Q
128Sir
Peter Viggers: To what extent have your members reached a
situation where they are confident that they now know the true value of
their assets? To what extent are their balance sheets still
contaminated by toxic assets? By way of illustration, I think that the
nearest analogue to the present situation is Lloyd’s of London.
Lloyd’s made a point of identifying and isolating the toxic
assets in the so-called spiral and then moving on. Are your members at
that stage? Are they doing
that? Angela
Knight: No. Lloyd’s put them into Equitas and
floated it off as a different vehicle—I recall it as well. We
would say that they know exactly where they stand. There are still a
number of imponderables, however, which are related to the valuation
process of illiquid assets. Illiquid assets are not necessarily bad
assets, but assets for which there is no market at the moment. The
process for how to value them changed from about 10 October,
when the US changed its valuation rules and allowed a valuation that
included a reflection of the income stream. That meant that one went
from having to try to determine the value of a product using mechanisms
that were no longer particularly appropriate, to using mechanisms that
were appropriate. That has started to clarify the issues very
considerably indeed, but the difficulties are not just the result of
exposure to particular types of complex US sub-prime, although that is
where they start, and undoubtedly there is that exposure around the
world. There has also been a loss of confidence in an asset class
generally—that is, housing—in many jurisdictions, which
has fed through to ordinary assets that one would never even remotely
call particularly complex. There are many factors involved. On the
specific question, the new valuation rules are significant.
Jonathan
Taylor: I would agree with that general description
of where we are. In other words, I think that at this point there is
something approaching certainty, but I would not want to put it more
strongly than that. I would be comfortable with
that.
Q
129Ms
Sally Keeble (Northampton, North) (Lab): This is a
question for Adrian. Given that building societies have not had the
same track record of failure, are you concerned that this package of
reforms might be applied to you although you are not part of the
problem? Adrian
Coles: No, we do not believe that we are part of the
problem, although I would not claim that building societies will sail
through the recession without any difficulties whatever. We have
already had announcements of two building society mergers, which were
necessary to ensure that the building society sector maintains its
record as a safe haven for investors’
funds. We
are keen that building societies are perceived to be, and are, as safe
as banks that are covered by the legislation, so we took an early view
that the legislation should cover building societies in exactly the
same way as banks. It would be wrong if some of the mechanisms that
could be applied to a bank in difficulty were not available to a
building society in difficulty and, as a result, some investors somehow
got the perception that a building society investment was less safe
than one in a
bank. We
are supportive of the additional clauses in the legislation that say
that the provisions that apply to the banking sector also apply to the
building society sector. We think that we would be in a weaker position
if they did
not.
Q
130Ms
Keeble: Are there any aspects of the legislation that are
of concern to your
members? Adrian
Coles: We have already covered one of the most
important ones, and that is the FSCS meeting the costs of a bank or
building society in the SRR. Most building societies will never go into
the SRR but will still have to meet the costs. Also, single customer
information must be kept in the way prescribed by the FSA for FSCS
payout. That could impose significant costs on small institutions, but
the huge likelihood is that a small institution would be taken over by
a larger one rather than go through the FSCS procedures. Therefore, the
effort of organising affairs in a way that the FSA wants would be
wasted for small and medium-sized building
societies.
Q
131Ms
Keeble: Are you concerned about the pre-funding
arrangements, if they come in? Given the benign track record that
building societies have had, do you feel that they would be unduly
onerous? Adrian
Coles: As I indicated to Mr. Bone, if we
moved to pre-funding, it would mean taking a lump of money out of
building societies’ capital, which is there to protect their
depositors, and putting it into the compensation scheme. I do not think
that is particularly helpful. If there were a requirement to keep
capital—
Ms
Keeble: But that is a general comment. The point about
pre-funding is that, to some extent, the cost has to be related to
risk. The risk for the banks could be quite substantial, but you could
make a case that the risk for the building societies is slighter, given
your track record.
Adrian
Coles: Yes, I was going to say that if there were a
requirement for pre-funding, and if there were a requirement to keep
capital at the current level in building societies, the only place the
money could come from is higher mortgage rates or lower saving rates
for building society
customers. There
is also a strong view among many building societies, which I think the
Building Societies Association would now endorse, that there should be
some element—we have not fully worked it out—of
risk-related premiums. Building societies certainly find it galling
that they have to contribute to payments that are being made in respect
of institutions that have not been run as prudently as building
societies.
Q
132Ms
Keeble: On the trigger mechanism, would any variations be
required for triggering the SRR for building societies in comparison to
banks, given the very different sort of
models? Adrian
Coles: Clearly the mechanisms by which the SRR is
implemented and by which public authorities might take control of a
building society will be very different. You cannot buy shares in a
building society, for example, but we have not identified particular
differences in the overall approach that we would wish to apply to a
building society compared to that which we would apply to a
bank.
Q
133Mr.
Bone: To return to a point that was made earlier, I found
the answers that were given to Sir Peter’s question about the
balance sheets of the banks extremely interesting. In the balance
sheets of the banks last year, you had some assets that have turned out
to be worth much less than had been thought, so the banks have now
written those down—as I understand you are saying—and
have really got to a valuation. What was the change in the valuation
rules? Was it a huge
write-down? Angela
Knight: First, the new guidance on how to value an
illiquid asset held in the trading book, rather than the banking book,
only came in on 10 October, so it has not all been done. What it does
is to take a different method for assessing a more certain valuation
for an illiquid asset, rather than trying to determine what a market
valuation would be when you have no market. If you look at what has
happened in the States, you will see that there has been a constant
spiral-down of assets for which a market could not be found. Although
for various reasons there might have been a fire sale price out there,
everyone knew that value was probably not relevant, but you had to use
it. It is the volatility that mark to market can bring when a market no
longer exists.
