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John
Footman: The Governor said that to the Treasury
Committee. But it does affect the way in which the functions are
managed. It goes to the balance sheet. It goes to risks, and it goes to
controls. It also goes to decisions that the court will have to
take—for example, about the lender of last resort, transactions
outside the normal course of business, collateral swaps that would not
be within the normal delegations to the Governor and the executive. The
court would need to be consulted and to decide on them. That is why a
financial stability committee is something that the court would create,
and give executive
functions.
Q
77Mr.
Todd: Good. I have that. The Bill, as I explored earlier,
is not absolutely clear about the relationship between the financial
stability committee and the court. It is in certain respects, but not
in other aspects. Would you welcome a clarification of the clear
subsidiarity of the financial stability committee or do you feel that
allowing it to float free to some extent is desirable—as appears
to be the intent of the Bill, as
drafted? John
Footman: The Bill requires the court to create the
committee. It does not completely flow free. A clause enables the court
to delegate functions to it. It is very likely that the court would
want to delegate, for example, short-run immediate transaction
decisions to it. There is already a transactions committee at the
court, so they could be rolled together. The functions in the Bill are
to recommend financial stability strategy to court, which will decide
and then advise.
Mr.
Todd: The Bill is silent as to whom it gives the
advice. John
Footman: One assumes that it is to the executive.
That is how I have read it. I agree that one can read it in other
ways.
You
heard the exploration as to the role of the Governor. He is designated
as the chair of the financial stability committee, yet part of the
committee’s function is to scrutinise the Bank’s
executive role for which he is responsible. That is an unusual
combination of roles, is it not?
John
Footman: The word “oversee” is used in
the
Bill.
Q
79Mr.
Todd: It may help if I quote the Bill. It says
“to monitor the
Bank’s use of the stabilisation
powers”. I
interpret that as a scrutiny function normally carried out by
non-executives, but the committee would be chaired by the main
executive responsible for the delivery of those
functions. John
Footman: That is, in a sense, why I wanted to stress
that the function is given to the Bank. Typically, the court delegates
to the Governor, as the executive, a range of functions, but reserves
certain decisions to itself. It is reasonable for the committee to
advise the executive and also to exercise some of the functions that
the court reserves to itself, and it would do so. It is also likely
that there would be oversight within the committee. The fundamental
oversight process—this goes back to the 1998 Act—is the
court, or the non-executive of the court in what is called NedCo, which
reviews the Bank’s performance in delivering its various
activities, with the exception of monetary
policy.
Q
80Mr.
Todd: Would it be fair to say that the court will have a
significantly different function than it does now? The Bill cuts the
number of members of the court.
John
Footman:
Yes.
Q
81Mr.
Todd: There is an implicit suggestion that a somewhat
different character of membership might be required to carry out this
role, which it has now been given rather more explicitly than in the
past.
John
Footman: At least four of the non-executive members
would be members of the financial stability committee, and would
require the skills, abilities and knowledge to exercise that function.
The remaining nine members—or eight if you take out the chairman
of the FSA, who is usually on the committee—would review the
performance of the Bank in its financial stability role. You are right:
expertise and ability would be needed in that as
well.
John
Footman: A complete appointment of new members of the
court.
Q
83Mr.
Todd: There is a reference in the Bill to co-opting other
non-voting members. I hope that is a means of recruiting those who are
not necessarily UK citizens, but have valuable experience of financial
stability issues. Of course, the Bank already has someone from the
Scandinavian banking system who, even before this happened, advised it
on stability issues, presumably based on the experience of nearly 20
years ago. Is that the kind of model that is envisaged regarding the
use of that power?
John
Footman: That is one possible model. The other
simpler point about co-opting is that the executive directors of the
Bank are not formally members of the court. They would also need to be
co-opted, but could be from outside or inside the Bank
establishment.
Q
84Mr.
