The
Chairman: Time is catching up with us. I call for the last
question.
Q
46Ms
Keeble: This is a general question. Clearly, the public
are going to have high expectations of the Bill as being able to
prevent the kind of catastrophe that we have seen in recent months.
What do you say to people who say, “Well, actually what happened
was down to some dysfunctions in some banks that were not properly
regulated or managed by the people who were supposed to be doing so.
So, how is the Bill going to make a difference and which particular
measures are going to make a difference?” What do you say to the
public? Ian
Pearson: Let me be clear: even at the risk of stating
the obvious, the Bill cannot stop sub-prime lending in the United
States. It puts together a permanent regime for dealing with a
situation in which banks are failing
and—
Q
47Ms
Keeble: Hang on. You say that it is not meant to outlaw
sub-prime lending in the US, and obviously it cannot do that, but it is
supposed to make the banks here spot when some of that sub-prime
lending is bundled up, packed over here and cannot be dealt with. That
is where we came in.
Ian
Pearson: One of the things that is certainly in the
Bill, which we have just been talking about, is an enhanced role for
the Bank in ensuring financial stability. Financial stability should
take into account some of the things that my hon. Friend is talking
about. Clearly one piece of legislation cannot do everything. I hope
that I have been very clear that this is one part of a package of
reforms and actions that have been taking place. I also want to
emphasise the enhanced supervisory framework that the Financial
Services Authority has been adopting. We have learned lessons from
Northern Rock, and I
suspect that there are further lessons that we need to learn as a result
of the global financial crisis, but I am confident that the legislation
is robust and is needed to ensure that we have a permanent regime in
the first
place. The
message to all of us is that we need to understand the global nature of
international monetary markets better, and to understand that one needs
a global response to regulation. The Prime Minister has been pushing
for that for the best past of a decade or more. When he was Chancellor
of the Exchequer, he said that there needed to be greater co-ordination
globally on financial markets and institutions. I do not think that we
currently have the institutional arrangements that will be needed,
which is one of the reasons for a lot of the interest and activity that
has taken place in that area. It is not part of the Bill, but it is
part of the learning experience that we have all been going
through.
12
noon
The
Chairman: Order. Thank you, Minister and Mr.
Levendoğlu. I now call the next group of witnesses. We will hear
evidence from representatives of the Bank of England, the Financial
Services Authority and the Financial Services Compensation
Scheme. Lady
and Gentleman, welcome to this morning’s meeting. Beginning with
the lady, would you introduce yourselves,
please? Loretta
Minghella: Good morning, Chairman. My name is Loretta
Minghella. I am the chief executive of the Financial Services
Compensation Scheme.
Dr.
Huertas: Good morning, Chairman. I am Thomas Huertas,
director of the banking sector at the Financial Services
Authority. Nigel
Jenkinson: Good morning. I am Nigel Jenkinson,
director of financial stability at the Bank of England.
John
Footman: Good morning. I am John Footman, director of
central services at the Bank of England.
The
Chairman: Welcome. Our first question is from
Mr. Mark Hoban.
Q
48Mr.
Hoban: These questions are addressed to the
representatives from the Bank of England. The Governor said that it was
more important to get the special resolution regime legislation right,
rather than rush it through to a fixed timetable. To what extent are
you convinced that the Bill gets it
right? Nigel
Jenkinson: As the Governor also said, he thought that
by October the Bill would be in a sufficient position to be scrutinised
extensively by Parliament—a process that is now under way. We
believe that the Bill is in such a state. We strongly support the
current Bill and think that it is ready to be taken
forward.
Q
49Mr.
Hoban: The Governor argued that the Bank should have the
ability to pull the trigger on a failing bank. What benefits do you see
from that
approach? Nigel
Jenkinson: That is a debate which has taken place in
the past; it is not a proposal that is currently in the Bill, where it
is clear that the FSA will pull the trigger. But the Bank can, and
will, make recommendations in particular cases. That is the debate we
have had and a decision has been made. We will wish to operate under
the framework that is now in the Bill.
Q
50Mr.
Hoban: But the Bill talks about the FSA consulting with
the Bank before it pulls the trigger. Do you think you need a much more
formal process for making recommendations to the FSA about whether a
bank should be placed under the
regime? Nigel
Jenkinson: Further information will be published. We
are working with our colleagues in the FSA and the Treasury in terms of
revised memorandums of understanding protocols on how the new
arrangements will work. As I have stated, under those arrangements we
will be able to make recommendations; there will be good information
sharing between the FSA and the Bank of England and we will be in a
position to make such recommendations, but it will be the
responsibility of the FSA to make the actual decision. I do not know
whether Tom wishes to say anything on that.
Dr.
Huertas: I very much agree with my colleague from the
Bank of England—both on the way that the process would work, and
that in the Bill there is a provision for the FSA and the Treasury to
recommend to the Bank the resolution tool that would be adopted. That
is a solution that we heartily endorse.
Q
51Mr.
Hoban: Under the terms of the Bill, you may lack the legal
power to pull the trigger, but do you not have a de facto power to pull
the trigger? If a bank came to you, looking for help to enter into
liquidity or some other form of financial assistance, the fact that you
can refuse would, by necessity, place the bank in the special
resolution regime.
Nigel
Jenkinson: The particular issue of which the FSA
would have to take account—and they will take account—is
whether a bank is continuing to fulfil the threshold conditions for
regulation and/or the likelihood of being able to improve the position.
If a bank came to the Bank of England seeking additional liquidity
support and liquidity assistance, that is undoubtedly something that we
would be talking to the FSA about, and the Treasury too, in respect of
finding the right approach for that particular
bank.
Q
52Mr.
Hoban: But presumably if you said that you could not
provide liquidity assistance to a particular bank, that would
effectively pull the trigger?
