Banking Bill

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Mr. Todd: Absolutely.
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.
Q 78Mr. Todd: One can.
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.
Q 82Mr. Todd: Which is?
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.
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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