Examination of Witnesses (Questions 1580
TUESDAY 18 DECEMBER 2007
KNIGHT CBE AND
Q1580 Chairman: In a word, Angela,
is it a case of first-tier banks getting first-tier regulators
and second-tier banks getting second-tier regulators?
Ms Knight: I think I could argue
that you want first-tier regulators with second-tier institutions
Q1581 Ms Keeble: I wanted to ask
a bit more about transparency and disclosure following on from
what Philip Dunne asked. Adrian Coles, you mentioned in particular
the third pillar of Basle II. Do you really think that that would
be adequate, given the problems which have been already encountered
with an organisation which I think you said was already operating
to Basle II standards?
Mr Coles: I think there are two
issues about transparency. The first is what is the nature of
the bits of paper that are being issued by issuing institutions
and are the people buying those bits of paper well enough informed
to understand what they are buying. I do not think there should
be intervention in that area. I think it is up to the people who
are buying the paper to employ the experts to properly understand
the nature of the financial arrangement that they are buying into.
I think the more important question is when people invest in banks,
should they know whether or not those banks have invested in risky
bits of paper on the other side of their balance sheet? Pillar
three is certainly going to give us much more information on that,
although I am not aware whether Northern Rock has made significant
pillar three disclosures since it got its IRB waiver at the end
of June this year.
Q1582 Ms Keeble: Can I just come
back on that point because you said the banks should employ the
people who are able to look into the investments and to work out
Mr Coles: when they buy
Q1583 Ms Keeble: That is right and,
in a sense, the people who then invest in the banks are dependent
on the banks doing that first bit properly. One of the things
which has emerged through our discussions is that the due diligence
is not adequate in terms of people looking into what lies behind
the commercial paper. Do you think there is a real need for the
banking sector to improve its due diligence so that when it discloses
what it has invested in, it does not just say we have invested
in these triple-A star rated securities but it says what is actually
bundled up in those securities?
Mr Coles: I think personally that
would be helpful.
Q1584 Ms Keeble: Could you say a
bit more than just "it would be helpful" because otherwise
we do not know enough about what your thinking is about what the
banks should be doing.
Mr Coles: Building societies typically
do not invest in these pieces of paper anyway, so I think I will
defer to Angela on that one about the nature of the investigation
that should take place in due diligence.
Ms Knight: It is a fair point.
Firstly, so far as disclosures generally are concerned, IFRS 7
is one of the standards that is coming into force. I think that
will certainly help on general disclosuresthere are some
others, as I have said earlier. Theses are all coming into place
over a relatively short period of time. I think it is important
to see exactly what clarity they bring. However, the answer to
the point that you made about whether there has been too great
a reliance on something being called triple A or triple B rather
than a proper investigation behind, is that is probably the case.
Certainly Basle II has brought the reliance on external ratings
agencies more into the fold than I think was intended, so more
needs to be done in respect of these agencies. We have put a list,
which I hope we sent to you, of some of the specific issues that
we think it is important to look at in terms of this whole area
of transparency. One is clearer signposting between mortgage-backed
securities based on prime assets and securitisation based on sub-prime
for example. Another relates to the sort of actions that programme
managers ought to be taking in terms of regular updating, disclosure
of information, and so on. Are there more things that can be done?
The answer is yes. Some of them do get into rather arcane-sounding
language but the question is is it going to be more understanding,
does it need to be more understandable, and those are the sorts
of recommendations that the banks are making because better transparency
is where they want to get to.
Q1585 Ms Keeble: What are your criticisms
of the credit ratings agencies?
Ms Knight: I think they need to
monitor their ratings more; I think they need to articulate why
they have got to the ratings they have; and I think there is something
about the separation of the provision of ratings from the financing
of the agencies that is important as well.
Q1586 Mr Breed: Is it not abundantly
clear now that banks collectively have been totally irresponsible
in lending vast amounts of money against worthless bits of paper?
Ms Knight: No.
Q1587 Mr Breed: How can you stack
Ms Knight: There is certainly
a problem which has arisen, but it is by no means distributed
evenly right across the banking industry.
