Interview with Mervyn King: All Things Monetary Policy

Christopher Jeffrey interviews “Mervyn King on his career and big ‘mistakes.’” The subtitle reads: “The former BoE governor speaks with Christopher Jeffery about the value of transparency, lessons from the GFC [global financial crisis], the need to track broad money and tie short-term funding to haircut collateral, and danger presented by non-banks” (Central Banking, June 30, 2026, free registration required). The interview is delightful and insightful throughout, but here are a couple of points that caught my eye in particular:

On central bank transparency:

The great tradition in central banks was the opposite of transparency. At the Bank of England [BoE], there was a famous session in the 1930s, when the then deputy governor, when asked if the bank had considered publishing a report on any of its activities by a parliamentary committee, said: “Well, I have considered it, but I can’t say that I have considered it for long enough to have reached a conclusion.” When asked “Well don’t you think you should explain?”, he said: “It would be very dangerous to give reasons for our actions.” Even more recently than that, 40 years ago, the Federal Reserve never published a statement about the interest rate that it was setting. Market participants had to go into the market and infer the interest rate that the Fed was setting.

And I remember the very first year that I joined the Bank of England full-time, in 1991, Paul Volcker came over to London … and said he wanted to have dinner with the new member of the Bank of England … [A]fterwards I said to him: “Give me one word of advice for a new central banker.” And Volcker, who was 6 feet 7 inches tall–so he certainly looked down on me–just said: “One word, Mervyn: `mystique’.”

I came to the view that we had to go in the opposite direction. And, in 1992, when Britain was forced out of the Exchange Rate Mechanism, we had to develop a new domestic framework for monetary policy. Although Britain wasn’t the first to introduce inflation targeting –we followed New Zealand and Canada–we were the first major bank to push explanations of policy to the forefront.

What King calls the “pawnbroker for all seasons” method of preparing for the next crisis:

I think the secret here is to deal with many of these problems before the crisis hits. That’s why I proposed a system where banks pre-position collateral with the central bank. And the central bank says you cannot issue more short-term funding–anything that rolls over within three or four months–then the amount of money the central bank is willing to lend against the collateral that the bank has pre-positioned, allowing for the haircuts that the central bank would impose. If it’s a very obscure financial instrument that we don’t really understand, the central bank might impose a haircut of 90%. If it’s long-term government bonds, it could be just 2% or 3%. … That would be a massive improvement on where we are now. …

Certainly, the Bank of England and the Federal Reserve are moving to do more pre-positioning of collateral. … It has the great benefit that, done properly, bank runs would just disappear as a threat. I think regulation will carry on developing in that direction. I don’t expect any central bank to suddenly say they’ve “seen the light”, and want to adopt a “pawnbroker for all seasons”. They’ll use their own language … But people are making progress in that direction, and the Bank of England has gone further than anyone else.

King was Deputy Governor of the Bank of England from 1998 to 2003, and then Governor from 2003-2013. The interview is a good place to see what the issues of the time looked like on the other side of the Atlantic: for example, the UK bank run at Northern Rock in September 2007, which was a canary in the coal mine for the financial crisis that followed; the question of how to act in advance to make central bank interventions in a crisis less needed; how quantitative easing starts off as an emergency measure in 2008, with no one expecting that it will last more than a few years; and the reaction of the European Central Bank when the euro crisis hit from 2010-2012.