There are not one, nor two, but three policy committees at the Bank of England. Their names describe their respective responsibilities: the Monetary Policy Committee (MPC), the Financial Policy Committee (FPC) and the Prudential Regulation Committee (PRC). One could be forgiven for assuming that these committees would share a common template when it comes to their composition and decision-making process – three committees cut from the same cloth. But they are not.

Author: Dr Richard Barwell

Published: 17 April 2023

There are not one, nor two, but three policy committees at the Bank of England. Their names describe their respective responsibilities: the Monetary Policy Committee (MPC), the Financial Policy Committee (FPC) and the Prudential Regulation Committee (PRC).  One could be forgiven for assuming that these committees would share a common template when it comes to their composition and decision-making process – three committees cut from the same cloth. But they are not.

Clearly, the structure of a policy committee does not pre-determine its conduct and performance. But structure matters and there are interesting differences in the design of these committees. This article reviews the alternative choices that have been made and argues that adopting best practice on the decision-making process and membership of these committees could bring benefits.

Decisions To Make by mattjeacock, Getty Images Signature

Decisions To Make by mattjeacock, Getty Images Signature

Decision-making

Committees can reach conclusions in different ways. The Bank’s three committee do not all follow the same model. The MPC takes decisions by one member one vote, and in the event of a tie, the chair gets a second casting vote. In contrast, the chairs of the FPC and the PRC are directed in the legislation to “seek to secure that decisions of the Committee are reached by consensus wherever possible”. It is only in circumstances where a consensus cannot be reached that these committees will resort to voting (and again, in the event of a tie, the chair gets the second casting vote).

There appears to be a broad consensus within the monetary policy community that taking decisions within committees by voting is in theory preferable to searching for a consensus, which mirrors what is being done in practice in many central banks around the world. The principal argument in favour of voting is that it changes the way that policymakers think about their role on those committees: they are accountable first and foremost for their individual contribution rather than just the decisions of the group and the majority in particular. This should encourage policymakers to speak and vote their mind and if policymakers stand up for what they believe then that ought to make for a healthier debate and ultimately better decisions.  Indeed, former Governor Mervyn King once observed about the MPC that:

“Some of the other central banks have a token dissent, or one odd ball, but … this is genuinely a committee in which people feel under great pressure to say what they really think and that’s the principal part of how the committee operates. That you get better decisions if you ask the nine people to say what they really think, instead of asking them to sit round and try and come to a consensus”

It is true that MPC members regularly register dissenting votes on the policy stance that differ from the majority view. However, it is also true that in the vast majority of cases, these policymakers are dissenting from the majority view on the policy rate by 25 basis points and, at least from a macroeconomic perspective, that represents a marginal difference of opinion.[1] Dissenting votes on asset purchases (QE) are arguably even more marginal still.[2]

It may well be that these individuals are only voting the direction of their dissenting view but they are still registering dissent. A signal of dissent conveys useful information to those trying to understand and forecast future policy decisions.  The next move in the policy stance may be more predictable in a voting model, and therefore perhaps less disruptive: where one or two dissenting members lead, others may gradually follow to form a new majority, as opposed to a discontinuous shift in the consensus.

It is not just the signal sent by the vote itself.  Decision by votes could plausibly lead to better communication of the policy debate. We should still expect to find a discussion of alternative perspectives on the state of the economy or the appropriate policy response to those favoured by the majority in the official communication of a policy committee when decisions are taken by consensus. But once a policymaker decides to vote against the consensus then he or she has a vested interest in making sure that a clear and comprehensive account of the particular arguments that he or she finds most persuasive is presented in the public record of the policy discussion. Indeed, even those members who are minded to dissent but ultimately vote with the majority are likely to want to push for a proper recognition of dissenting arguments in the public record today so that a dissenting vote in the future (should they choose to register one) will be more explicable.

The argument for decision by voting is likely to prove most persuasive to those commentators who are concerned about Groupthink – that is, the tendency of a committee of like-minded people, particularly one housed in a hierarchical institution, to become too easily convinced of a particular hypothesis and then impervious to evidence to the contrary which can then lead to policy errors. Anything which impedes the gravitational pull of the consensus – and in particular, the power of the Chair to define where that consensus lies – would be welcome for these commentators.  Paradoxically, those worried about Groupthink can see merit in a process which encourages committee members to stick to what they believe and not be too quick to embrace the arguments of their colleagues (i.e., argue a bit more and listen a bit less).

