Examination of Witnesses (Questions 80-98)|
25 MARCH 2004
Q80 Chairman: Do you have anything
to say on that, Governor?
Mr King: I think one of the difficulties
which the US has got into in this area is the belief on the part
of many market participants that the organisation set up to guarantee
and make feasible the market in long-term fixed-rate mortgages
has a government guarantee, and if you start doing that, you are
giving an implicit public subsidy to an activity the value of
which moves around. That is not something that I think would be
sensible to encourage. I do think that if a market in long-term
fixed rate mortgages were to evolve, it should be because the
lenders and the borrowers decide that that is how they would like
to structure the relationship. I think it is reasonable to feel
that, as the period in which we have a degree of macroeconomic
stability continues, it should be more attractive for people to
take out fixed-rate mortgages than has been the case hitherto.
But I think it would be a mistake to try artificially to encourage
that by offering some kind of government guarantee or subsidy.
We have been through a period in which,to go back to the
question that was asked earlier by Mr Plaskitt, when thinking
about what was causing problems in the housing market,for
a long time the fact that there was tax relief on mortgage payments
was regarded as a major difficulty. We have managed to get rid
of that now. It would be somewhat ironic if we were to go back
and find another one, which has caused very serious difficulty
in terms of volatility, as you said, in long-term interest rates,
Chairman, and I think we would be well advised to stay away from
that. As Marian says, if it were the case that we had more long-term
fixed-rate mortgages, and there was a smaller impact of interest
rate changes on debt servicing and hence on consumption, we would
have to move interest rates by more than we presently do. So what
you gain on the roundabouts you lose on the swings. I do not think
that this is an issue that we feel terribly strongly about, but
certainly I would like to see the full range of mortgages made
available to people. I think the point David Miles was making
in his report is that maybe many households have not thought through
the benefits that they would get from taking out a fixed-rate
mortgage in terms of having some insurance against subsequent
movements in real interest rates.
Q81 Mr Cousins: I wonder if I could
also take you back to paragraph 14 of the minutes and draw your
attention to the first sentence rather than to the last. That
is the one that refers to "Total lending to individuals was
growing at some 14% on an annual basis." You have perfectly
properly drawn a distinction between secured lending and unsecured
lending in your answers to us. Do you have any idea as to what
proportion of this growth is secured and what proportion is not
Mr King: Of the total stock, I
think it is something like two-thirds to three-quarters secured,
that is, three-quarters secured and one-quarter unsecured. The
growth rates have been changing recently. There was a period over
the last couple of years when unsecured was growing more rapidly
than secured. Now the growth rate of unsecured lending is falling
and the growth rate of secured has picked up. There was indeed
some suggestion last year that, because of the increase in house
prices, it became possible for people to substitute secured lending
for unsecured lending, and of course it is much cheaper.
Q82Mr Cousins: You used the figure of
10% in some of your earlier remarks, Governor, 10% of households
potentially at risk.
Mr King: That was the survey that
we carried out. We commissioned a survey of almost 2,000 households
to look at their position vis-a"-vis unsecured lending,
and of that sample, about 10% felt they would have some difficulty
were interest rates to rise in the way that the market now expects.
But they were primarily people with credit card lending, and with
smaller amounts of lending. They may be large relative to their
incomes, but smaller relative to the average figure for unsecured
lending. So most unsecured lending, the survey showed, was actually
being undertaken by people with higher incomes who could afford
to repay it, and indeed were repaying it. Nevertheless, there
was this minority of 10% of those individuals in the survey who
might have difficulty, but it was associated very much with rapid
growth in credit card borrowing, which itself is only a small
fraction of unsecured borrowing.
Q83 Mr Cousins: The clear view you
are expressing to us here this morning is that it would be quite
wrong to take decisions about the macro economy, about the levels
of interest rates, solely on the basis of some abuse or some speculation
or some bad practice on behalf of a small minority of both lenders
and borrowers in the unsecured section of the market.
Mr King: Yes, and without taking
a position about whether or not there is an issue and what should
be done about it in terms of that small number, it is a separate
issue. And it is something which you, I know, have been interested
in on this Committee, and I would not discourage you from pursuing
it. But we do not feel that it is sufficiently quantitatively
important to be a major factor for macroeconomic policy.
Q84 Mr Cousins: Thank you very much
for making all of that clear to me.
