Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 60 - 88)



  60. He also talked about the need for more research resources to improve the statistical models used. Indeed the Bank in its reply said that there was an urgent need to allocate more resources. What has been the Court's reaction to that?
  (Baroness Noakes) We consider that in February; they said that would be considered in the context of the budget and we consider the budget for the Bank in February. If the Bank at that stage wants to put forward the additional resources for forecasting I suspect they will be pushing at an open door in Court.

  61. I am sure the Governor will read that with interest. Do you think though that waiting until February ... I forget when the Bank actually made their reply; the sixth of this month, not long ago. I suppose February is arguably an urgent enough response to an urgent need.
  (Baroness Noakes) Urgency in terms of economics is not quite like tomorrow, as I understand it.

  62. A final point on the Kohn report and the issues surrounding it. He is obviously a central banker. He says in his report that he was limited in his knowledge of central bank procedures really to the Federal Reserve which he knew very well. He says, "Finally, it has been difficult to measure what I observed against other central banks". He does not have a particularly wide view of procedures. I am not suggesting he is not an eminent central banker for a second, but would you look in future when you commission such a report at getting a wider view and a wider experience from other central banks?
  (Baroness Noakes) Yes. I should say that Don Kohn is maybe being over modest. He is one of the most senior people on the central banking scene and he did have contacts with many of the other central banks because he asked them on specific aspects and there is a community of major central bankers. I take the point that when we come to ask the Bank to commission another external study—and I am not sure when that will be—we should think about the kind of person who would bring a perspective. Having had the Fed, where do you go from there? We need to think very hard on the best kind of person to do that study.

Mr Plaskitt

  63. How well is the MPC doing in terms of supporting the Government's objectives on growth and employment?
  (Baroness Noakes) That is not a judgement which we have to make. The MPC's role is to pursue monetary policy and subject to that to support the Government's objectives for growth and employment. We do not judge the effectiveness of the MPC. We think that is fundamentally a job for the Chancellor and indeed parliamentary committees such as this one. Our job is actually a modest one confined to the procedures and it would be getting above our station if we started to say how well they did on their main policy remit.

  64. Let us ask what procedures you see in place which support the MPC in performing its job? Do you think they are effective procedures?
  (Baroness Noakes) We have said in our report that the totality of MPC's procedures are effective.

  65. You would not make any specific observation with respect to these objectives as opposed to the inflation objective which tends to dominate the argument most of the time.
  (Baroness Noakes) It is their main objective.

  66. I know it is the main objective, but the Act also requires them to have regard to and support the Government's growth and employment objectives when setting interest rates.
  (Baroness Noakes) I shall struggle to answer on this.

  67. Are you aware of separate procedures anywhere that the MPC is following?
  (Baroness Noakes) There could not be separate procedures. The data flows are going to be the same data flows. We talked about regional and sectoral information. They certainly have considerable information on growth and employment, both sectorally and regionally decomposed where those data are available. It is getting the information and then I believe it has the data that it needs flowing in a professional and effective and efficient way. What it does with it is then a judgement to be made by cleverer people than us.

  68. You have heard of no problems in this regard.
  (Mrs Heaton) No and that is the way it would come to us. It might come from the Treasury representative or from any source indeed so that we would act if we felt that something was going awry. The basic structure is for the data to be fed in, which would include data on employment and growth which will be taken into account in the MPC decision and the MPC are aware of the Government of the day's policy.

  69. In answers this morning you have said that you have not heard of problems or problems have not been brought to you with regard to something or other. As a general rule, do you wait until problems are brought to you, or do you think you have any responsibility to go out and find a problem?
  (Mrs Heaton) We have our monthly Court meeting when things can be raised at a formal level. I actually think the informal discussion with MPC members when we meet them afterwards for lunch, that sort of thing, when one gets into a discussion about how things are going, would be where I would find it more likely that I would identify something at an early stage. I would see that as an important part of my job to try to find things then rather than wait until they become a problem.

