Banking Bill

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Mr. Bone: But do you not think that the public would think that was rather strange? The regulators have obviously failed, because we have got to this situation, but nobody can actually sue the regulator.
Dr. Huertas: It is a separate discussion as to whether the regulators have failed, but there are countries where there is an ability to sue and it constrains quite clearly the ability of the supervisory authorities to take necessary actions and it interferes with the possibility of taking prompt action to correct matters. Although the public might be surprised, an ability to sue the regulator for damages can interfere with the ability of the regulator and the supervisor to take timely action.
Q 60Sir Peter Viggers: The tripartite arrangements left the Bank of England with general responsibility for financial stability, but put the supervision of individual banks upon the FSA. Now the Bank is to be charged with a range of new responsibilities relating to bridge banks, private sector purchaser tools, partial transfer tools and so on. How will it ensure that it has the resources and the expertise that it will need for that duty?
Nigel Jenkinson: In terms of the resources that we will need, obviously we will have to ensure that we have the right staffing in place. We have a strong staff already in place. In some areas we may seek to bring in people with additional skills—for example, to fulfil some of the tasks in the special resolution authority. It is important that we have a strong working relationship with the FSA. I am very confident that we have such a relationship and that we can continue to strengthen it further. It is important to have access to the information that we need to fulfil that responsibility. I believe that we can and will undertake the responsibilities that we are being granted, should the Bill be passed.
Q 61Sir Peter Viggers: I have put it to the Governor and others that a good regime would have the FSA responsible for regulation, but that when it comes to supervision and action, the Bank should be the supervisor. What steps can you take, short of what has been described as the nuclear option of the special resolution regime? What range of measures do you have available, short of that?
Nigel Jenkinson: I shall ask Tom to comment on that. As you indicate, we very much hope that the use of the special resolution regime will be a last resort prior to institutions getting into a position where they are failing to meet their threshold conditions and it is not very likely that they can remedy that. There is obviously a strong role for supervisors working with the banks to try to remedy that position. When institutions are getting under stress the Bank will be thinking very hard about planning. Should the worst case happen in terms of special resolution, we will be increasingly involved as institutions get under stress. We will be providing advice to the FSA, but I think that Tom should talk about the regulatory tools.
Q 62Sir Peter Viggers: How will the Bank stay close enough to individual banks and financial institutions to have an awareness of the general situation without duplicating the work of the FSA or treading on its toes?
Nigel Jenkinson: We already have close contacts with many financial institutions through our operational role. As the operational arm of Government in respect of the financial system we have an operational framework, which we try to build on, to improve our understanding of what is going on. In terms of financial market developments, we have in recent years significantly enhanced what we call our market intelligence function, which is led by my colleague, Paul Tucker, the markets director. We will need to put additional resources into our analysis and understanding of individual financial institutions, particularly when there are perceptions that those institutions are getting into stress conditions or when financial market conditions, in general, are getting into stress. It is important that we share the information that we collect from our market intelligence and that we share the analysis that we undertake on risks in the financial system and individual institutions with our colleagues in the Financial Services Authority, and that they do the same with us.
It is a matter of making sure that we are working together positively and co-operatively from time to time, and perhaps challenging each other constructively. I am confident that we can build and develop such a relationship, and none the less make it absolutely clear that we are not duplicating the work of the FSA and that the delineation of responsibilities is very clear; the FSA is responsible for implementation, supervision and regulation and the Bank is responsible for the functions set out in the Bill. I believe that we can do that.
Q 63Ms Keeble: I want to ask the FSA, in particular, about the trigger mechanism. There is an argument that there is a risk of regulatory forbearance because, in a sense, triggering the regime would be a sign of regulatory failure. Do you accept that? If so, how would you guard against it?
Dr. Huertas: We do not accept that there has been regulatory forbearance.
Ms Keeble: There could be. Sorry, I was being hypothetical.
Dr. Huertas: There could be, yes. There is a theoretical possibility that regulatory forbearance could occur. I do not think there is any dispute that the theoretical possibility exists.
Q 64Ms Keeble: But do you think it is a realistic possibility?
Dr. Huertas: I do not think that it has been a realistic possibility. In the UK, in particular, the market is a very stern disciplinarian. The market moves quite quickly to bring to everyone’s attention institutions that have difficulties and to force the hand of the authorities to deal with those institutions. The only way in which forbearance might be exercised is by the provision of very large and extensive amounts of liquidity.
Q 65Ms Keeble: Is the trigger mechanism sufficient? Clause 7 on page 4 sets out two conditions and then there is the consultation process. One condition is whether or not the bank satisfies the threshold and the second condition is a judgment call as to whether the bank might be able to recover. Applying those two conditions, would you have picked up Northern Rock, for example?
