Treasury team member Neil Davidson on the skill-set needed to run the Bank of England
There is a growing appreciation that the UK economy’s problems lie within the financial system. The banks are perceived as pushing credit markets into a near sclerotic, highly damaging condition. Supervision of financial markets requires a goal of encouraging growth, prosperity and stability as well as a monitoring function. Well-supervised markets encourage the real economy towards enterprise. Well-supervised markets do not encourage a few players merely to extract massive compensation with no regard to the real economy.
Looking to the future, the next Governor of the Bank of England should of course have an intimate understanding of how markets work, but also how they can do so to bring about economic growth. The next Governor should also be of sufficient stature to command the respect of financial markets both in the UK and overseas. The perceptions of central banks in the Middle East and Asia are especially significant at this time.
The problems the UK faces are global in their nature. Intelligent international supervision can guide markets away from the negatives of constricted credit, excessive compensation and corporate insolvency, and towards their proper purpose of supporting economic growth. The next Governor should be qualified to take a lead in devising such solutions with international counterparts.
A real concern exists that come the next financial crisis, the UK may not have the immediate access that enables swift action at times of great difficulty. In the 2007/8 crisis, it was fortuitous at prime ministerial level that there long established trusted relationships were in place. The next Governor must be at the centre of international financial dialogue. And there is plainly a role given the UK’s pre-eminent position in global markets for the next Governor to be in a position to lead.
Effective supervision goes well beyond regulation, important though that is. It requires direct access to views and policies expressed elsewhere to appreciate the impact these may have on the UK. It also requires a capacity to gain the confidence of other central banks in solving international problems.
In the current financial climate, the UK’s skills in finance and understanding of the flow of funds can be marshalled by the next Governor to enable the UK to regain a central position in international finance. An international outlook and an ability to produce effective and far-reaching solutions would enable the next Governor to contribute effectively to the UK’s economy and the wider global position.
Lord Neil Davidson is a member of Labour’s Treasury team in the House of Lords