Q1588 Mr Breed: So they all knew
exactly what they were lending against and the value of the pieces
of paper that they were lending against?
Ms Knight: As you will know, the
exposure is different and no doubt the knowledge has been different
as well, because some of these structured products are far more
complicated than others.
Q1589 Mr Breed: Some banks have been
able to lend perfectly satisfactorily against asset-backed securities
of which they knew the total value?
Ms Knight: I think you will find
that that is entirely correct. Some will have said that they want
an exposure where there is a higher return and thus a higher risk,
and that is also a perfectly reasonable lending decision for them
to have taken. What is important here though is not should banks
have a mixture of different types of lending, different types
of analysis and different types of criteriaof course they
should; it is an assessment of risk. If there was not that assessment
of risk much of the financing of anything from British industry
to industry around the world would not take place. What we have
here, though, is probably a pretty uniqueI sincerely hope
it is uniqueoccurrence whereby what is, in effect, a serious
housing problem in one country has, through the spread of risk,
found its way around the world. Not just in the UK but to other
financial centres as well.
Q1590 Mr Breed: I think that is overly
simplistic. Can I ask two quick questions. Was Northern Rock a
member of the BBA?
Ms Knight: Yes.
Q1591 Mr Breed: And did it discharge
all its responsibilities to the BBA properly?
Ms Knight: As far as we were concerned,
yes, it participated in committees and it took part in discussions
around the committee. The responsibilities
Q1592 Mr Breed: There are a lot more
obligations than that to the BAA.
Ms Knight: The membership relationship
with a trade body is, as you rightly say, something of a two-way
street in that we are primarily there to assist our members, often
on regulatory and tax issues, and lobby on their behalf. There
is a two-way flow of information, but what we would not expect
is for one of our members to talk to us about their business and
commercial decisions; that is for them. We are there for the generic
issues, the market issues and those things which are common to
everybody. The Northern Rock was, after all, regulated by the
Q1593 Mr Breed: So the announcement
in August was a complete surprise to the BBA as well, was it?
Ms Knight: The problem with the
money market and the freezing up of the money market, which was
Q1594 Mr Breed: No, the problem with
Northern Rock, your member?
Ms Knight: That was in September.
Q1595 Mr Breed: When did you become
aware of the problems with Northern Rock, at the same time as
all of us?
Ms Knight: Yes, the Thursday evening
when the leak occurred about the lender of last resort arrangements
was the first time that we were aware of the situation.
Q1596 Mr Breed: That one of your
members was in failure essentially?
Ms Knight: Correct. We were certainly
aware of the concerns in the market and we had read the analysts'
report. We had seen the share price fall and we had read the statement
that the Northern Rock had made about its own finding issues,
which was in June, so, yes, we were aware of the difficulties
and we were certainly aware of the effective closure of the market,
but we knew for certain at the same time as everybody else did.
Q1597 Mr Mudie: If I could get some
common ground between you and my colleague Colin Breed. Your defence
of the banking industry is understandable by your position, but
would it not be correct to say that some banks acted unwisely
and maybe even irresponsibly in terms of these past months?
Ms Knight: In which respect? I
beg your pardon.
Q1598 Mr Mudie: Are you sticking
to the position that they are all as pure as the driven snow and
that this was something that could not be avoided or are you agreeing
that some of them perhaps now wish they had not got into certain
Ms Knight: I am sure they do.
I do not pretend the industry is perfect. I do think it does a
good job but mistakes can be made. A lot of it is about a judgment
call and I suspect that there are some people who, as you rightly
say George, wish they had not invested in some of the stuff that
they have invested in, yes.
Q1599 Mr Mudie: I have certainly
got the impression from some of the folk that have come before
us that their lack of exposure was more down to timing; they got
in late rather than in at the start and so their exposure was
less, but it was not a question they were not in it because it
was too profitable not to be in it.
Ms Knight: It also depends on
the type of business that you are running. Whether you are focusing
predominantly at investment banking or are focused predominantly
at the retail market, so that would also depend upon banks' exposures