  70. Again, only if you were alerted to it by an MPC member over lunch.
  (Mrs Heaton) Or anybody else in the Bank if there were dissatisfaction, or outsiders. People know our role.
  (Baroness Noakes) The annual round of formal questioning of each individual MPC member is designed with a broad agenda to find out what is concerning them.
  (Sir Ian Gibson) When there is a process that every year bring the non-executive group into contact with MPC members and supporting areas, with the dialogue being initiated by those non-executive directors to say "What about these issues? What about those issues? What is your feeling about this?", you create an environment which is saying those are your answers now, if you feel that those answers change ... We are not dealing with small insignificant people here, we are dealing with nine of the cleverest people I know, far cleverer than I am. They are able to come to bring their points when they see that there is a route there. It is quite unlike the issue we were talking about earlier. If I have 1,000 people beavering away at machines in a building where the building is being ripped apart around them and they know 200 of them are going to go, they are not going to come to tell their directors. It is not in their nature. Those people who sit on the Monetary Policy Committee are likely to come to tell you whether you wish to be told or not. Once the dialogue and the process is established, it is like you knowing your colleagues on this Committee except it is a smaller group than this one.

  71. So it is fair to say you offer each and every member of the MPC the chance to come to a confessional.
  (Baroness Noakes) Once a year, but more importantly make it very clear that we are open to speak to them whenever they want.


  72. Do you send your telephone numbers to them?
  (Baroness Noakes) They would have the telephone numbers.
  (Mrs Heaton) Yes; it is not a problem.

  73. Your fax numbers and e-mail numbers.
  (Baroness Noakes) All those things.
  (Sir Ian Gibson) MPC members attend Court each month and quite often table to the non-executive members a question about which they would like the answer from the region or the sector. They go round the table and say "What about X?". They want to ask a question because it is affecting their thinking about X. If they are that used to plying us with specific questions and making us sing for our supper or lunch, they are equally capable of explaining why afterwards and they do. They would therefore talk about their own issues.
  (Ms Blow) I am a relatively new member and I have been going through a period of meetings with individuals to get to know them. I do feel that there has also been plenty of opportunity at the monthly meetings, going to the pre-MPC meeting as well. One does get to know these people and it is possible to spot if all is not well. We are not just relying on reactivity. I could think of one occasion already where I asked a question specifically because I was not quite sure how people were feeling about something. You should not worry that this monitoring is not going on.

  74. That is very helpful. How does the Treasury representative work?
  (Baroness Noakes) In what sense?

  75. I understand you have relations with the Treasury representative as well who is a member of the MPC.
  (Baroness Noakes) Yes, I speak to him.

  76. He can come to talk to you.
  (Baroness Noakes) Yes; it is not a problem. Both Gus O'Donnell and Sir Andrew Turnbull, who sometimes acts as Treasury representative, are known to me and several others in any event and we have been to see them specifically in the context of this annual washup we do to try to talk to everybody who has a view individually. Everybody has people's telephone numbers. It operates as a good network in my view.

Mr Beard

  77. May we move away from the MPC to your responsibilities in relation to the Bank as a whole? In particular, the Court's functions as defined in section 2 of the 1998 Bank of England Act "shall include determining the Bank's objectives (including for its financial management) and strategy". Could you say how the Court of Directors go about determining the "objectives and strategy" of the Bank?
  (Baroness Noakes) Yes. There is an annual process of determining the objectives and strategy of the Bank which takes place first amongst the executive, as you would expect. Then it is brought to Court, sometimes in draft form and then in final form a month later for discussion. Usually that is the way. So it has an executive process, draft objectives, discussion in Court, further iteration, finally agree the objectives in Court. That process is published in the annual report, the objectives for each year are published as well as a retrospective review of how well we did against the previous year's objectives. We have a formal paper once at the half-year stage to see how well we are doing against the objectives which were set last year, to give us an opportunity to see what is going wrong or right at that stage. That describes the whole process.

