Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 100 - 119)



  100. And if the next move in interest rates is more likely to be down than up, which is what the Committee is saying and I think what you are saying, what do you think will be the critical factors in the next couple of months that you will be looking at very carefully to judge whether or not you should move from that biased policy to actually implement recovery?  (Sir Andrew Large) Well, I think I mentioned the way in which the factors of the sort I mentioned appear to be influencing the behaviour of consumers and hence the overall demand pattern.

  101. Can I move on in relation to those to look at the impact of recent movements in the Stock Market which is obviously an area which will be of particular significance to you and one in which you already have some expertise. How much effect on the rest of the economy, the real economy, if you like, has the recent downturn in stock prices in this country had?  (Sir Andrew Large) Well, in a very general sense of course, the way people feel depends on what they feel their wealth is at any given moment in time. Of course that is hard to measure, but obviously that is a factor. You are, I am sure, aware that in the US it was felt that that would be a very major determinant of consumer spending and it appears not to have been as major as people thought it might be. In fact the area which has then been looked at somewhat more carefully is that of house prices where for many people the house constitutes a major part of their assets and, therefore, movements in such prices are also capable of affecting their behaviour. When you come to levels of indebtedness there is an interesting, difficult question about the way the consumer may behave which in a sense has a sort of feedback, if you like, to the whole question of stability because if you have a low level of interest rates and you are confident that that low level of interest rates will remain in place, then of course you can look at sustaining a higher level of indebtedness and feel comfortable with it than you could if you were worried that that might not be the case, so clearly we need to look at all these factors.

  102. As a Barclays Bank shareholder, you will be aware of recent changes in the price of financial company assets in particular. Do you think that there is any risk that we see something of a credit crunch in the UK and in the US because of the deterioration in the position of the financial institutions?  (Sir Andrew Large) I do not see any sign of that at the moment and I think you need to bear in mind that the prices of the shares for the financial institutions is of course a reflection of all kinds of views and thoughts that equities have in relation to those institutions, but you also need to bear in mind that the capital base of those institutions is very strong. There have been improvements in risk management processes which are really the things that the financial institutions look at when making decisions about what they are going to lend and to whom they are going to lend it, not so much their stock price.

  103. Finally, can I just ask you, you will be aware that there has been particular concern at the FSA and within the markets about the position of the insurance sector and there has been a loosening of the resilience test by the FSA to allow for the downturn in stock prices.  (Sir Andrew Large) Yes.

  104. Since you have taken responsibility for your job, have you been able to look in particular at that area of concern and have you reached any conclusions about the risk of the deterioration in that sector spreading to other parts of the financial market?  (Sir Andrew Large) I have not looked at it in detail in the last two days, no, but I of course am very aware of that sector and I think at the moment it is clearly a sector in which there has to be some scrutiny. There is absolutely no question of that, but I do not think it is a question of alarm.

Mr Beard

  105. One of your roles is to be a member of the tripartite committee with the FSA and the Treasury dealing with systemic risk.  (Sir Andrew Large) Yes.

  106. Have you attended any of the committee meetings?  (Sir Andrew Large) No, I have not, no.

  107. What do you see is the role of that committee?  (Sir Andrew Large) Well, it is based, as I am sure you are familiar, with a memorandum of understanding which was drawn up in 1997 at the time that the changes were made both to the Bank of England's independence and to the regulatory environment in terms of banking supervision being handled by the FSA. I think actually I left the SIB at the time it was being discussed, so I actually left before it had been agreed, but I, therefore, had some interest in it and I actually do feel that the document and the arrangements are really quite ground-breaking. I think that they are a real attempt at coming to grips with a whole series of extremely difficult and complex areas by making clear who is responsible for what, but putting in place a mechanism to ensure that there is regular scrutiny of all issues that could ultimately be of systemic importance and which could ultimately, in theory, lead to problems arising which call for some sort of official action. I of course have not been part of this process at all since it started up, but I think that all I hear leads me to feel that it has been a very valuable process and one which I very much look forward to participating in.

  108. The Bank of Japan's recent move to buy back from the commercial banks the equity is causing some anxiety as to where it is going and it could back-fire on them. What is your appreciation of that? Do you see that as having a potential impact, that manoeuvre?  (Sir Andrew Large) I make two points on it, I think. One is that, as has been commented on fairly widely, it is an unusual event, no question of that at all, and the other is that, just relating back to an earlier question—ie areas of systemic risk—this is just the sort of situation which all of us who have observed Japan over the last ten years have seen—ie the difficult situation that exists within the banks. And we fortunately do not have that difficulty here. Just looking at the process point, which I think is important, it would be to consider any eventuality leading in that kind of direction that the machinery we have has been put in place and it would be to prevent the need for any such situation to arise such as has happened in Japan.

