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September 24, 2017

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BOE's gilt interest transfer to gov't under new scrutiny

LONDON -- A Bank of England (BOE) decision to hand over interest payments on the central bank's gilt holdings should not lead people to assume it is immune from future losses from other programs, the author of a report into the BOE said on Tuesday.

Bill Winters, a former co-CEO of J.P. Morgan Investment Bank, addressed the decision during an appearance before a parliament committee, where he was presenting one of three independent reviews published earlier this month into the BOE's readiness for another bank crisis.

Some economists and opposition politicians have already criticized the Nov. 9 decision by finance minister George Osborne and BOE governor Mervyn King to return more than 35 billion pounds (US$56 billion) of interest from the BOE's gilt holdings, purchased as part of its quantitative easing program to spur the economy.

"The decision on the appropriate level of capital for the Bank ... should be a conscious decision. It shouldn't be backed into by the profits that happen to be there at a point in time. At another point in time there could be losses," he said.

Winters also said that he hoped that the BOE's supervisory board, known as its court, would be consulted on future decisions to transfer funds to the government.

Answering a legislator's question, Winters said that the money to be transferred to the Treasury was the BOE's capital, but in a later statement issued via the central bank, Winters said this was incorrect.

"I did not think the question of the appropriate level of capital of the Bank of England should be judged on the basis of the cash flow position of the APF," he said.

"In my more detailed responses to questions, my language may have given the impression that the decision to transfer cash from the APF reduced the Bank of England's capital. I did not intend to convey that, and in fact, the transfers decision has not affected the Bank of England's capital position."

The BOE and government say the decision brings BOE practice into line with the U.S. Federal Reserve and the Bank of Japan, but critics say the move is aimed at boosting the government's chances of meeting politically sensitive debt reduction targets.

Although the Treasury has indemnified the BOE against future losses on its quantitative easing program, Winters said the BOE may need to look more closely at other exposure from other programs that is not similarly protected.

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