Examination of Witnesses (Questions 1548
TUESDAY 18 DECEMBER 2007
KNIGHT CBE AND
Q1548 Chairman: Good morning and
welcome to the Committee. You are both very familiar with the
Committee, but could you introduce yourselves for the shorthand
Ms Knight: Angela Knight, I am
the Chief Executive of the British Bankers' Association.
Mr Coles: I am Adrian Coles, I
am Director General of the Building Societies Association.
Q1549 Chairman: As you know, this
inquiry is largely about financial stability, so my first question
to you is: is it possible to design a system where payouts are
made from a failing bank within days or weeks of a failure rather
than months or years as at present? Is work going on on that?
I notice that a representative from the IMA has suggested plugging
the Bank of England into the ATM network in order to provide immediate
access to funds up to the £35,000 limit if a bank were to
Ms Knight: Yes, I think it is
possible to design a system, Chairman, whereby payouts can be
quicker. The existing Financial Services Compensation Scheme has
been designed primarily for investment products and not for deposit
protection in terms of a quick payout scenario. If we look at
the various options that are currently in operation in other countries,
I think that there is there some information and some models which
we could probably usefully consider here. We made brief mention
of some of those within our submission to the Treasury on reform
of the Deposit Protection Scheme, a copy of which we sent to yourself.
Q1550 Chairman: Adrian, if you could
just take that and add to the point that if depositors were to
receive immediately their deposits from the FSCS, what implications
would this have on depositors' status as creditors? Could creditor
status be transferred to the FSCS?
Mr Coles: Clearly it is possible
to design a scheme where depositors get their money back immediately.
That is exactly what happens in America with the Federal Deposit
Insurance Corporation Scheme. They normally aim to get deposits
in the hands of the depositors of a failing bank within 24 or
48 hours. The answer to your first question is absolutely yes,
although it is fair to observe that in the American system most
of the banks that have been saved over the last ten or so years
have been very tiny institutions with deposits of only $10 million/$20
million/$50 million, much smaller than the sort of circumstances
we are talking about in the UK at the moment. What tends to happen
with the larger institution in the States is that the depositors
do become creditors of an institution owned and controlled by
FDIC, so again the answer to your question is, yes, this could
be arranged if there was the desire to do that in the United Kingdom.
Chairman: We hope to finish by half past
ten so we are going to ask brief questions and receive brief answers
so that we will get the maximum out of this session. Peter?
Q1551 Peter Viggers: In your memorandum
you commented on the amount of liquidity made available by the
Bank of England and contrasted that with the amount of liquidity
made available by the European Central Bank and the Federal Reserve
yet when asked a specific question by us, the Governor on 29 November
said that: "The European Central Bank has not increased the
amount of liquidity at all since the beginning of August."
He said: "The Federal Reserve has not raised the total amount
of liquidity very much," and then he went on to contrast
that with the Bank of England: "The amount of liquidity that
we are extending to the banking system is almost 30% higher. Can
you explain that apparent conundrum?
Ms Knight: I will try but I think
you will have to redirect most of those questions back to the
Governor of the Bank of England. In effect, what we had in the
UK was a money market framework which was more constrained than
that of the European Central Bank or that operated by the Fed.
Thus for a UK bank accessing liquidity there were collateral rules
which were much tighter and there was the so-called penal rate,
which was not levied elsewhere. Whereas technically liquidity
might have been available, it was unattractive to take it because
of the costs involved and because of the lack of ability to offer
up the broader range of collateral. It is interesting to note
that nowin fact todaythe market operation that is
going to be undertaken by the Bank of England actually does adopt
the collateral arrangements that we proposed and reduces the penal
rate; it is now as we asked. I think perhaps one last thing to
say is this: the BBA has had discussions with our fellow trade
associations both in Europe and also in the US because of the
differences that were operating in respective money markets and
we too were aware that somehow the statistics at the bottom seemed
to imply a different story than we were experiencing. We asked
the question: what did it look like and how did it feel like for
you? The answer that we got from all of them is that it looked
like their central banks were standing behind the industry ready
to provide liquidity as and when it was needed in a broader way
that the UK which was more in line with that which the industry
Q1552 Mr Todd: The FSCS compensation
scheme is designed primarily not to deal with the failure of a
very large firm. How do we define the limits of what it is supposed
to deal with and the apparent liabilities that the state presumably
bears for firms that are so large that it cannot cope?
Mr Coles: The current arrangements
are quite clear. The scheme is designed to deal with the loss
of up to about £4 billion because that is the maximum amount
of money that will be available to be paid out to the depositors
of a failing bank after the reforms that have been agreed earlier
this year are implemented on 1 April 2008. So anything above £4
billion the Financial Services Compensation Scheme cannot help
with. In fact, the current figure would be about £2.5 billion.
