Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 100-102)

20 NOVEMBER 2003


  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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