The new
guidance was formulated first in the US under US generally accepted
accounting principles, and then the International Accounting Standards
Board moved to bring its guidance more or less into line—I have
to say “more or less” because there are bound to be some
legal differences. Both the accounting profession and the industry
think that enables the much more certain type of valuation and in due
course we will see the outcome of
that.
Q
134Mr.
Bone: Do we have any idea of the level of
write-down? Angela
Knight: The level of write-down has been very
significant.
Q
135Mr.
Bone: Very significant?
Angela
Knight: Well, you see that in the public domain
daily, as is evidenced through share prices and all sorts of other
areas, but where we are with more relevant guidance in place for a
current environment will certainly pan out over a period of time. Being
able to use the ongoing cash flow—for the various formulae and
discounts you will have to ask the auditors for the complex
details—seems a much more sensible way of valuing something that
has a value but for which there is no
market.
Q
136Sir
Peter Viggers: In an early comment by the BBA, you are
quoted as saying that your main reservation related to partial
transfers of banks, nil-rates and creditors. You made that comment in
July. You said that you saw an imperative need for the Government to
give further time for consideration of the partial transfer
arrangements and that they should be stripped out of primary
legislation. Would you like to confirm that that is still your view and
elaborate on
it? Angela
Knight: If you say where we think the order should
be, the first thing is that the regulators regulate and we do not get
to the SRR. The second is that, if the SRR is triggered, we would like
to see an entire bank move—we hope—into the hands of a
private purchaser. If that has to have stability at some point before
the process can take place—the bridge bank—then so be it.
Partial transfers come rather a long way down the list. Our preference
would be not to have a partial transfer unless there has been a
default. If it is the decision of Parliament that a partial transfer
must remain as part of the SRR tools before a default is triggered, it
is absolutely essential that the creditor’s rights are not
reordered, that the netting is properly taken care of and that the
decisions taken at the time cannot be retrospectively changed by clause
65.
Q
137Mr.
Hoban: This is a question to you, Mr. Taylor.
You said earlier that the provisions of the Bill affect stand-alone
investment banks only to the extent to which they are counterparties in
transactions where there is netting. Are there any tools in the Bill
that you think appropriate to be used if a stand-alone investment bank
suffered a financial problem, or are you happy with the existing regime
for insolvency and
administration? Jonathan
Taylor: I would be happy with the existing regime,
but I am not sure whether, in practice, the distinction would work in
that way. I am trying to think about
it.
Q
138Mr.
Hoban: So, in effect, you anticipate that the tools
available in the Bill could be used in relation to an investment
bank. Jonathan
Taylor:
Yes.
Q
139Mr.
Hoban: Although it is not the intention as the Bill is
currently
drafted. Jonathan
Taylor: That is right. My point is that, in
particular, the netting arrangements are of direct concern to the
investment bank. Indeed, as Andrew was saying, there is a link between
that and the partial transfer point. That is one of the reasons why the
partial transfer point raises serious
questions.
The
Chairman: If Members have no further questions, may I
thank the panel for coming to the Committee today and call the next set
of
witnesses?
5.28
pm
The
Chairman: We will next hear evidence from representatives
from the Association of British Insurers, the Investment Management
Association, Citizens Advice and Which? Welcome to our meeting this
afternoon. Could you please introduce yourselves? I will start with
Teresa. Teresa
Perchard: My name is Teresa Perchard. I am director
of policy at Citizens Advice, which represents citizens advice bureaux
in England and Wales.
Guy
Sears: My name is Guy Sears. I am the director of
wholesale at the Investment Management Association. We represent UK
asset
managers. Stephen
Haddrill: Stephen Haddrill. I am the director general
of the Association of British Insurers.
Doug
Taylor: My name is Doug Taylor and I am the personal
finance campaign manager for
Which?
Q
140Sir
Peter Viggers: Mr. Haddrill, the Association of
British Insurers said in its submission to the Treasury Committee in
July that the case for the special resolution regime was “not
fully proven”. What is your view
today? Stephen
Haddrill: Given the events of recent weeks, we feel
it is right that a resolution regime of some kind is brought forward
and we support the greater part of the Bill. Our anxiety is that there
is a big national, governmental and taxpayers’ interest in a
bank that has got into this situation being got back into the market,
being eventually funded by the institutional shareholders and the City
and being got off the state’s hands. Therefore we are concerned
that the regime should generate confidence that a bank will not be put
into special resolution unless it is absolutely necessary. We think
that there are some things in the Bill that could, perhaps, be
strengthened to provide confidence in that respect. If the bank goes
into the regime, to the extent that there is value still left in it
that should be fairly distributed among the creditors, including the
bondholders of the company, if not the shareholders, so that general
confidence about investing in banks is preserved as far as
possible.
Q
141Sir
Peter Viggers: Have you ideas on what steps could be
taken, short of a special resolution
regime? Stephen
Haddrill: Ahead of the special resolution regime, as
Angela Knight was saying, it is essential that the regulators actually
regulate the industry effectively to ensure that the capital is
adequate and that the risk of a bank failure is minimised. We would
like to see in the Bill a requirement on the FSA to report publicly on
why it has not been possible for the regulatory regime to discharge its
responsibility in that respect, so that sufficient responsibility is
placed on the regulator to keep the bank going, make sure it does not
get into that difficulty and avoid going to the SRR. But we accept,
now, the case for an SRR in
extremis.
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