Bone: I should like to kick off with some questions on
depositor protection. The Governor of the Bank of England banged on
about moral hazard many
times on television. I think I understood what he meant—we do not
want irresponsible lending and we have to bear the consequences of the
risks we take. On the other hand, although we have talked about a
£50,000 limit to depositor protection, we all know that it is
effectively 100 per cent. We have seen that with Northern Rock and the
Icelandic Banks. Politically, the Government do not dare allow
depositors to lose money in banks.
Was the
Governor saying “moral hazard” for soundbite purposes, or
was he serious? If he was serious, what is he saying to the Government
regarding their actions in giving, in effect, 100 per cent.
protection?
Nigel
Jenkinson: The question of moral hazard is important
in the design of financial regulation and the operation of the
financial authorities. The Governor is right. It is important to look
hard at what incentives the systems of regulation and supervision
entail with regard to the behaviour of participants in the financial
system. On the specific issue of deposit insurance, the Bank view is
that there is merit in a risk-based, pre-funded system of deposit
insurance. The opportunity and the powers to implement it are clearly
set out in the Bill, should the Government decide to do so. However,
given current financial circumstances, the decision has been taken not
to adopt that measure now, and it will be a decision for Government in
the future. It is important to think hard about the respective
incentives in terms of how the system is designed. It is important to
think about moral hazard issues.
Q
85Mr.
Bone: I am not quite clear. Let me give an example. Were
the Government right to protect all retail depositors with the
Icelandic banks? At that time, the scheme said that deposits of up to
£35,000 were protected. That is where it should have come in.
People who had money above that amount should have lost it. That is the
moral hazard aspect—people who went to an Icelandic bank that
gave a higher rate of return were taking a moral risk. That is not what
happened; the Government rushed in and said that we must protect
everyone. There might be somebody who is very rich and had £5
million in an Icelandic bank. Such a person is protected the same as
somebody with only £35,000. Does that not drive a coach and
horses through the idea of moral
hazard? Nigel
Jenkinson: The Government took the decision last week
and that was a decision for Government. You raise an important question
about whether there is a hard limit in the longer run. In the current
stressed circumstances and conditions where people do not have much
confidence in the financial system, a strong case can be made that it
is important to retain and protect depositor confidence. That is the
decision that the Government took last week. In other circumstances,
under more normal financial market conditions, where suddenly a bank
gets into particular difficulties on its own, it is possible to make a
different decision. In terms of financial stability, it is important to
look at the conditions of the time. That was a factor behind the
Government’s decision last
week.
Q
86Mr.
Hoban: Nobody 13 or 14 months ago would have expected a
bank to fail. No one anticipated that the Financial Services
Compensation Scheme would
have to step in to repay depositors. Will Ms Minghella set out what
lessons the FSCS has learned over the last year and what changes it
needs to make to adjust to the new financial
climate? Loretta
Minghella: I would start by saying that it has been
very clear over the last 13 months how important it is for people to
know what compensation will be available to them and to be confident
that that can be paid quickly. The FSCS has always dealt promptly with
the failure of smaller credit unions and deposit takers. We have the
experience of dealing with about 35 of those and an MP thanked me the
other day for dealing with his claim very quickly. He is joined by many
thousands of people who have had that
benefit. Over
the last year we have also been able to participate, thanks to the
Banking (Special Provisions) Act 2008, in much larger-scale rescues.
For example, in the case of Bradford & Bingley, we paid £14
million overnight so that 2.5 million people went to bed on 28
September banking with Bradford & Bingley and woke up on
29 September banking with Abbey. That was a tremendous
result in terms of consumer protection. That was only possible because
of the provisions of the 2008 Act, which is why it is terribly
important to us that the Bill goes through. It will allow that kind of
thing to happen in the
future. That
is not the only kind of scenario that we will face. There will be
circumstances in which payouts will be necessary for larger numbers of
people than is contemplated in smaller credit union failures. We must
be able to speed up payment. Eight measures must be taken to help speed
up payment. Four are delivered by the Bill and four can be delivered by
changes to be made to FSA rules, which Tom might want to comment
on. I
will speak about the measures contained in the Bill. Those are allowing
us early access to information about firms before they fail, assistance
from the liquidator in the event of a failure to prioritise the payout
of depositors, a streamlined process that will not need all the forms
that go backwards and forwards between us and the claimants—in
other words, no forms and deemed assignment of rights—and
immediate access to the liquidity that we need to pay people promptly.