The question then is whether it makes sense to apply the voting model of the MPC to the consensus-seeking FPC and PRC. It is sometimes argued that it does not because these committees have access to multiple policy levers or more detailed propositions over which committee members might have complex preferences so it may not always be possible to reach a settled conclusion through a voting mechanism. However, this seems to be largely an academic problem for the classroom rather than a practical problem for the committee room. After all, the MPC has successfully managed to vote on two different policy levers in one meeting at points over the past.[3]  Furthermore, the fact that the legislation makes provision for votes in the event that these committees cannot reach a consensus undermines the argument that these committees would be unable to take decisions by votes.  For example, it is not at all obvious why the FPC could not vote on the countercyclical capital buffer or rate or the limit on mortgage lending at high loan to income ratios. Whilst there may still be moments where it is not possible to put a decision to the vote in the FPC or PRC it seems likely that in many circumstances a vote could take place at which point all committee members would be forced to take a position and the true location of the consensus would be put to the test.

Membership

The composition of the three policy committees is codified in the Bank of England Act. In each case, some individuals participate because and for as long as they hold a particular job title, whilst others are appointed to serve for a specific term of office because they are experts on relevant subject matter. [4]  In almost every case, it is the Chancellor who ultimately decides who sits on these committee: the Chancellor appoints Governors and Deputy Governors (or DGs) of the Bank, the Chief Executive of the FCA and the external experts who sit on these committees. Just, one member of each committee is appointed by the Governor, albeit after consultation with the Chancellor.

Table: Legislative guidance on the composition of the three committees

Regarding Externals

Very little needs to be said about the question of who should be appointed to sit as an external member of these policy committees. Clearly, the people concerned must be recognised experts on subject matter that is directly relevant to the conduct of policy, and wherever possible, they should have a deep understanding of salient UK-specific features of the policy debate.  The key question is not who but how many of these external experts should sit on these committees, and in particular the optimal ratio of internals to externals – and hence whether Bank representatives are in the majority and can therefore dictate policy if they act as a bloc vote or a ready-made consensus.

This internals versus externals discussion has its origins in the monetary policy debate where there is a crystal clear distinction between the internals (the Governor, Deputy Governors and Chief Economist) and the externals (the independent experts appointed by the Chancellor). But where the FPC and PRC are concerned we have to place the CEO of the FCA, who arguably sits somewhere between these two polar extremes. What is interesting is that the balance between internals and externals appointed by the Chancellor varies from committee to committee (and, perhaps by coincidence, somewhat according to how decisions are taken). The internals are in the majority on the MPC (by 5 to 4) where decisions are taken by voting, and in the minority on the PRC (by 5 to at least 6 – even if you exclude the CEO of the FCA and the Chancellor only appoints six externals) where decisions are taken by consensus. The FPC is an intermediate case with six internals, five external experts and the CEO of the FCA – so arguably a slight majority for the internals in a consensus-driven model.

There has to be a place for internals on these policy committees. They may not have the same depth of knowledge as an external on the specific topic in which a particular expert has dedicated a significant part of their career but the internals should have an impressive breadth of knowledge, in part because of the nature of the individuals who tend to get appointed to these roles and in part because they will tend to stay on these committees for a long time (even if the policy debate doesn’t repeat itself it often rhymes). However, there are a number of compelling arguments for shifting towards the model set out for the PRC in the Act[5], where the externals are clearly in the majority.

First, experts should make better decisions, given their greater appreciation of relevant evidence and arguments. It is hard to argue against the proposition that the conduct of policy should at the very least be heavily influenced by people who are recognised experts. Of course, the experts don’t necessarily need to sit on the policy committee, they can brief the policy committee. For example, large central banks like the Federal Reserve and European Central Bank have the resources to recruit and retain a significant number of experts on the staff.

Second, the subject matter that these committees discuss is so complex and diverse that it is not possible to appoint a handful of experts who can cover all relevant material between them. The more vacancies there are for experts on these committees, the more scope there is to appoint someone with very deep knowledge on a relevant topic, who may know less about some aspects of the policy debate, so that between them, there is both breadth and depth of expertise.

Third, the independent experts have the luxury of time. They have far more time to think about the state of the economy and the appropriate policy response than the internals do, particularly the Governor and the Deputy Governors. More externals on each committee means more time thinking about policy in total and that ought to lead to better decisions. Of course, the more these external positions are framed as part-time positions, the more this advantage of time is diluted.

Fourth, increasing the number of externals could increase the institutional defence against Groupthink.  The externals should have the confidence and conviction and have none of the career concerns which may influence the staff and even those in ED positions that then enable them to challenge the received wisdom within the central bank, even if that means contradicting the views of those at the top of the institution.  If the objective is for the externals to make life in policy committees a little more uncomfortable then it might not be wise for external members to serve multiple terms of office or move into internal roles when they become available. A model of a single long term as a committee member may be more desirable, since the external member then has no incentive to modify their behaviour to increase the chance of re-appointment (whether to an internal or external role).

