The film “It’s a Wonderful Life” illustrates this point well. Rumours spread fast, depositors queue to get their money out while the bank still has funds available. In the film of course James Stewart came to the rescue, and he did that by convincing the queuing depositors that they should have faith in his bank. Loss of deposits is a symptom of a wider problem – in other words, typically a bank becomes illiquid because its depositors fear a problem which is more often than not to do with the expected future solvency of the bank. I want to put the emphasis here on the word “expected”. Very few banks fail because they are insolvent today. They don’t get that far. Typically, they fail because of a rising probability that they are expected to be insolvent at some point(s) in the future. This is important because regulating banks has to be forward looking, and in my view has not been adequately so in the past. It also means that a problem in a bank can spread to create a problem in the wider financial system, so called systemic risk. Maintaining the stability of the financial system – financial stability – is therefore at the heart of the efforts of the authorities to prevent problems in banks spreading out of control. The financial crisis of the last three and a half years has illustrated starkly what can happen when financial stability is not maintained.
This is buttressed by the way in which the Bank’s Court of nonexecutive directors approaches its statutory responsibility of reviewing the MPC’s processes, involving annual bilateral meetings with each MPC member. And, externally, it is similarly underpinned by the Treasury Select Committee holding us individually accountable for our monthly votes, which are published as part of the minutes of our meetings. This establishes very powerful incentives for each member to reach their own considered view. There is no free-riding in the MPC; and our policy debates are full and free. That lies at the very heart of the MPC’s operation, performance and communications. Indeed, it might be wondered whether the tone of some of the public scrutiny could set up incentives to cast minority votes with the aim of demonstrating independence of thought and action. 23 That, of course, would be perverse. Each member wants their individual decisions to matter – to the current Bank Rate, and to the expected path of policy and so the monetary conditions embodied in the money market yield curve. One votes in a minority when one disagrees with the immediate decision and the strategy it might convey. Occasionally, doing so, with the reasons disclosed in the minutes, can be an effective way of influencing monetary conditions. The make-up of the MPC’s majorities and minorities shifts around over time. There are no “blocs” on the Committee. And there is no distinction between “internals” and “externals” in that respect.