Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 140 - 149)



  Q140  Chairman: People were talking about Northern Rock. They were talking to me about Northern Rock and others were talking about Northern Rock so it is absurd for you to come here and say you did not know anything about it. You are the guy in charge of financial stability. You have twin hats on as the Deputy Governor of the Bank and at the FSA and, frankly, I do not think you are doing your job.

  Mr King: Chairman, may I just say it is very clearly not the job of the Bank or Sir John as a non-executive director of the board of the FSA to take responsibility for individual institutions.

  Q141  Chairman: Governor, understand this, we do not want to be complacent here, there is a big picture we have got to focus on but when we get complacent answers it gets us riled.

  Mr King: I do not think the answers are complacent, with respect, and I would urge you please to suspend your judgment about this until you have been able to talk to all three parties in the tripartite arrangement.

  Q142  Chairman: Okay. Sir John, lastly, are you disappointed that market participants appear to have taken no notice of comments made by you and the Financial Stability Report warning of the dangers of a change in the price of risk and the illiquid nature of certain market instruments?

  Sir John Gieve: Well, I think some of them took more notice than others and adopted less risky approaches, but, yes, obviously it would have been better, and it is not just the Bank, it is the FSA and other regulators too. Obviously looking back on it they mispriced risks especially some liquidity risks.

  Q143  Chairman: What lessons have you learned from that?

  Sir John Gieve: Well, I think two things. Firstly, markets under the new sophisticated markets as well as under the old banking markets, do get a momentum of their own and the players fear more the possibility of being left behind and losing business than they fear the possible costs if something goes wrong. That has been apparent in other financial booms, if you like. I think a lot of lessons have been learned about the details of how, in particular, sophisticated derivative markets work, and I think we will see in the market and among regulators a number of changes in the requirements on and structure of dealings.

  Q144  Chairman: Governor, this £10 billion facility that was announced yesterday what about the point of view from banks who say, "We are not going to go near that money, we are not going to ask for it because if we go for the money then there will be a question mark about us and some people will say there is a problem with our bank." In other words, there is a mark of Cain on people who approach you for that money. How are you going to get over that issue?

  Mr King: This is an anonymous auction, we do not reveal the names of the people who appear at the auction.

  Q145  Chairman: You do not think it will leak?

  Mr King: I know this is a leaky world but frankly this is about the only facility—

  Q146  Chairman: You are sitting in the leakiest place in the world here.

  Mr King: That is why I am not going to tell this Committee the names of the banks who will take part in it.

  Q147  Chairman: I hope that was not a snub, Governor.

  Mr King: We have designed this with a balance of considerations and we are putting on the table some liquidity. I would say one last thing, you put to Sir John what lessons have we learnt, for me the key lessen in all this is that I do not want to let down those banks who did read our report and did get out of profitable business in order to reduce the risks of their activities, and what is most important now is that we actually make clear to all banks that if they undertake risky activities we cannot stop them doing that and I do not believe you can get the regulators to stop them doing that. The only thing that will stop banks undertaking risky activities is the knowledge that if things go wrong and the risks materialise they and they alone will bear the consequences.

  Q148  Chairman: Governor, thank you very much. I have got a last question and, believe it or not, it is for Dr Sentance, sorry, my apologies but in terms of inflation what signals are you looking for that would indicate that the credit crunches are having a worrying effect on the real economy and have you seen any indications already?

  Dr Sentance: I think it is very early to talk about indications. I think so far the indications from the real economy, if you take for example the most recent CBI survey, do not show much impact but we would expect it to take some time if there are going to be impacts. I think the things we are looking at where we expect these financial market developments to impact are through the cost of borrowing and through the availability of borrowing in various forms, both to companies and to individuals, so we will be monitoring that very closely and Bank staff have stepped up the information they are providing to us on the Monetary Policy Committee on this issue. I think we made clear in the minutes that we will be monitoring very closely the price and the availability of credit to see if it is being impacted. I think we have to have an open mind at the moment and it will be the impact on the real economy and hence on inflation that will guide our actions on the Monetary Policy Committee. In my mind that is very clear. We have a mandate on inflation on the Monetary Policy Committee. Clearly demand conditions overseas and in the UK will affect inflation prospects and that is where we need to be looking to see if this is going to have any impact.

  Q149  Chairman: Governor, as I said earlier, as an all-party Committee we are intent on ensuring that we get to the root of this issue and the root of the problem and for us that is to see that the system is working properly. To date that has not been the case. We want to work with you and others in the future on that. As I said earlier, we are taking evidence from the FSA very soon after the house returns and then we will hear from the Treasury, but as a result of today's meeting I will also be writing to the Chancellor and when we have heard from him and sought wider evidence then we will no doubt come back to you for further questions and perhaps a further evidence session. Can I thank you and your colleagues for your attendance this morning.

  Mr King: Thank you very much, Chairman. Can I say there is a very key area, as I stressed before, of working together forward and that is the exit route from the current Government guarantee, which can only be an exit route to something better than where we were before. This Committee has a very important role to play in that and we would be very happy to work with you on it.

  Chairman: Thank you very much.

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