ages of my children, it makes a material difference to come here and then return to Canada. I will be more specific. My eldest daughter will just finish high school over the course of five years. The second-eldest daughter will have two years in which to reintegrate into a French school system in the Canadian school system, which is what she would do.[18]

Parliamentary scrutiny of the appointment of the new Governor

12.  In our Report of 2011 into the Accountability of the Bank of England we recommended that, in order to safeguard the independence of the Governor, the Treasury Committee be given "a statutory power of veto over the appointment and dismissal of the Governor of the Bank of England," similar to the power given to the Treasury Committee over the appointment of the Chair of the Office for Budget Responsibility.[19] In its response to our Report, the Government argued against our recommendation:

The Government believes the independence of the Governor of the Bank of England is vital, and is confident that this independence is safeguarded via existing mechanisms, such as his appointment by the Queen. The Bank of England and the Office for Budget Responsibility perform materially different roles. The Bank of England undertakes policy actions that directly affect markets and, as such, appointments to the Bank's executive or policy committees are market sensitive. This market sensitivity makes these roles unsuitable for pre-appointment vetting. The Government hopes that the TSC will continue to hold pre-commencement hearings for the members of the Bank's policy committees, which include the Governor and Deputy Governors.[20]

13.  When the Chancellor announced the appointment, he told the House that Dr Carney wished to appear before the Treasury Committee before taking up his appointment, and that Dr Carney would not otherwise be commenting at length on British economic policy until he took up his post.[21] The Committee announced later that day that it would hold what would amount to a pre-appointment hearing with Dr Carney and report its conclusions to the whole House. If necessary, the Committee said that it would request that its recommendations be debated on the floor of the House.

Our evidence session with Dr Carney

14.  Our meeting on 7 February 2013 gave Dr Carney time to answer a detailed questionnaire in advance covering his views on a wide range of topics relevant to his role as Governor. This, along with the CV that he also provided, was the basis for much of our questioning. The publication of the questionnaire, and the public oral evidence, have allowed the general public, policy makers and those with a professional interest to have a clear idea of Dr Carney's views and approach in advance of his taking up his role.

15.  The incoming Governor made clear that he would speak to the Treasury Committee before making other statements. The detailed examination of his views in this hearing, and the wider public scrutiny that comes with it, should assist the Governor's efforts to explain his approach to the public. We will follow a similar pre-appointment process for the appointment of subsequent Governors, and maintain our scrutiny once he has take up his appointment.

16.  We are most grateful to Dr Carney for travelling to London specially for his meeting with the Committee, and for providing full and helpful answers—both in writing and in person—to the Committee's questions.

Criteria for appointment

17.  When considering appointees for the Monetary Policy Committee, we judge them against criteria of professional competence and personal independence. The Governor's role is much wider than that of an MPC member, so we questioned Dr Carney on a range of subjects in order to reach a judgement in addition as to his skills and experience, leadership qualities and views on the governance and accountability of the Bank of England.

18.  Following the meeting with Dr Carney, the Committee issued a press release confirming his appointment. We conclude that he has the necessary professional skills, qualities and experience, and personal independence, to be Governor of the Bank of England.

19.  The Committee wishes Dr Carney every success for his term as Governor, and looks forward to our future meetings with him, including the regular evidence sessions we hold with the Monetary Policy Committee and the Financial Policy Committee.

20.  Dr Carney's views on the UK's future monetary policy framework could be of great significance. Since we heard evidence from him, however, the Chancellor has announced in the Budget changes to the remit of the Monetary Policy Committee. The Government discussed the new remit with the present Governor and Dr Carney, and it has their agreement, but the content of those discussions has not been made public.[22] These changes have formed part of our inquiry into the Budget and we will report our conclusions, based in part on Dr Carney's evidence, in that Report.

1   The Economist, September 15 2012, page 19 Back

2   Treasury Committee, Twelfth Report of Session 2006-07, The Monetary Policy Committee of the Bank of England: ten years on, para 84 Back

3   Treasury Committee, Seventeenth Report of Session 2007-08, Banking Reform, Ev 38 Back

4   Cabinet Office, Role profile, Governor of the Bank of England Back

5   HC Deb, 26 November 2012, col 21; Letter from Sir Nicholas Macpherson to Chairman of the Treasury Committee, 9 January 2013 Back

6   Letter from Sir Nicholas Macpherson to Chairman of the Treasury Committee, 9 January 2013 Back

7   HC Deb, 26 November 2012, col 21 Back

8 Back

9   Q 1 Back

10   Q 2 Back

11   Q 3 Back

12   Qq 5-7 Back

13   Letter from Sir Nicholas Macpherson to Chairman of the Treasury Committee, 9 January 2013 Back

14   Letter from Sir Nicholas Macpherson to Chairman of the Treasury Committee, 31 January 2013 Back

15   Q 8. 18 November 2012 was a Sunday. Back

16   HC Deb, 26 November 2012, col 22 Back

17   Ev 32 Back

18   Q 2 Back

19   Treasury Committee, Twenty-first Report of Session 2010-12, Accountability of the Bank of England, HC 874, para 148 Back

20   HM Treasury, A new approach to financial regulation: securing stability, protecting consumers, January 2012, Cm 8268, para B.30 Back

21   HC Deb, 26 November 2012, col 22 Back

22   HM Treasury, Review of the monetary policy framework, March 2013, p5 Back

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© Parliamentary copyright 2013
Prepared 19 April 2013