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. Dr.
Huertas: Extensive powers are available
to the FSA under the Financial Services and Markets Act 2000 with
respect to supervision and with respect to
inducing banks to take remedial measures. However, as we have seen over
the past year, in a rapidly deteriorating economic environment not all
remedial measures can be as successful as we would hope. Institutions
may come to the point where a resolution has to be implemented, and the
type of co-operation that Nigel has described has been very
instrumental there, as well as working with the Financial Services
Compensation Scheme to effect a prompt and orderly resolution. We
anticipate that the passage of the current Bill would allow that type
of situation to
continue.
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.
Q
76Mr.
Todd: You were sitting at the back when the earlier
questions were asked, so I can run through them
briefly. It is clear from the Bill that the financial stability
committee is not an executive committee. It has a hybrid scrutiny and
advisory role. Is that your
understanding? 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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