Spotlight BoE forecasting, crisis-fighting record

LONDON (Reuters) - The Bank of England is to be scrutinised over how well it acted at the height of the financial crisis and over how good its sometimes off-target growth and inflation forecasting is.

Its supervisory body said on Monday it was launching a review of both aspects of the Bank's activities, to be published in October. It follows criticism by lawmakers of Governor Mervyn King's reluctance to have the BoE's crisis record scrutinised in the same way as those of Britain's finance ministry and financial regulator.

The central bank has also faced criticism of its forecasting record since the financial crisis, after it had to cut its growth forecasts repeatedly while underestimating inflation.

"I welcome this set of reviews. Major changes to the operations of the Bank have already been made in the light of the financial crisis. These detailed, independent reviews will help to ensure that all the important lessons for the future have been learned," King said in a statement.

The reviews will be conducted by former BoE official Ian Plenderleith, former U.S. Federal Reserve official David Stockton and former J.P. Morgan banker Bill Winters, who also conducted a government review of Britain's banking sector.

The reviews will cover the provision of Emergency Liquidity Assistance in 2008/2009, the framework for providing liquidity to the banking system as a whole, and the forecasting capabilities of the rate-setting Monetary Policy Committee.

"The Court of the Bank of England believes it is important for the Bank to learn practical lessons from past experience in order to improve the way it operates in the future," said David Lees, chairman of the BoE's Court, which oversees the Bank's business conduct but has no say its policy decisions.

TOO OPTIMISTIC

The influential chairman of parliament's Treasury Committee, Andrew Tyrie, has repeatedly called for a review of the steps the BoE took during the crisis as the central bank will become the country's main financial regulator next year.

Tyrie said the reviews fell short of what was needed, criticising the timing and the scope of the review.

"The conclusions of a comprehensive review ... could, and should, have been available to inform the legislation currently before parliament to reform financial regulation," he said, reiterating his call for the Court to be given more powers.

Britain had to bail out two of its largest banks with tens of billions of taxpayers money in 2008, and had to nationalise lender Northern Rock after a run on the bank in the early stages of the financial crisis.

The first review would focus on the actions at the height of the financial crisis around the collapse of Lehman Brothers, when the Bank provided Emergency Liquidity Assistance (ELA) to Royal Bank of Scotland and HBOS, the BoE's Court said.

This review, which Plenderleith will lead, will examine the decisions to provide emergency liquidity assistance, the governance agreements within the BoE for these decisions and its capability to plan and implement them.

"Overall, the review will examine how the Bank discharged its responsibilities as lender of last resort in a crisis and make recommendations for the conduct of any such operations in the future," the Court said.

A second review will focus on the framework for providing liquidity to the banking system, looking into its effectiveness in implementing monetary policy decisions, its flexibility with regards to the range of collateral and the price of liquidity.

Finally, a third review, led by former Fed official Stockton, will examining the forecasting performance, the analysis presented to the MPC in the production of the projections and the processes followed by the MPC to produce the projections.

Last week, the central bank had to admit once again in its quarterly Inflation Report that its previous growth and inflation outlook had been too optimistic.

(For the full statement click: www.bankofengland.co.uk/publications/Pages/news/2012/049.aspx)

(additional reporting by Fiona Shaikh,; editing by Jeremy Gaunt)

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