Banking Bill

[back to previous text]

Q 90Mr. Hoban: But at what point would you request that information?
Dr. Huertas: There is a trade-off between the time required and the type of indication and one would have to make that judgment in the broad area of heightened supervision. More generally, we are looking at what aspect of the data banks need to keep with respect to insured deposits, and at the need for banks to inform their customers on a fairly regular basis as to what is and is not insured.
Loretta Minghella: It shows how terribly important it is for the FSCS and the tripartite authorities to work closely together in relation to particular firms. That is something that we want to see enshrined in the code of practice: that we will work together as we have done in recent times and that that will always be a feature of the way in which the arrangements operate.
Q 91Mr. Bone: I understand why you require the banks to hold the information in a certain format. I have no understanding of why you need that information in advance—of particular customers. When the button is pushed, the deposits of each customer will have varied from the earlier information. Why on earth do you need that information in advance? In the travel industry, the information is not required in advance—it is required in a format, so that it can be immediately had and acted on. Why do customers’ details have to be with you in advance of a failure?
Loretta Minghella: It is not that we are particularly interested in whether Ms Minghella or Dr. Huertas have any particular amounts—we are not interested in individuals from that point of view, but in making sure that the process works smoothly from day one. It is going to be one of the jobs of the FSCS to give advice on whether the payout could be activated speedily enough, or whether it would not, because of the status of the system, and some other special resolution tool might need to be chosen. That is what the FDIC does—it works with the particular systems of the institution, testing them to make sure that they will work effectively on the day and that the data that should be there are there in the right form. It is not a prurient interest in any individual’s account, but more to do with the issues of that system.
Q 92Ms Keeble: I wanted to ask about the pre-funding, which is not popular with banks. The Governor talked about the need to build up such a fund, but if there was a decision to go with that, it would take some years to provide the level of funding needed. What are your views on that and on how the Bill provides for a reserve power to be used at some future date?
Nigel Jenkinson: As you indicated, the reserve power is in the Bill, should the Government choose to take it forward—
Q 93Ms Keeble: But what kind of lead time would they need?
Nigel Jenkinson: I cannot talk about the parliamentary process, but I am not sure that that was the question. In terms of building up a fund, international experience—there is a range of sizes— would suggest typically about 1 to 2 per cent. of the deposit base.
Q 94Ms Keeble: How much would that be?
Nigel Jenkinson: I should need to check to be absolutely certain. I shall come back if I get this wrong, but I think that we are talking of the order of just over £10 billion to £20 billion.
Q 95Ms Keeble: Would that be enough?
Nigel Jenkinson: In our view, that would make a significant contribution. That would be a significant fund, certainly taking account of the recoveries. You have to take account of what recoveries are due to the fund in the longer run.
Q 96Ms Keeble: Time is short, and I had some indications from Dr. Huertas and Ms Minghella that they might have views about the adequacy of that size of fund.
Dr. Huertas: With respect to the fund, it is important to remember that the deposit guarantee promise needs to be backed by the full faith and credit of the Government. If it ever got to the point that the deposit guarantee promise was limited to the size of the fund, the exhaustion of the fund and the removal of any type of deposit guarantee for the remaining depositors would be a severe threat to financial stability.
Q 97Ms Keeble: You are saying that we have to bear in mind that, whatever happens on the pre-funding or the size of the pot, the Government have to provide the backstop.
Dr. Huertas: Without a Government backstop, the fund alone is not sufficient. The Government backstop is what gives ultimate security. Anywhere they have tried to limit the deposit guarantee promise to the size of the fund, inevitably there have been problems. It caused problems in the United States and in other jurisdictions.
Q 98Ms Keeble: Ms Minghella?
Loretta Minghella: We agree that the crucial thing is that the compensation scheme always has enough money to pay depositors when necessary. That is why the national loans fund part of the Bill is so crucial, from our point of view. Whether or not there is a pre-fund—we welcome the debate—the crucial thing is that there is always that backstop and that people can be confident that the Government will always be there for the scheme.
Nigel Jenkinson: May I add that I entirely endorse the comments of my colleagues? It is important that the scheme can pay out.
Q 99Ms Keeble: Some of our constituents might think that the idea of having a pre-funding scheme is to move some of the risk of failure away from the Government and on to the banks. But are you saying that, whether that happens or not, the Government still have to underwrite it?
Nigel Jenkinson: I think we have to be clear about the difference between provision of liquidity and funding of the scheme and who, ultimately, is paying. The scheme is extremely clear that, ultimately, the levy falls on the banking system. At present, the Government are providing liquidity.
Loretta Minghella: There is no permanent—
Ms Keeble: But then it is a loan.
Dr. Huertas: The bank, the levy payers, are responsible for the ultimate losses resulting from the failure of the bank, in so far as they are attributable to the amount of covered deposits.
Q 100Dr. Pugh: To be precise about this, what you are saying is that a pre-funding arrangement is not sufficient. To be very specific, would you say that it is necessary, or desirable?
Dr. Huertas: No, it is not necessary.
Q 101Dr. Pugh: In your view, is it desirable?
Dr. Huertas: Opinions differ on that question.
Q 102Dr. Pugh: I will take that as a “no”.
Nigel Jenkinson: From the Bank’s point of view, it is not necessary, but we believe that it is desirable.
Q 103Dr. Pugh: That is two not necessaries, one desirable.
Loretta Minghella: It is definitely not necessary and, if there were one there, it would have been useful recently.
Dr. Pugh: Right. That is necessary, desirable and useful.
Q 104Mr. Gauke: May I ask the Bank of England about clause 66, which relates to international obligations and says:
“The Bank of England may not exercise a stabilisation power in respect of a bank if the Treasury notify the Bank that the exercise would be likely to contravene an international obligation of the United Kingdom.”?
Will this mean that, essentially, the Bank of England will not need to take a view on international obligations and that it will proceed as if there are no issues with international obligations unless the Treasury says otherwise?
Nigel Jenkinson: No, I do not think it will. That is not my personal reading of the clause. In terms of the operation of the regime, the Bank will look at international, as well as domestic, aspects. The clause is saying that, ultimately, the responsibility—or treaty obligations—are for the Treasury. That is why the clause is laid out this way.
Q 105Mr. Gauke: You will be aware that there is a view that the Bank of England took perhaps too prescriptive a view as to the market abuse directive and what it could do, as far as covert support and so on was concerned. Do you not see this as an attempt to clip the wings of the Bank of England in any way, or as the Treasury saying, “We will take things on there; don’t you worry about that, Bank of England”?
Nigel Jenkinson: My understanding is that it is normal practice for the Treasury to be formally responsible for treaty obligations.
Q 106Mr. Gauke: But the Bank of England will do its own analysis and act accordingly.
Nigel Jenkinson: Of course, we will take those factors into consideration.
The Chairman: If Members have no further questions for the panel, that brings to an end the business for this morning.
Further consideration adjourned.—[Mr. Blizzard.]
Adjourned accordingly at One o’clock till this day at half-past Four o’clock.
Previous Contents
House of Commons 
home page Parliament home page House of 
Lords home page search page enquiries ordering index

©Parliamentary copyright 2008
Prepared 22 October 2008