Mr King: There is one other point
I would add on the first sentence, which has been a key part of
our deliberations. 14% is a very high number for the growth rate
of total lending, and the question is what is happening to it,
where it is going. What has been interesting is in the last couple
of years,if you look at the household sector as an aggregate
for the moment,there has been also a very rapid build-up
in the financial assets of the household sector. So although,
obviously, you cannot pretend that the household sector is like
one big, happy family making a common decision, it is not the
case that all this borrowing is going into spending. It has also
been matched by a build-up in assets of the household sector,
so both assets and liabilities are rising. The balance sheet as
a whole is rising. This is a phenomenon which is true of a number
of countries, that the size of the balance sheet relative to incomes
is increasing. Of course, that does raise questions about the
sensitivity of spending to changes in interest rates on those
assets and liabilities, and it also raises the question that if
the composition of the balance sheet, and particularly the asset
side, is becoming more liquid, a more liquid asset structure for
the household's portfolio may well lead them to spend more. These
growth rates can affect total spending in ways which I do not
pretend that the economic profession really understands. There
is plenty of speculation about how all this works. But the idea
that somehow there is a well-defined model that economists have
which tells them how these changes in balance sheets feed through
to spending is not true at all. Since the numbers here are large,
there has to be uncertainty as to what this does mean for spending.
Q85 Mr Cousins: But if that argument
is correct, Governor, would you not agree that is a pointer to
having smaller changes in interest rates rather than larger ones,
because there is more liquidity, more sensitivity, more awareness
of the effects of these changes?
Mr King: It is certainly the case
that if you are uncertain about how interest rate changes will
feed through to the economy, or more uncertain than you were,
then that is a case,you are right,for being somewhat
more cautious. That is precisely the reason that we had in our
mindsand said in the minutesfor our being cautious
when we started to raise interest rates at the end of last year.
There was some uncertainty given the new balance sheet position
of households as to how interest rates would feed through. So
a cautious approach seemed to us appropriate, and we said so at
Q86 Mr Cousins: I wonder if I could
ask Sir Andrew a couple of questions. I shall not tempt you into
designing headlines. In the banking and financial sector that
you must be particularly watchful over, are you concerned about
the growth of special-purpose vehicles, the use of "offshore-ing"by
that I do not mean the location of offices; I mean the offshore-ing
Sir Andrew Large: There are lots
of things we look for, obviously. We look at ways in which concentrations
of risk might be being built up and of course, if you are worried
about where concentrations may be being built up, you are worried
about transparency, and clearly, build-ups of assets in less transparent
jurisdictions are ones that you wonder about, because you do not
have all the answers. So in that sense, yes, it is an aspect of
financial stability work that we do think about.
Q87 Mr Cousins: Has there been any
recent increase in the scale of the transactions that are located
in what you have described perfectly properly as less transparent
Sir Andrew Large: It is very hard
to say. One of the problems is that you do not know what the numbers
are. There are some types of transactions which take place in
somewhat less regulated environments, and they tend to be less
transparent, but I would be very hard put to answer you as to
whether there has been an increase or not recently.
Q88 Mr Cousins: You will forgive
me for saying I am actually a little bit disturbed that you do
not have a handle on it, because I do think it is very important
that someone does have a handle on it.
Sir Andrew Large: This is one
of the things, for example, that are discussed in a number of
international gatherings of people who are involved in financial
stability, both central banks and supervisory authorities, and
indeed, ministers of finance. It is the sort of issue, for example,
that is discussed at the Financial Stability Forum, which meets
twice a year. Efforts are being made to improve the transparency.
I can assure you of that, and I think it is fair to say there
has been some success in that direction. What I was trying to
say is that the more opaque it is, the more it is a matter of
concern. I think that efforts to reduce the opacity are being
made and with some success.
Q89 Mr Cousins: Could I finally ask
you about the insurance part of that. Are you concerned about
the stability of the insurance industry?
Sir Andrew Large: That is asking,
I think, a very long-term question. Are you talking about life
assurance or are you talking about general insurance? I should
have asked you that question first.
Q90 Mr Cousins: There are questions
about both, but let us take them separately. Let us take general
insurance first, because that follows on more naturally from my
Sir Andrew Large: The question
is the stability of that industry? Of course, you have to consider
the type of shocks it might be exposed to and its financial strength.
It is certainly true that that industry has been subjected to
some fairly unpleasant shocks over the last few years and is quite
vibrant. I think from that point of view we can take quite a bit
of comfort. But if you take a long-term view, it does not give
me a large amount of concern, no. I think that there is going
to be a demand for insurance services and there is going to be
a supply of capital that will be devoted to it, and I think we
have seen that that has been really quite effective over the recent
past, and I do not see why that should change.
Q91 Mr Cousins: Finally, life insurance.
