Dr.
Pugh: But you do recognise the anxiety there, that leaks
of one kind or another will create more problems than you originally
started
with? Ian
Pearson: I am
sorry?
Dr.
Pugh: You do recognise the problem that if a degree of
transparency causes panic in the market, to some extent the special
resolution regime will not work as perfectly as it
might? Ian
Pearson: Let me come on to that point. There is first
the point about getting the legislation right, and then how it will be
implemented if it is thought right to do so in the future. On that
latter secondary point, we have been clear in the legislation that it
is the responsibility of the Financial Services Authority to take the
decision to initiate the special resolution regime. It is the Bank of
Englands responsibility to decide which tool to use, and its
implementation of that option must be presented to the markets in a
single step. I agree that any period of uncertainty surrounding these
processes could undermine the resolution of a failing bank. That is why
it is important that the authorities work closely together on this, and
why although there are clear roles and responsibilitiesand
rightly sothere will be close working between the three
authorities.
Q
16Ms
Sally Keeble (Northampton, North) (Lab): I want to ask
some questions about the regime for depositor protection. To what
extent do you think that in setting up the enhanced scheme, the
Government have abandoned the idea of moral hazard and consumer
responsibility, by diversifying the risk across
investments? Ian
Pearson: I do not think that we should abandon the
principle of moral hazard, but the actions taken in the past to ensure
stability were right. As my hon. Friend will be aware, the FSA recently
increased the compensation limit to £50,000. It is currently
consulting on reforms to the scheme. We have made it clear that the
Government will do whatever it takes to ensure that depositors have
confidence in their savings, and that is the right approach in the
current circumstances. However, you should not assume that, by saying
that, we have completely abandoned the concept of moral hazard, because
that would be the wrong thing to
do.
Q
17Ms
Keeble: When Mervyn King came to see us he said that a
scheme like this, if the banks were to pre-fund it, would amount to
tens of billions of pounds, which he called
non-negligible. Since then, to maintain confidence in
the banking system has cost more than
thatit has been hundreds of billions. What modelling have you
done about how much would actually be needed for the scheme? What kind
of bank collapse would it be able to deal with? Could it deal with an
HBOS? What size of bank? When will you publish the draft
regulationsthere are some in clauses 155 onwards, but I mean
more detailed ones?
Ian
Pearson: I will let Emil answer the question about
regulations, but I will say something about the broader approach. When
the Governor of the Bank of England came to speak to you, he did so in
slightly different times. Many of us have been living these events day
by day, and the unprecedented crisis that we saw in global financial
markets meant that we had to take unprecedented action, and rightly so.
That is why the Government have said that they will do whatever it
takes when it comes to deposits, and that is why we have seen the bank
capitalisation programme and the money going in to ensure liquidity and
support inter-bank lending. Many other countries have adopted that
approach across the world, and it has been the right one to try to
bring stability to the financial system.
Q
18Ms
Keeble: But what size collapse would you expect this to
deal with? How much money would you expect to be in the kitty, and
where would it come from?
Ian
Pearson: It is not helpful to talk about what size
collapse there might bethat is not a place we want to go to.
Emil, did you want to say something about regulation?
Emil
Levendoğlu: Absolutely. As Ministers have made clear,
the power to pre-fund the Financial Services Compensation Scheme, in
part 4 of the Bill, is taken as a power to be used in the
futurethe medium to long term. This would not be the
appropriate time to introduce pre-funding, and there is no plan to
introduce draft regulations until a decision has been taken as to
whether to proceed with pre-funding. That will be at some point in the
future when market conditions have changed.
Q
19Ms
Keeble: Whatimproved or got worse? That is a
serious question. If the decision is to be taken in the future, at what
point would that happen?
Ian
Pearson: Perhaps I can reply to that. The Government
will make a decision, in conjunction with the FSA and the Bank of
England, as to when the economic and financial circumstances might be
appropriate to make progress with pre-funding. As Emil said, we want to
make that decision before publishing
regulations.