Nigel
Jenkinson: It depends on the circumstances. Together
with the Treasury and the FSA, we would have to make a decision about
whether to provide liquidity assistance in those particular
circumstances. It is not clear that there would be an issue of
liquidity in all cases. For example, there might be a case where a bank
had poor capital levels that the FSA was concerned about. That factor
might lead the FSA to believe that the bank was failing to meet its
threshold conditions and, consequently, could be a candidate for the
special resolution regime. Not all cases would necessarily go along the
lines that you suggest.
Mr.
Hoban: No, I am sure that is the case.
Dr.
Huertas: Indeed, some of the
considerations that I imagine our colleagues at the Bank have under
review are the need to provide liquidity under the conditions outlined
in the Red Book revisions, and the wish to avoid the possibility of
stigmatising any bank that sought liquidity under those conditions. The
question
of liquidity provision to banks should be seen generally. It is not
always with respect to emergency liquidity
assistance.
Q
53Mr.
Hoban: No, quite. Mr. Jenkinson, you are the
director for financial stability. What does “financial
stability” mean?
Nigel
Jenkinson: For my interpretation I can do no better
than quote the Governor when he was asked that question by the Treasury
Committee. We consider a situation of financial stability to be one
where the financial intermediation mechanism works normally, where
households and corporates can mediate their savings into real
investment in the economy at home and abroad, and where the payment
system operates normally. It is a situation where intermediation works
well, where people have confidence in the system and where the payment
system operates well. That is a reasonable working definition, although
there are clearly many definitions of financial
stability.
Q
54Mr.
Hoban: Yes, but do you think that it would be helpful to
define financial stability in the Bill? Clearly, the Bank will be held
to account on its ability to deliver financial stability. At the moment
that is a high-level concept, which is undefined in the Bill. How can
we hold the Bank to account if there is no definition, even along the
lines that you have outlined?
Nigel
Jenkinson: I do not personally think that it is
necessary to have a definition of financial stability in the Bill. We
produce regular reports, with which I hope that you are familiar. For
example, we will continue to publish our financial stability report in
which we give our assessment of the risks and vulnerabilities to the
financial system, state whether we think that there are threats to
financial stability or the likelihood of financial instability and
discuss what can be done to remedy that position and improve the
resilience of the financial system. I do not think that it is necessary
to have a definition of financial stability in the legislation, but in
terms of a broad working definition, we would subscribe to the one that
I have just set out.
Q
55Mr.
Hoban: You talked about the financial stability report,
and your organisation was one of those that pointed out some of the
issues that were building up in the economy. What tools do you have to
implement your responsibility for financial stability?
Nigel
Jenkinson: We have a number of tools. First and
foremost is the one that you referred to in terms of the role of the
central bank as the ultimate supplier of liquidity in the economy. That
is a crucial role for central banks and is very important in
determining financial stability. As Tom Huertas has indicated, we have
just undertaken a review of that function and put out a new document
about how we will conduct our liquidity operations.
The role of
payment systems and financial infrastructure is an area of crucial
importance to the financial system, and one in which the Bank has
particular responsibilities. The Bill goes further in providing it with
statutory responsibilities. There will also be responsibilities in the
Bill for the functions of the special resolution authority.
More broadly, in the financial stability report, we aim to provide an
assessment of where we believe there to be risks and vulnerabilities in
the financial system, and set out what policies and changes can be
adopted to try to improve the resilience of the financial
system. We provide
advice to the Financial Services Authority, for example, on some
aspects of the prudential regulation framework. We participate in a
range of international committees, such as the Basel Committee, the
Financial Stability Forum, and the committee on payment and settlement
systems, which set standards to try to strengthen the resilience of the
financial system. Across a wide range of areas we can exercise the
responsibility set out in the Bill, to try to improve financial
stability and to strengthen the protection and enhancement of financial
stability.
Q
56Mr.
Hoban: It seems to me that you lack the ability to
intervene to maintain our stability. If you go back to the issue that
was identified about growing levels of debt in the economy, what tools
are at your disposal to affect
that? Nigel
Jenkinson: As I have already indicated, we have
policies in respect of liquidity, which is absolutely central. It is
another area, but clearly the Bank has important monetary policy
objectives in terms of the responsibility to set interest rates in line
with the inflation target. As regards the regulatory framework, we can
and do get involved in some aspects, such as the liquidity framework,
in which I am personally involved on an international committee. The
pure regulation and supervision of banks, however, is clearly
delineated to the FSA, which is
fine.
Q
57Mr.
Bone: Tucked away on page 105, clause 222, extraordinary
bank immunity has been given to the Bank of England; it cannot be sued
for any acts or omissions it commits. Why has that been tucked in
there? John
Footman: It is an immunity that we had when we were
supervisor, which the FSA also has as a supervisor. As we are getting
the more formal roles in financial stability set out in the Bill,
including roles in the special resolution regime and the oversight
functions of payment operations, it seemed sensible for us to have the
same statutory immunity as the FSA and other regulators. It is not
totally unusual in the sense that you mean
extraordinary.
Q
58Mr.
Bone: Does that answer imply that this would be
retrospective to anything that the Bank has done in the
past? John
Footman: I would need to think about it, but I should
think not.
Q
59Mr.
Bone: I would like the FSA to answer this question: do you
think that the public would be surprised, having had the biggest
financial crisis for 100 years, with runs on banks and banks nearly
going bust and being nationalised, if the regulatory bodies immune
themselves from being sued? Would not the public think that rather
strange?
Dr
Huertas: In terms of the exercise of
public duties, with respect to compensation that might be due to
shareholders there is provision in the Bill for such compensation. It
is in that area that shareholders and
other creditors would be able to seek compensation, rather than suing
the particular agencies directly for
damages.
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