  109. From what you know of what is happening, what is your view of the manoeuvre?  (Sir Andrew Large) Well, it is very widely commented on that there has been a difference of view as between the private sector's analysis of the indebtedness of the Japanese financial system and the official view that has been put out by the Japanese authorities. I have to say I have not been party to the way in which the Bank of Japan itself has come to the conclusion that it came to, but the underlying situation, I think, is fairly clear for people to see. There are very significant levels of indebtedness and there is a difference of view as to what they are as between the official sources and the private sector. The Bank of Japan appears, though I am of course not privy to the way in which they took the decisions they took, but it appears to be calling into question whether the official figures are actually what they have been published as.

  110. As the Deputy Governor responsible for financial stability, what steps would you take if you felt that some of the banks were over-exposing themselves to property debt?  (Sir Andrew Large) Well, of course the supervisory responsibility for the banks is not with the Bank, but with the FSA and, therefore, one would expect that the information on the level of indebtedness to the property sector, as for any other sector because it is not just property, by the way, that one would be looking at, but one would be looking at other sectors as well, with the information that would come in through them. Clearly the FSA would be likely themselves to have views on the wisdom of any level of indebtedness that they saw building up and I would imagine that in the regular conversations that took place between the Bank and the FSA and maybe in the context of the arrangements we were talking about a moment ago discussions could take place as to how bad the situation was, whether something should be done about it and who is doing it.


  111. You will be in the ideal position, Sir Andrew, because you will be a non-executive director of the FSA.  (Sir Andrew Large) I will, yes. I hope I will be able to play a major contribution to that discussion, yes, but I want to make clear that the actual responsibility for supervision will be handled by the FSA whose job it is.

Mr Beard

  112. But you have a role, you see, in appreciating the situation and keeping an eye on it.  (Sir Andrew Large) Yes, that is clear and I think if you read the memorandum of understanding it actually refers to this area and to that role.

  113. A lot of anxiety is being caused by lenders offering six times salary, for instance, on house prices which is somewhat extravagant compared to the levels of the previous regime.  (Sir Andrew Large) Certainly that level is high, but there could be circumstances, I suppose, under which it might be—

  114. But this has been generally advertised. Do you have a view on that sort of marketing?  (Sir Andrew Large) Well, I think that I would need to see exactly what it was that was being said and the manner in which the marketing was being led, but I would certainly want to have a very close look at a situation where, as a regular matter and without very, very close analysis, amounts of money of that sort were being made available on a regular basis.

  115. Do you think there have been changes to the financial sector since 1980 which would allow lending now to exceed what was the level in 1980?  (Sir Andrew Large) I think this probably comes back to the point that I raised before, that with expectations of a stable and low interest rate environment and inflationary outlook, the sustainability of higher levels of indebtedness than was the case in earlier times may well be higher, but I think that is the direction I look in in approaching an answer to that question.

  116. Does the current concern for the level of debt against the low level of interest rates cause you any anxiety that if there is a small change in interest rates, a lot of people will be financially embarrassed?  (Sir Andrew Large) You are referring to housing here?

  117. Yes.  (Sir Andrew Large) You say a small change. I think it is a matter of degree. This is obviously a factor that has to be looked at very carefully, yes, and partly, for the reasons I mentioned earlier, because of its impact on consumer behaviour.

  118. But does it cause you any anxiety now, that the situation is arising now, that we are on low interest rates and we have a high level of domestic debt, particularly on property?  (Sir Andrew Large) It does not cause me particular concern at the moment in that we have confidence in the stability of the level of interest rates and inflation at the moment and I think that another thing that perhaps is relevant to this is that although obviously no one can have or no financial institution can have a 100 per cent, cast-iron certainty, I do think that, and you said since 1980—

  119. Since the 1980s.  (Sir Andrew Large)—but over the last ten or 15 years I do think that there have been quite significant improvements from the point of view of many financial institutions in their own assessment of risk and, therefore, of levels of debt that are sustainable, so I think there are several factors to this which I suppose, therefore, give rise to an answer to your question, which is yes, I think there have been some changes.

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