Appointment of new Governor of the Bank of England: Why is it so important?

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Much has been printed in the past week about the appointment of Mark Carney as the new Governor of the Bank of England.  It is the most senior position in the Bank of England and is nominally a civil service post. It carries with it the chairmanship of the Monetary Policy Committee.

He is the 120th Governor and the first foreigner – a Canadian – to be appointed to the position which he will take up in June 2013, when Sir Mervyn King retires.  He has a massive role in guiding national economic and monetary policy, and is therefore one of the most important public officials in the United Kingdom.  The shape and future well-being of the UK economy depends on this being the right appointment.

The Bank has three main responsibilities; keeping the Consumer Price Index (CPI) measure of inflation close to the target set by the government; financial stability by ensuring the entire financial system works; and making sure individual banks do not go bust, landing the taxpayers with a huge bill for bail outs.

The Bank of England and its governor are at the heart of dealing with any financial crisis together with the Financial Services Authority (FSA) and HM Treasury.

In 2013, the FSA will be replaced by two new regulatory bodies:

  • The Prudential Regulation Authority (the PRA), a subsidiary of the Bank of England, will be responsible for promoting the stable and prudent operation of the financial system through regulation of all deposit-taking institutions, insurers and investment banks.
  • The Financial Conduct Authority (the FCA) will be responsible for regulation of conduct in retail, as well as wholesale, financial markets and the infrastructure that supports those markets.

In other words, from next year, the Bank of England will take back the formal responsibility for the regulation of individual banks and will be able to intervene directly in the running of any bank which it thinks is running excessive risks.

The current banking reforms are to ensure the authorities pro-active, rather than waiting until a crisis has occurred before acting.

Mr Carney will have three deputy governors: One responsible for monetary stability; one for financial stability. Next year a third deputy will be responsible for the regulation of banks.

Currently Governor of the Canadian Central Bank, Mr. Carney does have a successful track record. Canada managed to cut back its unsustainable welfare state and public sector, cleared its debt, saw the banking crash coming and managed to avoid it. And last year its economy grew by 3%.   He has demonstrated strong leadership and an understanding of financial markets. He also appears to have undisputed integrity and standing.

Is his appointment a masterstroke by the Chancellor?

For the sake of the financial progress and stability of the UK, let us hope so.

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