Examination of Witnesses (Questions 100-102)
20 NOVEMBER 2003
MR MERVYN
KING, SIR
ANDREW LARGE,
MR RICHARD
LAMBERT, PROFESSOR
STEPHEN NICKELL
AND MR
PAUL TUCKER
Q100 Mr Beard: On the Basel Accord,
which you have mentioned previously, the Chairman of the Basel
Committee on Banking Supervision, Mr Caruana, is quoted in the
Financial Times recently as saying this: "The committee believes"
that is, his committee "that it can complete the framework
by mid-2004. We do not believe that this schedule will affect
our original implementation dates. In fact, the committee has
accelerated the work on implementation. We are also ready to start
working on future improvements: Basel II is an evolutionary process
and we remain committed to reforming it in order to incorporate
best practices in risk management." Do you share Mr Caruana's
optimism?
Sir Andrew Large: Broadly, I do.
I think that the thing which it is important to bear in mind in
the Basel discussion is this: that the work that has been done
in coming up with new, prudential capital adequacy standards has
been prodigious, and great advances have been made in coming up
with something that aligns risk with capital to a far greater
degree than has been the case hitherto. So the Basel Committee
is coming forward with proposals which then require to be implemented.
One of the things this means is that, both in the case of the
European Union and in the case of the United States, the standards
that they have labouriously come up with, as a result of a large
amount of thought, consultation and negotiation, have to be translated
into the domestic environment, and here there is an unpredictability.
The unpredictability has been that it has been uncertain as to
the speed with which that can happen in the United States, and
there is also the requirement for the process in Europe to be
translated into an EU Directive , which I referred to in my earlier
remarks. Of course, there is an element of unpredictability in
that process because it involves decision of the domestic authorities.
I use "domestic" in the European sense , as far as the
EU is concerned, as well as in the United States: so it would
be wrong for me to say that I can foresee precisely how that will
go. I think, in relation to his basic optimism that he is justified
in making those comments. It should be possible, first of all,
to agree the underlying standards that have to be translated into
the domestic agendas, and secondly there is a significant impetus
that there is from the banking industry, on the one hand, and
supervisors, on the other, to try to get this in place.
Q101 Mr Beard: Are you disappointed
that a large part of the American banking system has been opted
out of Basel II?
Sir Andrew Large: This has been
a very difficult one. At the outset of the whole Basel process,
which goes back a number of years now, it was felt that this would
be more applicable to major internationally active organisations,
who are capable of deploying sophisticated risk management techniques,
and therefore at the outset the thought that Basel II would apply
across a very much broader population of banks had not really
arisen. During the last few years, it became clear that certainly
in the European Union it would be necessary for the process to
apply across the whole market-place. The United States has taken
a somewhat different line, but as far as the international community
is concerned (and it is the international aspect which is important
for us because of the potential impact on financial stability
here) I think it is fair to say that those American banks who
will be covered by the Basel Accord constitute—I am not
absolutely sure of the figure— but somewhere around 90%
of the international activity of the American banks. Consequently,
the fact that they have decided to move that way, rather than
including the many thousands of mostly smaller banks in the States,
is of no particular concern for us from the point of view of the
things we are trying to do.
Q102 Chairman: Thank you, Sir Andrew.
The last question, Governor, before we go. With our record trade
deficit and a booming housing market and soaring household debt,
are you surprised that there are comparisons with the late 1980s'
boom?
Mr King: I am not surprised that
there are comparisons. I think they are rather superficial comparisons.
I do not deny that there are issues raised by all of the factors
that you mentioned, but I think you have to look at the situation
as it is now and not make rather false and simple-minded comparisons.
We have talked in our speeches and in the Inflation Report about
how we think about the current account and the trade deficit,
about our views of trying to understand house prices and why they
have risen so sharply relative to earnings. All of these things
are relevant and, as I said in my speech in Leicester, I do not
underestimate that there is the potential for shocks and disturbances
ahead. It could be a bumpier ride ahead than we have had for some
years. I am not sure if it sensible to think that history just
repeats itself automatically. It does not and the right thing
for us to do is look at the environment as it is now, analyse
the debt position, the imbalances in the economy, and see what
that implies for our policy. And that is what we do: I think that
just sticking to that course, not trying to do anything too fancy,
not just drawing comparisons from the past and looking at the
data as they are now, what does that imply for the future, setting
policy accordingly. It is doing that for the last six years—even
though certainly we cannot forecast the future at all but just
doing the best we can, as a group of nine people—that has
given us the stability we have had in the last six years and I
hope we can continue, perhaps not in quite as smooth a way but
in as smooth a way as is feasible.
Chairman: Governor, thank you very much
for the informative session. Mr Lambert, I am sorry we did not
bring you in so much but we look forward to reading your speeches,
and Paul Tucker's, on your website before your next appearance
before us. Professor Nickell, we will keep you right on the credit
cards with a quiet word, okay? Thank you very much.
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