Select Committee on Treasury Written Evidence

Memorandum from HM Treasury

  This memorandum responds to the Committee's requests at the evidence session on 25 October 2007.

Further details of the stress testing carried out under the auspices of the Tripartite Committee, during the course of 2007 (Q 799)

  The Committee asked about scenario testing undertaken by the Treasury, Bank of England and FSA recently. Testing has included scenarios relating to financial events and to operational disruptions such as terrorism.

The authorities engage in an exercise programme to provide assurance about the robustness of plans, tests responses to particular scenarios, and provides training opportunities. Objectives underpinning the exercise programme include:

    —  testing and improving plans and decision-making processes against a range of scenarios;

    —  training and familiarising staff with Tripartite crisis response arrangements in pressurised situations;

    —  understanding how international counterparts will respond in a crisis; and

    —  testing equipment and familiarise staff with back-up facilities.

  The programme of exercises has focused on the following main strands:

    —  testing with private sector/exercising with wider Government;

    —  testing tripartite plans and processes;

    —  exercising with key international partners; and

    —  connectivity tests.

  For reasons of market sensitivity, details of some exercises are not normally made public.

  The Treasury has been involved in the following tests or simulation exercises during 2006 and 2007:

    —  HMT, Bank of England and FSA testing of back up and primary site communication links (February 2006);

    —  HMT, Bank of England and FSA involvement in the EU-25 financial market simulation exercise under the aegis of the EU Economic and Finance Committee, with the participation of EU banking supervisors, central banks and finance ministries—76 participants at the premises of the ECB (April 2006);

    —  HMT, Bank of England and FSA simulation of cyber attack on financial infrastructure (June 2006);

    —  HMT and Bank of England half day simulation of physical and electronic attack (July 2006);

    —  HMT, Bank of England and FSA six-week tabletop and live Market Wide Exercise on pandemic flu, including involvement from main private sector market participants and infrastructures (October to November 2006);

    —  HMT, Bank of England and FSA financial crisis management tabletop exercise (November 2006);

    —  HMT, Bank of England and FSA participation in a tabletop exercise with authorities from another major financial centre (February 2007);

    —  HMT, Bank of England and FSA participation in a cross-government counter-terrorism exercise (March 2007);

    —  HMT, Bank of England and FSA financial crisis management tabletop exercise (March 2007); Beside participating as appropriate in these exercises, the legal teams advising the tripartite authorities conducted joint training exercises in January and July 2007.

How many Treasury staff are working on financial stability issues (Q 807)

  The Chancellor of the Exchequer is the principal member of the tripartite standing committee on financial stability, alongside the Governor of the Bank of England and the Chairman of the FSA.

  In most circumstances, the tripartite committee meets at the level of deputies. For the Treasury, the formal deputy member is the Managing Director, International and Finance (Stephen Pickford). He is supported by, and interchanges with, the Director, Financial Services (Clive Maxwell). They maintain regular contacts with their counterparts in the Bank of England and the FSA, both in normal and more stressed circumstances.

  Approximately 65 staff normally work on financial services in the Treasury. This includes approximately 16 in the Financial Stability and Risk (FSR) team, headed at team leader (Deputy Director) level. The FSR team has responsibility for the day-to-day operation of the tripartite arrangements, including financial stability and business continuity planning, and the Treasury's interests in prudential regulation and in risk management in the financial sector. The team members are typically in daily contact with colleagues in the Bank of England and FSA in normal circumstances, and in even more intensive contact in more stressed times. The team has been supported by colleagues based in other parts of the Treasury during recent market developments.

  The Permanent Secretary (Nick Macpherson) is involved in discussions where appropriate, especially where there are potential financial consequences given his Accounting Officer responsibilities.

  Arrangements are in place to ensure that senior members of staff—notably the Managing Director, Director or team leader—are available to deal with any unexpected financial disruptions.

  The financial services teams in the Treasury are supported by two teams of lawyers, amounting to approximately 50% of the department's legal resource. The Department's Legal Adviser has participated as appropriate in tripartite meetings and maintains regular contact with his counterparts at the FSA and Bank of England.

  More recently, additional resources have been moved to assist work on financial stability (in particular Northern Rock) and the Treasury has acted flexibly to bring in further expertise as the circumstances require:

    —  an additional Director has been appointed on a temporary basis to the senior management team;

    —  two additional team leaders (Deputy Directors) have been moved to this area, to head up work on reforms to bank depositor protection and to help manage the response to Northern Rock and associated legislative and policy analysis;

    —  the Managing Director, Public Services and Growth (John Kingman) is responsible at the level of the Executive Management Group for the ongoing work with Northern Rock itself; and

    —  these additional areas of work are also receiving further support from the Treasury internal legal advisors (who have had the help of lawyers loaned from other Whitehall legal teams), as well as from external legal and investment banking advisors.

  In total, approximately 15 additional staff are working on these issues, on a temporary basis, redeployed from other functions.

October 2007

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