  78. Could you say what impact the Court has had on that process? Where have changes been made in the draft as it has been, due to formal consultation, in the earlier stages before it is formally before the Court?
  (Baroness Noakes) We have a lot of discussion on particular areas which will condition how the next year's objectives are set.
  (Ms McKechnie) If I recall, we did take very seriously the issue of recruitment and retention of sufficient numbers of economists and I think in the course of that discussion it was given rather more priority than the paper which came in. That was the one instance where we have said this has to be given more priority because there is nothing more important in terms of the working of the MPC than making sure that they have the quality of staff to provide them with the information that they need.
  (Baroness Noakes) IT is another one, where we were concerned about the level of IT and we got a specific objective in on that. I was certainly involved, not in the last one but the previous financial objective. Being an accountant by training financial objectives are my natural territory. I wanted them to be as specific as possible which is now why we refer to the achievement of the £20 million overhead cost reduction agreed at the time of the departure of the FSA so we can be as specific and measurable as possible. If we trawl through we can probably find other ways in which we have refined the objectives or added in new topics. What we are trying to say to you is that it is an interactive process.
  (Mrs Heaton) The more important thing really is that the executive do pick up priorities that the Court has and build that into the process rather than leave it to come to Court and be formally rejected. It is certainly more difficult when you have that interactive process to work out quite who said what that was the critical thing which changed it.

  79. Do you think the Court's assessment of the Bank's performance when set out in the annual report is reasonably objective, or do you feel confined to be loyal?
  (Mrs Heaton) I am always a very independent person.
  (Baroness Noakes) Most of us are actually. If we go back, before we had the specific requirement to review these objectives and report on them, I think you will find the review of what the Bank have done during the year was blander than it now is. One of the things we have encouraged the Bank to do, because we cannot report unless they report clearly on their performance against their objectives, is to be open, transparent and honest about performance. We report things which have gone well as well as things which have not gone quite so well and things where we are not quite sure whether we have achieved our objective. Our role has been to work on a bit of the Bank's report which reports on the progress against last year's report and objectives. It is that on which we concentrate to make sure that is as transparent as possible and if it is, then we can say that it is okay. Of course you are loyal to an organisation because all boards of directors are loyal to their organisation but we are 16 non-executives, each of whom brings a particular level and direction of challenge, which nobody holds back on.

  80. What criticisms of the Bank's performance over the last year would you make?
  (Baroness Noakes) Criticisms? That is always a difficult one to answer.
  (Ms McKechnie) There was one instance which came up as a result of some of your questioning: you asked were we doing enough, that is both the non-executives and the executives, to promote the understanding of the MPC process and the benefits of low inflation? I think after we met you we thought that that was an area where more could be done and we then encouraged people to do more by way of speeches and the schools competition and all of those type of events.
  (Baroness Noakes) The area I would pick up is IT, where we did have a paper on IT and we thought that it needed a further look. Indeed the Bank then took a further look. You ask where I am critical? You have to look at where we have had an interaction with the Bank in Court or outside Court. IT is the one which comes to mind over the last year but there will be others.
  (Mrs Heaton) Change too. One could argue that the Bank has not changed fast enough; but yet for what is inherently a conservative organisation, as banks always are and have to be, it has pushed through tremendous change. That is what we are now seeing the effects of to some extent in staff morale problems. I am very pleased that the Bank is having a second survey and getting the feedback from that and that is where we shall be pressing to see what we can do to persuade the staff that change will go on and they will have to go on living with change, but that there are some good things and what can we pick out to make the staff still believe that the Bank is a good place to work. That is the message we have to get across. It is not just about money, it is people wanting to work for the Bank because it is a prestigious organisation, it is a fair employer, it is a good employer. More needs to be done there and we shall work on it and the Bank will too.
  (Sir Ian Gibson) I was just pondering. It is always hard coming from a business which is fairly tough on target setting. You asked whether there were any criticisms of the Bank's executive for not having achieved their objective and the answer to that is no. Are there any generic criticisms I would have of the Bank? Yes. I would have of every organisation of human beings I have ever known and you just keep tabling them and trying to work towards them. There is nothing which cannot be done better. Transparency can still be better, understandability to the public can be better, communications internally can be better, speed of implementation of some change can be better. I know few organisations I cannot say that about and where you do not keep striving.