Those are the four changes that the Bill will deliver. We have realised
how important they are in delivering consumer
confidence. There
are four sets of changes under the Bill that will also help us:
simplifying the eligibility criteria, ensuring that banks have the data
that we can use immediately to pay out showing a single view of each
customer and what they are owed, the need not to set off
people’s loans against their deposits before they are paid out
and streamlined arrangements for people to open new accounts with other
banks, so that they can pay their compensation cheques into them if
necessary. We have learned over this past year how important all those
things are, and that is why we support the
Bill.
Q
87Mr.
Hoban: You talked about how you were able to transfer
money overnight to Abbey, straight from Bradford & Bingley. How
long do you think it is right for customers to wait until they can
access their accounts, if the situation is not that a bank’s
assets are being transferred to another bank, but that a bank is going
insolvent? Is it one week, two weeks, or longer?
Loretta
Minghella: Tom may wish to comment on that, because
the FSA has been running some research about consumers—what they
need, and what they believe will give them the confidence that they
need. I think a period of a week or two is what we are looking at,
which is why we are aiming for a seven-day payout for the majority of
what people are owed, with the balance, if necessary, to follow a few
days later. Obviously, there will be some cases of hardship even so,
but we think that is realistic and would meet the needs of the majority
of people.
Q
88Mr.
Hoban: What are the principal barriers to a seven-day
payout? Loretta
Minghella: I have set out the eight things that need
to change, and I would say that missing out one or two of them would
probably defeat the whole object, so we commend to Parliament the list
of changes as a whole. One of the key things will be having the right
data from banks at the point of failure and knowing that those data are
reliable, which is why we need to be in earlier. Part of the reason why
the Federal Deposit Insurance Corporation can pay out quickly is that
three months beforehand, it starts the preparations towards payout. The
FDIC works with the firm’s data—it runs through them, it
tests them, it explores them and it does dummy payment runs—to
make sure that when the button is pressed and it goes into payout mode,
the process will be reliable.
The data have
to be there, they have to be tested and reliable and they have to fit
the compensation scheme rules as they currently stand. If we have to
pay out everybody except so-and-so, we must be able to identify who
that so-and-so might be. If we have to set off loans, we need to know
what to set off; if we do not have to, all well and good. The data are
crucial and we have been working with the FSA and consultants to
examine the whole business of the speed of payout, to see how it can be
delivered most efficiently. Tom may want to say more about
that.
Dr.
Huertas: We are very much working on that. There is a
trade-off between speed and accuracy. On balance, for the broad number
of depositors there should be much more emphasis on speed. It may
involve a bit of overpayment, but with respect to the broader social
objective of ensuring that the depositors get access to their money
quickly, we would come down on the side of taking the risk that there
is a bit of inaccuracy and potential overpayment, in order to get the
speed in
place.
Q
89Mr.
Hoban: Just going back to Ms Minghella’s comment
about the FDIC in the States going in three months before the button is
pressed to make the payments, how would that work in the context of the
regime we are talking about? If a bank was to go into the amber zone of
heightened supervision, would you expect the FSCS to become involved in
that situation, to prepare the ground in case a bank goes into the
special resolution
regime? Dr.
Huertas: One of the provisions in the Bill is the
ability of the FSA to request the information that could be passed on
to the FSCS, so that it would have the type of information that it
requires should payout become necessary, so that the speedy payout can
be achieved.
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