Sir Andrew Large: Life insurance:
I think, the long-term question really in the industry is quite
how it will be structured, and here, this really falls outside
our remit, but there has been reference recently to the changes
that the FSA are introducing to bring in realistic measurements
and reporting in relation to life assurance so that it is clearer
to customers and indeed the marketplace exactly what is going
on within life insurance companies. My own view is that if that
is done, and as that is introduced, it actually will be very positive
for the long-term future of that industry.
Q92 Mr Cousins: It is difficult to
raise these issues without either sounding pompous or scary, and
I do not want to sound either, but there clearly are now groups
of political extremists who have been turned loose in the world
and they are seeking to engineer brutal destabilising shocks,
not least to the economic system. How far do you intend to take
that or to guide the Committee into taking that into account in
making your decisions?
Mr King: Of course, we did think
about this carefully after September 11th, and there was a debate,
including at international level, about whether the new concerns
about terrorist activity would add to the costs of international
trade and travel and depress economic activity. Looking back,
it is not easy to discern any significant effect of that kind.
The world economy has recovered and grown pretty robustly, and
that has been very much on the back of growth in international
trade particularly in Asia and outside Japan. So I do not think
it would be sensible at this stage to think that concerns that
have been raised, particularly in the wake of the Madrid bombing,
have really changed the outlook for the world economy, though
it is something that obviously we will keep in mind and we talk
about with our international colleagues when we meet. More to
the point is that, in terms of the Bank of England itself and
our responsibility for payments and settlements and stability
of the financial system as a whole, and in terms of our involvement
in the City, we are working very closely with all concerned to
ensure we do have proper business continuity frameworks in place.
If there were disruptions of any kind, we would be able to ensure
that financial payments and economic activity could carry on.
That is an important part of the Bank's work, but I do not think
for the time being it is a major issue for the Committee, though
we obviously keep a watch on this question and if the prospects
were to change, we would take it into account. But I do not think
either September 11th or one incident in itself will make a major
change. The world economy has continued to grow healthily, as
indeed has the British economy.
Q93 Chairman: Sir Andrew, on the
insurance aspect, following up what Jim said, in the recent Article
IV consultation the IMF considered that "weaknesses remain"
in the insurance industry and went on to say "although the
authorities indicated that they affected mostly firms with little
systemic impact." What do you think they meant by that phrase?
Sir Andrew Large: Quite what one
means by "systemic" you can discuss at length. Basically,
I think what that means is that if there were to be a major problem
in an insurance company, it would not spill over into having an
impact on the banking system and the financial system more generally.
I suspect that must be what was in their minds when they made
that comment, though I am afraid I do not recall the exact words.
Q94 Chairman: Taking that aspect
of systemic risk, if Equitable Life became insolvent, are you
confident that it would pose no systemic risks across the financial
Sir Andrew Large: Of course, this
is a hypothetical question, but I think that the spill-over of
that into the banking system and the liquidity in the banking
system would be quite limited, and so in that sense I think it
would pass the test that you are asking me about.
Q95 Chairman: The Governor mentioned
credit card lending, and you mentioned transparency. Given your
background in the banking system for many years and your concerns
about household debt in your speech last week, I suppose you would
agree we need an informed customer in the financial services and
a level playing field for the customer to understand what the
products and the issues are.
Sir Andrew Large: I read your
report with great interest, and I think that the demand you are
making for greater transparency is one that would be very helpful
to people making more informed decisions.
Q96 Chairman: As you know, in our
report we mentioned the two different ways of calculating APR,
ten different ways of calculating interest rates, low minimum
repayments of 1% or 2%which means that it would take over
20 years in a number of cases to pay off the debt, and the customer
is not informedand the lifting of credit card limits by
companies without the approval of customers. Why do you think
this industry has been so sluggish for reform and has kept the
customer in the dark for so long, and what advice would you have
for the industry?
Sir Andrew Large: I think it would
be wise for the industry to take very seriously your request for
Q97 Chairman: Excellent! On that
good note, Sir Andrew, let us finish on a high with your news
Sir Andrew Large: I have to say,
Chairman, I do not regard myself as an expert in headline writing.
You said I could have six words. I can offer you one with five
or one with four. The one with five would be "Increase your
debt with care" and the one with four would be "Increase
leverage with care." I said I was not an expert in tabloid
Q98 Chairman: I think you should
stick to the MPC advice.
Mr King: You know our aim is to
be boring, so I would suggest "`Think before you borrow',
says Boring Bank."
Sir Andrew Large: I defer to the
Chairman: Thank you very much, all of