  81. Could you explain how the Bank's objectives and strategy, irrespective of the influence the Court is making, have been modified for the year ahead?
  (Baroness Noakes) We are in the process of doing that and we shall not agree that formally until we get to the end of February. It is not for me to say what the Bank's objectives for next year are ahead of their formal publication. Indeed if you want to know I think you have to ask the Governor for them. They are work in progress as far as the Court is concerned, in particular because the financial objective is never set until February.

  82. Are there any pointers from the way in which the objectives and strategy were modified in the past year?
  (Baroness Noakes) I think you will find some modifications. May I confine myself to that at the moment? You will find some modifications but probably not radical change.

  83. When the FSA was set up, the committee was established between Treasury and FSA and the Bank to cover what is called the systemic risk, which is covered in the Bank of England Act under several headings: maintaining the integrity and value of the currency; maintaining stability of the financial system, both domestic and international; seeking to ensure the effectiveness of the UK's financial services. Are you now satisfied that the Bank has a supervisory capability to assess the risks to the UK and overseas financial stability now that this split has happened?
  (Baroness Noakes) We are satisfied that the financial stability area has had staffing strengthened. It has been looked at very carefully in terms of the staffing they want. They have looked carefully at the effectiveness of the financial stability review, which comes out every half year, and the value of that. We have had reports in Court about the effectiveness of the tripartite working arrangements which are the ones which are designed to bring together the capabilities based on individual institutions within the FSA, the systemic responsibilities of the Bank and the oversight responsibilities of the Treasury. We get reports on those aspects on a regular basis. It is rather difficult to say you are absolutely satisfied in the terms you actually expressed that question, but we are very conscious that a serious and consistent effort is being made to improve the area, to keep it under review and to make sure it meets the objectives as set out in the core purposes of the Bank.

  84. Let me put the question in a slightly different way. Are you satisfied that you now have the ability, through the staff of the Bank, to fulfil the obligations which are put on you which I read out such as under section 2 of the 1998 Bank of England Act?
  (Baroness Noakes) The financial stability area has had significant staffing increases over the last couple of years and the quality of the staff. We shall never know whether we are satisfied until it is actually tested by a systemic problem and it has not been in the last two and a half years. It is very difficult for me to say I am satisfied; it is very difficult for any of us to say we are satisfied, because we shall not know until there has been a crisis. This is the nature of the setting up of these kinds of systems: you have to do your best to get the intelligence, the information and the procedures in place in the hope that they will see you through if a crisis comes.

  85. Does not the Court periodically monitor the scene and know where the weaknesses are and see where the possible dangers could come from? These are things which are more routine.
  (Baroness Noakes) Yes; absolutely. There are regular reports from the financial stability area. The Court's agendas are structured into monetary stability, financial stability and then internal management issues of the Bank and miscellaneous topics. There is a section of the agenda which is dedicated to financial stability issues.