Q
20Ms
Keeble: So in the meantime, it is Government
funded?
Ian
Pearson: The Government have provided a loan to the
financial services compensation fund.
Q
21Dr.
Pugh: May we go back to depositor protection and the
variations in it? When Northern Rock began to have difficulties, the
compensation scheme changed and went up to 90 per cent. It went up to
£35,000. Recently, protection increased to £50,000 and
now offshore depositors in failed Icelandic banks are told that they
are totally protected. Can you point to a genuine practical
compensation limit, or is it a case-by-case decision being made by the
Government?
Ian
Pearson: The Financial Services Authority has a
£50,000 compensation limit. As you will be aware, it is
consulting on possible variations to that limit and that remains our
position. In the extraordinary circumstances that we were faced with,
we thought it right to say that the Government would do what it takes,
and to ensure that no retail depositors of Icelandic banks lost their
money. We still think that that was the right decision to ensure public
confidence in the banking system in the United
Kingdom.
Q
22Dr.
Pugh: So if another crisis of another nature were to loom
up, theoretically, the limit could change again almost
overnight?
Ian
Pearson: It is not helpful to speculate on things
that might happen in
theory.
Dr.
Pugh: It happens in
practice. Geraldine
Smith (Morecambe and Lunesdale) (Lab): We certainly live
in extraordinary times; may I begin by congratulating the Treasury
team? I think that you have worked extremely well in amazing
circumstances. I thought that the Government had a lot of things to
deal with, but we effectively have a strike of capitalism, with the
banks refusing to lend money to one another. I hope that the measures
we are taking can get them back to work and get them lending the money
to businesses again. The SRR that the Government are bringing in
is presumably the nuclear option. You would not want to be using that
too often. What can you do to prevent us getting to this
situation?
Obviously
there needs to be some global regulation. A lot of ordinary people feel
that there has almost been criminal negligence here. What can we do to
prevent these sorts of things happening in the future? We are seeing
large amounts of taxpayers money being used to prop up the
banking system. It must never be allowed to happen again. I appreciate
that we need to act quickly, but we also need to get some
responsibility back into the banking
system. Ian
Pearson: I think there are a number of
different points. First, on what my hon. Friend calls the strike of
capitalism, which we tend to call inter-bank lending, the Government
have provided £250 billion to support inter-bank lending. We
believe that we will make a difference and we are already seeing a
reduction in LIBOR rates. So there is an indication that this is
working. Clearly, the operation of this special resolution regime only
happens in exceptional circumstances. We hope that the legislation that
we will discuss in detail in due course will never have to be used, but
it is important to have that framework of legislation in place so that
we can take decisive action and give a framework of confidence to banks
and building societies as well for the
future. The
other point that I would want to make is about the enhanced role that
we are giving to the Bank with regard to financial stability. We see
that as being an important part of the Bill. The Bank has always played
a role in financial stability, but the proposals in the Bill build on
what is done to date and provide it with a high-level statutory
responsibility for contributing to the maintenance of financial
stability. We see that as one of the ways in which we can say that we
have learnt lessons from recent events and are building a more robust
system for the future.
Mr.
Bone: Just so there is no doubt, I think that the Treasury
team have been running around like a load of headless chickens. They
have been lurching from one set of goalposts to another. So I take a
slightly different view from the hon. Lady. May I refer the Minister to
the Banking Bill regulatory impact assessment? Paragraph 1.192 says in
big red
lettering: The
Banking Bill will enable the FSA to collect information from firms that
the FSCS requires (and share this with the FSCS) before
default. Why? Ian
Pearson: First of all, I should like to pay tribute
to Treasury, FSA and Bank of England staff for the actions they have
taken to ensure the stability of the UK financial system and to deal
with the crisis, which has not been of our manufacturing, but started
in the United
States.
Mr.