Regarding Internals

Where the internal members are concerned the question is very much about who should participate on these policy committees, and in particular, the merits of increasing the representation of people at the Executive Director (ED) level within the Bank, relative to say the Deputy Governors (DGs).

At present, the Governor and DGs dominate the internal representation on the MPC, FPC and PRC.  It is only the final vacancy on each committee – where the Governor has responsibility for appointing someone – that creates an opportunity for the Bank’s EDs to serve. In actual fact, there are clear instructions in the legislation encouraging the Governor to appoint EDs where two of the three committees are concerned.  The Governor is instructed to appoint someone to the MPC “who carries out monetary policy analysis within the Bank” and the seat goes to the ED for Monetary Analysis. The Governor is instructed to appoint someone to the FPC “who has executive responsibility within the Bank for the analysis of threats to financial stability” and the seat goes to the ED for Financial Stability, Strategy and Risk.  But no such instruction exists for the PRC and interestingly the person chosen to sit on the Committee is not one of the EDs in the senior management team of the Prudential Regulation Authority. Instead, the seat on the PRC goes to the DG for Monetary Policy.

The Bank’s EDs are more likely than the DGs who sit above them to have been promoted into their role from within, as opposed to appointed from outside.[6] The typical ED will therefore have spent many years working in a number of roles at the Bank, sometimes across several directorates.  The typical ED should therefore have accumulated a lot of valuable human capital over the course of his or her Bank career that should be relevant to setting policy by the time they achieve these positions. The EDs will also have more bandwidth to think about the details of their particular policy agenda than the DGs. After all, the DGs serve on multiple committees whilst each ED is a member of at most one and the DGs will likely have to devote more of their time to other tasks (the DGs will typically have more direct reports – several EDs and Directors versus a single Director for an ED – and have broader responsibility for the management of the Bank and its balance sheet).  Presumably, there is therefore more of an opportunity to appoint a genuine expert on the relevant subject matter to the role of ED, given the narrow scope of the role, and if that person sits on a policy committee, there is a greater imperative to do so.[7]

In theory then the EDs should be as least as qualified as the DGs to set policy. Nor should one expect these individuals to have exactly the same view on the state of the economy or the appropriate policy response as the DG to whom they report (any more than one would expect the DGs to necessarily share the view of the Governor). The argument for the inclusion of EDs is perhaps most compelling in the case of the PRC, given that very few of the people who are appointed into DG roles at the Bank will have spent much of their career thinking about microprudential supervision and regulation in any detail. It is therefore a little surprising that there are four DGs on the PRC and none of the EDs with responsibility for aspects of prudential regulation.

Nor is it obvious that only one ED should feature on each committee. Once upon time, the ED for Markets sat on the MPC as well as the ED for Monetary Analysis. However, the ED for Markets has effectively been replaced on the MPC by the new DG for Markets and Banking and no longer sits on any policy committee.  This is perhaps unfortunate in that the ED for Markets ought to have a valuable perspective and skillset that complements those of the existing members of the MPC and FPC – namely a detailed knowledge of the implementation of monetary policy and the inner workings of the core wholesale markets.  Indeed, as the recent financial stability intervention in the gilt market illustrates, the ED for Markets can play a pivotal role in the conduct of Bank policy.

In short, there is an argument for reinstating the ED Markets on one or both of the MPC and FPC. Likewise, there is a case for multiple EDs in the PRA to serve on the PRC. One would imagine that the EDs for UK deposit takers and prudential policy could both consistently make a significant contribution to the debate within the PRC.

Squaring the circle

Proposals for change need to make sense as a package. If the externals are to be in the majority and the Executive Directors on the staff are to participate more actively on the committees then it seems that one of two things must happen. Either the committees have to get a lot bigger, with enough externals recruited so that they are still in the majority even with the addition of new EDs, or some DGs must lose their places on some committees to make way for the EDs and reduce the need to significantly increase the size of these committees.

Neither of these options looks particularly attractive. The quality of the debate may start to deteriorate as the size of the committee increases and it may become difficult to continually recruit enough experts to keep the externals in the majority. Nor does it seem wise to exclude the Bank’s Deputy Governors from the committees that set Bank policy.

Best practice abroad suggests a solution to this problem so long as there is an accompanying change in the decision-making process, with decisions taken by votes.  The externals can still be in the majority when it comes to taking decisions even if there are more internal policymakers in the room so long as not every internal has a vote at every meeting.  To be clear, those internals without a vote can (and should) still express a view. They simply cannot determine the final outcome of the meeting.