  86. In that respect, could I repeat the question? Are you, as non-executive members of the Court, satisfied that those arrangements, given that there was a crisis arising, would be able to spot them and that those arrangements are able to forewarn you of where the hazards might be?
  (Baroness Noakes) We can only say we hope so. We believe that significant effort has been put in by the Bank to meet this and the Bank, before the FSA went, had to deal with the issue of systemic risks. So it was not as though we had acquired a new responsibility. Systemic risk was part of the responsibility of the Bank which existed prior to the departure of bank regulation. We are satisfied that the Bank has approached it in the right sorts of ways and keeps the area under review.
  (Mrs Heaton) It is an area of responsibility which the Bank has had for some time. So the Bank should know what resources would be appropriate. There has been no question of us saying that they should cut back in this area: indeed the opposite has happened. We do need to make sure that there is not excessive overlap with the FSA as well. Based on the Bank's historic knowledge of this area, and the questions we put to them and the answers they have given, we are confident that a good level of resource is retained in the Bank following the splitting off of FSA. Another area which is obviously of critical importance is the relationship between the Treasury, the FSA and the Bank, to ensure that at an institutional and personal level it is working smoothly. We have also asked questions in that area and we have had positive response on that. We also enquire periodically about the level of secondments between the FSA and the Bank because one of the good ways one can continue to build a bridge between the organisations, whose people did, after all, all know one another because they were in the same organisation, the banking regulation and systemic risk area, is to make sure they continue to cooperate rather than compete and that is something we shall continue to watch for.
  (Ms McKechnie) The nearest thing we came to doing in practice was Y2K. If you remember, before Y2K there were several reports in the press about the possibility of there being some systemic risk as a result of the rollover into the next year. The fact is that it was a damp squib and a bit of a non-event and the whole process went extremely smoothly. If I recall rightly, we did have a report to the Court both about all the planning arrangements and the logistics of handling that kind of event and then we reviewed it afterwards. The process was incredibly successful. I also think there has been some scenario type planning within the teams to make sure they have tested all the communication systems and that if there is a crisis all the infrastructure is in place to ensure that there is not some kind of problem which arises because somebody does not have the appropriate channel of information.

  87. Mrs Heaton touched on the Court monitoring the liaison between the FSA and the Treasury in these matters, which is a new arrangement. It is not enough to say the Bank has been doing it for a long time because these are all fresh terms of reference for everybody. Do you monitor these arrangements regularly, both for the day-to-day liaison and to see whether there would be any difficulty if a financial crisis were to arise?
  (Mrs Heaton) I should say periodically. It is certainly an area we discuss in Court from time to time and we get reports back on what is going on. Again, it is another of the areas I enquire about informally because that personal relationship is going to be so critical in times of crisis.
  (Baroness Noakes) You probably also know that Howard Davies, Chairman of the FSA, is a non-executive member of Court and David Clementi, the Deputy Governor, is a member of the FSA. Howard Davies sits on Court with us and we have the opportunity when we discuss these things to ask Howard for his perspective on how it is working, which is actually quite powerful.

  88. I understand that but it is slightly disturbing to see with major responsibilities like this that the answer to the earlier questioning was: well, we hope we are equipped for them. When it comes to this sort of question, which is a central part of making sure that the systemic risk is covered, to have quoted that it is periodic or you do it on the old boy network when you meet over the Bank table, really does not sound too much as though the response measures up to the seriousness of the responsibilities at that rate.
  (Baroness Noakes) But the Bank is taking this very seriously. The Bank has a whole financial stability division, it has the resources dedicated to the tripartite arrangements. If you are asking how often Court gets involved, we have a report every month on financial stability but that might be something on a particular area of interest which is arising in the month. We are looking specifically at how these procedures work in one way or another every three or four months.
  (Mrs Heaton) Yes, every three or four months.
  (Baroness Noakes) We are looking at some aspect in Court once a month. We have to look to the executive to gear itself up and that is why we take periodic reports to ask them how they are gearing themselves up and how these relationships are working. I would not describe Howard Davies sitting on our Court as part of the old boy network: he is there specifically to provide part of the link to the FSA which gives us an additional assurance that a line of communication is open if matters need to be dealt with.
  (Ms McKechnie) Singularly inappropriate use of "the old boy network" when there are four of us sitting in front of you who are females.

  Mr Beard: A slip of the tongue.

  Chairman: A good note on which to end. Thank you very much.

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