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
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.
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 mornings 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.
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 Parliamenta 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 Englandboth 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 accountand they will take accountis 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.
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
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.
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
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