How do we define how big an institution we want to save beyond
that is very much more difficult. If you are looking at Northern
Rock that is an institution that has clearly been defined as `too
big to fail'. If you are looking at some of the smaller banks
or smaller building societies, the actual dividing line becomes
Q1553 Mr Todd: Do you think there
is an argument for transparency about where that line lies?
Mr Coles: Think there are two
issues regarding transparency. First of all, should there be an
indication to depositors about the size of the guarantee£25,000
or, as we have in the UK now, £35,000and the second
issue is should there be an indication of the size of the fund
that is available to support in the event of a bank failure in
relation to the size of the bank. I think that would also be important
information for a depositor to know.
Q1554 Mr Todd: The protection scheme
was clearly largely unknown to depositors themselves. Do you think
that banks have a clear obligation to display on their products
exactly where the guarantee lies and to what extent it is?
Ms Knight: I think you can actually
express that question rather more widely: is there a well-known
explanation of the various protections given by the Financial
Services Compensation Scheme to the broad range of individuals
who engage in a variety of ways with the financial services industry?
The answer is that, whilst it is no secret, I do not think that
there is necessarily the sort of pulsating clarity which we needed
look at now. Certainly so far as the banks are concerned, we have,
not surprisingly, had a significant amount of discussion on this
and have said to the FSA that we want to engage on this point
of explanation. What I also would say though is that the attention
has been paid on prevention and I think in this instance we should
be looking at prevention. The question is often asked "did
individuals understand that there was some deposit protection
or not?" Certainly they got the hang of that relatively quickly
with the Northern Rock, as we are all well aware.
Q1555 Mr Todd: I think awareness
will be wider now!
Ms Knight: There is greater awareness
now and in one respect that is a good thing because it means that
we can play into that awareness with providing knowledge. As I
say, we have said to the FSA quite clearly that the banks want
to engage on this. We do not just think it is for one part of
the industry. We think that there is a broad question that needs
to be asked and answered and that is: how do we describe to the
individuals how they are protected?
Q1556 Mr Todd: You listed four elements
of a protection scheme that you felt were required. Do you think
the scheme does actually meet those four elements of requirement?
Ms Knight: I think the key to
all this is actually speed of payout and I think it is the speed
of payout that we need to address. That might require a mixture
of scheme rule changes but also might require some legislative
changes to allow earlier intervention with a deposit taker that
has got into difficulty.
Mr Coles: I think the speed of
payout issue is related to the size of the institution. As I said,
if you look at America, they pay out within 24 to 48 hours. If
you look at the payments that our own Financial Services Compensation
Scheme has made to depositors of credit unions, typically those
payments are being made in seven to ten days, so for small institutions
we are almost meeting the standards in America. For much larger
institutions it is much more difficult.
Q1557 Mr Todd: Lastly, do you think
co-insurance has no great value because it simply muddies the
water and confuses the customer as to what extent of risk they
are actually bearing?
Ms Knight: I think co-insurance
still does have a place. It is the point at which it start which
is worthy of debate. Interestingly, I think it is the Netherlands
which has just gone through that discussion (because co-insurance
is quite common there) and in so doing they lifted their deposit
protection scheme to the equivalent of about £25,000 in full
and then over that it was co-insurance up to about the level we
are at the moment in the UK. So there is a role but it is the
point at which it starts.
Q1558 Mr Todd: That means that transparency
is all the more critical so that people clearly understand what
they are buying into.
Ms Knight: I think this is all
part of your earlier question, if I may say, about how we explain.
Mr Coles: The complexity of the
co-insurance is a difficult thing. When we had a limit, apparently,
of £31,700, that was extremely difficult to explain to the
Q1559 Mr Fallon: Ms Knight, the banks
have been extremely profitable in the last few years, yet you
have been hiding behind a scheme that nobody really understands
and that is not really properly funded. The Chancellor's guarantee
for Northern Rock depositors would not have been necessary if
we had had a properly funded upfront scheme with notices in every
branch in every bank telling people exactly how quickly they can
get their money out.
Ms Knight: Interestingly of course,
there has just been a full discussion about the whole of the Financial
Services Compensation Scheme and the Deposit Protection Scheme,
undertaken by the FSA with the assistance of consultants, and
they came up with the current limits and current arrangements
that we have. I think the reality is that it is certainly possible
to be able to use a deposit protection route for certain sizes
of institutions that take deposits, but over a certain amountand
if we look again elsewhere around the worldyou are into
bigger issues than a protection scheme can properly cater for.
On the question of whether it is properly funded, one of the things
that we have here in the UK is embedded within the legislation
is a requirement, an obligation if you like, on the FSCS to make
demands for payments into it when it knows the extent of its liabilities.
It is not as if you have a scheme where the industry is asked
to put some money in and then everybody goes away for 12 months
or whatever. There is a requirement and that is a requirement
that has to be fulfilled for the FSCS to make demands from the
relevant part of the industry if it requires funds.
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