Dr. Huertas: Northern Rock could have been handled had the Bill been in place at the time.
Q 66Ms Keeble: Can you say how that trigger would have worked? I thought that one of the problems with Northern Rock was that it ticked all the boxes and the problems were not immediately evident.
Dr. Huertas: It depends on the point in time at which the exercise had been conducted. As the Governor and others have pointed out in various testimonies, not having had available a special resolution regime certainly bound the hands of the authorities in dealing with that particular institution.
Q 67Ms Keeble: Would they be sufficient steps in practice?
Dr. Huertas: Yes.
Q 68Ms Keeble: Would you be able to get through them in a timely fashion, without triggering a bank run? That is the other problem.
Dr. Huertas: I believe that the answer is yes to that. The possibility of preventing a bank run would be greatly enhanced, but I would find it difficult to sit here today and say—indeed, it would be difficult for anyone—that the possibility of preventing a bank run is absolutely banned. The overall prospect of the Bill, which allows us to deal much more promptly with a failing bank situation and to resolve it in a manner that protects depositors and strengthens the ability of the Financial Services Compensation Scheme to pay out to depositors, is a much better place than where we were in September 2007.
Q 69Ms Keeble: May I come back on this again? Condition 1 is, in so far as these things can be, objective. Condition 2 is a judgment call, is it not?
Dr. Huertas: Yes.
Q 70Ms Keeble: What things would you look for and how would you frame that judgment call?
Dr Huertas: The judgment is with respect to the interaction with the bank, its capital and liquidity plans and whether they are realistic and capable of execution within the relevant time frame and, as Nigel and others have pointed out, we would also have the benefit of recommendations and consultation with the bank and our colleagues at the Treasury.
Q 71Ms Keeble: You will have some criteria you will look at. In terms of the public, suppose something goes wrong again and it comes back to a Select Committee, which can say, “What were the objective criteria?” and “What factors did you take into account in condition 2?” People would see that. The staff would be trained in that, as well.
Dr. Huertas: Yes, that is correct. There is a process that asks whether the institution meets threshold conditions. If it does not, it asks what is the likelihood that it will be able to resume adherence to threshold conditions in very short order.
Q 72Mr. Gauke: May I follow up the issue that Sally raised about potential bank runs and panic? Clearly a balance needs to be struck between transparency regarding the special resolution regime and not inducing panic among the public. Could I ask the FSA in particular—I will be grateful for the thoughts of the Bank of England, too—what your communication strategy will be regarding measures taken under the special resolution regime? How are you going to avoid panic?
Dr. Huertas: It is very important that the decision about whether the trigger should be pulled is closely co-ordinated with the solution that is to be adopted, and that a communication strategy be developed at the same time, so that all three things are done together as a piece. Unfortunately, we have had the opportunity for a good deal of practice in that regard. The importance of that overall co-ordinated approach has been very much driven home and that is something we expect to continue.
Q 73Mr. Gauke: The most striking thing about the last 13 months or so, about the various developments in this crisis, has been that practically every interesting bit of information has been revealed by Robert Peston on the BBC News. To what extent has that been a major difficulty for the FSA and the Bank of England—that control of the story appears to be in the hands of Robert Peston rather than the authorities? Is there anything in this regime that will prevent that happening again?
Dr. Huertas: The control of the BBC is not a matter for this legislation.
Q 74Mr. Gauke: Do you identify it as a problem—whether with existing powers or under these new powers—that every story seems to be breaking not through official channels but through leaks to a particular journalist? Is that an issue for financial stability?
Dr. Huertas: The overall issue of communication and communication to the public is certainly an issue but it is not a matter for this legislation.
Q 75Mr. Gauke: But has it exacerbated the difficulty that there seems to be a constant stream of leaks?
Dr. Huertas: The overall question of communication and the method by which it occurs is certainly of great importance for the authorities and one to which we continue to devote attention but, again, it is not a matter for this piece of legislation.
John Footman: Yes, it is a committee of the court. I shall go back a stage: if functions are given to the Bank, as the Bill does, they are initially exercised by the court of directors or the board of directors, and it is likely that the court in any circumstances would have wanted to create a sub-committee. There is already an informal one at the Bank called the financial stability board. The financial stability committee would be a natural thing for the court itself to create to help it carry out the functions. The financial stability functions are significantly different in how they affect the Bank from the monetary policy functions.
The monetary policy functions take monetary stability and deal with that quite separately. Just dealing with the risk-free interest rate does not affect a lot of the activities of the Bank. Monetary stability is much broader.
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Prepared 22 October 2008