Examination of Witnesses (Questions 140
THURSDAY 20 SEPTEMBER 2007
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
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
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
Q145 Chairman: You do not think it
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
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.