Not all internals have to be treated equally. Common sense suggests that some internals should vote at every meeting, with votes rotating among the remainder. In the context of the Bank’s committees a sensible starting point might be for the Governor and the DG and ED with direct responsibility for the policy brief in question having permanent voting rights and then votes rotating amongst the remainder, with perhaps DGs voting more often than EDs.  To avoid any doubt, the EDs would not be obliged to vote the view of their boss when the vote rotates their way; as with all other members of the committees, the EDs would be expected to vote their own view.  It is worth noting that a voting system like this – where some people vote all the time and among the rest, some vote more often than others – works perfectly well within the Governing Council of the ECB and the FOMC of the Federal Reserve. [8]

Proposals

This article has reviewed the interesting differences in the design of the three policy committees at the Bank – the MPC, the FPC and the PRC – and sees merit in the following package of reforms.

  • Vote your view: The MPC process of taking decisions by votes which are published is preferable to the decision by consensus on the FPC and PRC. Voting encourages individual committee members to develop, articulate and defend their own view and thereby increases the chance that alternative points of view and policy options are properly debated and the genuine consensus located.
  • Externals in the majority: The PRC model of clearly putting external experts in the majority is preferable to the MPC model, in that it should increase the quality and quantity of time devoted to the policy process, which should ultimately lead to better decisions.
  • A larger role for EDs: the requirement in the Act to fill the vacancy on the MPC and FPC with an Executive Director has much to recommend itself, for similar reasons to the previous proposal: the EDs are more likely to be experts on their subject matter and have more time to devote to their policy process than a DG. There is also merit in the old MPC model where more than one ED served on a policy committee.
  • Rotating votes: the committees can accommodate more internal members and still place the externals in the majority without having to become too large if some of the internals only have the right to vote at some of the meetings.

Endnotes

[1] Dissenting votes on Bank Rate are almost 25 basis points above or below the majority view and according to the MPC’s own published estimate of the interest rate multiplier, a difference in view on the level of the policy rate of that size that is maintained for a year would imply a difference of view on the outlook for inflation of at most 10 basis points (i.e., close to a rounding error, given the accuracy with which the data are published).

[2] Many (and perhaps most) MPC members appear to believe that outside crisis conditions where markets are febrile and illiquid – in the words of external member Silvana Tenreyro – the macroeconomic impact of asset purchases is likely “small and temporary” and that “large quantities could translate into limited yield movements”. If that is the case, then it is hard to believe that small quantities (the difference in dissenting votes) could translate into anything other than very small yield movements.

[3] For example, at the November 2021 meeting the MPC voted on three propositions: first, that Bank Rate should be maintained at 0.1% (where two members voted against, preferring a 15bp hike); second that the Bank of England should maintain the stock of sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, at £20 billion (unanimously supported); and third, that the Bank of England should continue with its existing programme of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these purchases at £875 billion (where three members voted against, preferring to reduce the target from £875 billion to £855 billion).

[4] There is a particular reference in the Act to what the Bank refers to as a “non-voting” member of the FPC who represents HM Treasury, even though nobody votes on the FPC except in extreme circumstances (where no consensus can be found) and a Treasury official is also present at the meetings of the MPC and does not vote there either.

[5] The Act allows for the appointment of at least six independent experts to the PRC which means there will be at least seven externals on the PRC when we add the CEO of the FCA. However, only six independent experts currently sit on the PRC which limits the extent to which the internals are in the minority. Common sense suggests an upper bound on the optimal size of a committee that needs to take decisions but it is not obvious why more external experts have not been appointed.

[6] Those EDs who are not members of policy committees may find it difficult to build the public profile and demonstrate their suitability for appointment to DG positions, which can then perpetuate the dynamic of many if not most DGs being external appointments.

[7] This argument could work against the traditional Bank model of internal promotion into these roles, particularly where the role of ED for Monetary Analysis is concerned, which doubles as the Chief Economist of the Bank. The Bank may require that the person who fills this role has significant academic credentials, and there may be no candidate at the Director level within the Bank who meets that standard.

[8] The members of the ECB’s Executive Board vote at every meeting and the Governors of the NCBs vote at a frequency determined by the relative size of their economy and financial sector.  The Governors from the five largest countries (Germany, France, Italy, Spain and the Netherlands) share four votes between them and the remaining 15 Governors share 11 votes between them, with votes rotating on a meeting by meeting basis. Likewise, the members of the Board of Governors and the President of the New York Fed vote at every FOMC meeting, and votes rotate on an annual basis between the Presidents of the other Reserve banks, with one from each of the following groups: Boston, Philadelphia, and Richmond; Atlanta, St. Louis, and Dallas; Minneapolis, Kansas City, and San Francisco; Cleveland and Chicago (which means that most Presidents vote once every three years, but for a couple, it is once every two years).