Bone: That is open to
debate. Ian
Pearson: You say it is open to debate and I know that
your leader wants to airbrush out of history the facts of the sub-prime
crisis in the United States and that most countries across the world
are taking similar action to us because they are in similar situations
due to the combination of the credit crunch and high oil and food
prices. I do not think there is much debate. I think there is a very
small minority opinion that does not accept that there has been and is
a global financial crisis.
With regard
to what you say about the regulatory impact assessment, I refer you to
clause 162, which allows the FSA to make rules allowing it to obtain
information that the FSCS may require to carry out its work or prepare
for payment of compensation. The FSA is working with the industry to
establish how customer-level information can best be provided to the
FSCS and on what basis compensation is calculated. The FSAs
plan is to consult on new rules in due course and in line with its
statutory obligations. This will include a cost-benefit analysis of any
new rules. I think that that covers the point that you are
making.
Q
23Mr.
Bone: Mr. Chairman, I think the Minister said
customer-level in that answer. I am trying to
understand why that customer information is wanted in advance of a
collapse. The nearest comparison I can think of is a collapse of a
travel firm where ABTA will, immediately after the collapse, get the
information about the customers who are travelling and then refund. Why
do you want customer-level information to go to a Government agency
before the
collapse? Ian
Pearson: Perhaps I may ask Emil to
answer. Emil
Levendoğlu: The FSCS will not necessarily require
customer-level information prior to collapse in order to take a view as
to what work is needed to prepare for payout. It may need to see the
sort of information held by the institution so that it can judge how
quickly it can prepare for payout in the event of the firm collapsing.
The point about customer-level information relates to the work around
ensuring that depositors get fast payout and the question of the single
customer view has come up in consultation and also in the Treasury
Committees report. The question of how customer-level data are
provided in the event of a payout is one that the FSA
is
working on with the industry to work out the best possible solution. So
customer-level data may not be required prior to
default.
Q
24Mr.
Bone: Finally, Mr. Chairman, we have already
touched on it but there is the matter of funding this compensation
scheme. I link it again to the travel industry, where the funding is
put up by the travel companies and paid into a fund so that it is there
for when a company collapses. It is very strange that we are treating
bankers with kid gloves and not making them contribute. Last year, one
of those banks made £9 billion. Are we talking one thing for
bankers and another thing for other
companies? Ian
Pearson: I understand the point that the hon.
Gentleman is making. However, it remains our view that pre-funding at
this stage would not be appropriate. We do believe that in different
times there should be pre-fundingwe have said so on
recordand it is why there are powers to do this in secondary
legislation. We do not think it right to go down that road at the
moment. Emil
Levendoğlu: Of course, the industry does contribute
in the event of a deposit payout. In the current arrangements, it
contributes after the payout rather than before. It is not the case
that the industry does not contribute to the cost of
payout.
Q
25Mr.
Mark Todd (South Derbyshire) (Lab): The Bill says that an
objective of the Bank should be to
protect and
enhance the stability of the financial systems of the United
Kingdom.
It is not
clear what tools, other than a financial stability committee, it will
have to carry out that function. Can you tell us
more? Ian
Pearson: The Bill talks of the financial stability
objective. My hon. Friend knows that the Treasury Committee, of which
he is a member, has strong views about membership of the financial
stability
committee.
Q
26Mr.
Todd: I shall come to
that. Ian
Pearson: I thought you might. I emphasise to the
Committee that the Bill gives the Bank of England responsibility for
oversight of the payment system. The Bank of England also has
responsibility for taking action under the special resolution regime,
in the event of a failed bank. I suspect that the hon. Gentleman is
probing more on how we prevent getting into a situation in which the
SRR has to be
introduced
Q
27Mr.
Todd: I am probing whether the Bank has the resources to
do what is set down in its new objective, which is not to manage the
stability, but to contribute to protecting and enhancing our ability to
protect
stability. Ian
Pearson:
Yes.
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