Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1600 - 1607)

TUESDAY 18 DECEMBER 2007

MS ANGELA KNIGHT CBE AND MR ADRIAN COLES

  Q1600  Mr Breed: Angela, in the October Financial Stability Report, the Bank of England said that the banks should reflect on their business models and they gave three scenarios. If I could put the scenarios as (i) they should redesign the credit structures and carry on, (ii) carry on as before because it is profitable and they might regard this as a temporary setback—which I find amusing—or (iii) that they should scale down and move back towards a more traditional model of banking; which one do you think you would prefer and which direction do you think the banks will move in?

  Ms Knight: I certainly cannot dictate to any bank what it is that they should do.

  Q1601  Mr Mudie: Yes, but your advice is closely watched.

  Ms Knight: One can certainly see from their actions what it is that they are doing and that is they are reassessing the credit situation. They are looking at their activities and their business models and they are, like I think the rest of us, hopeful that this period of uncertainty will come through and then they will be able to use their repriced risk and their review of their business model to recover in the activities in which they want to get involved.

  Q1602  Mr Mudie: So that is the first one—make these instruments a bit more transparent and carry on as before?

  Ms Knight: I do not think that just carrying on as before is exactly the description of what I have just said. I think, if I may say, that the assessment of the business model and the business that you want to be in and what you think is going to happen to that business is something that is taking place right now within the industry itself. They are assessing where they have made losses and they are assessing what is the situation with some of these complex products. To decide what the outcome and what changes they are going to make, I do not think that a) I can tell you and b) I doubt that they have all come to that conclusion yet, because at the moment some of the problems of the sub-prime are still in the process of unfolding, so there has to be an element of wait and see, an element of review, as well as an element of change.

  Q1603  Jim Cousins: How damaging has all of this been to London's markets?

  Ms Knight: I think it has been quite damaging actually. I went out to Brussels in about the middle of September for the first time after the Northern Rock, and I keep going out there, and also because we are an association where 60% of our members are from overseas, we get the impressions of the industry and of authorities around the world, London does rather look like its authorities dropped the ball, that when push came to shove and a problem arose other countries managed to deal with it and the UK somehow did not. It is partly because so much got played out in the public domain and queues outside banks are immensely visual things. I think that we have to recognise that it has done us damage and that we have quite a lot of work to do to restore that damage.

  Q1604  Jim Cousins: Who should lead the international action that is required to bring about better standards across jurisdictions?

  Ms Knight: There is a number, as you know, of big international entities, IOSCO being an obvious one and the World Bank another. There are therefore a number of organisations and institutions already there. I think that the best way to make those sorts of global institutions work properly is for countries which have big financial centres such as ourselves to fully engage with global standards. You can never be sure that everybody is going to abide by global standards because in the end it has got to be locally administered, but the big centres are the ones that have the people, they have the products, they have the broad range of services and have of course the self-interest of getting the global standards right. That is the sort of engagement which I sincerely hope we continue to make because I do know the Treasury and the FSA have both been making proposals over recent times and no doubt earlier as well.

  Q1605  Jim Cousins: Have we not got on the international level the same slightly chaotic separation of accounting standards, reserve requirements and actual regulation that to some degree you are saying are reflected in our own national arrangements?

  Ms Knight: And of course this is reflected in Europe as well even before we get out of our region. First of all, there is an inevitability in the sense that standards have built up from different bases. Accounting standards have come up from the accounting profession, prudential supervision has tended to come up from central banks, financial regulation from various financial regulators and so forth. To co-ordinate them together is, as you rightly say, absolutely essential. I think that we see a greater co-ordination taking place right now. We note particularly, for example, the work of Basle and the work of the accounting industry and that needs to be built upon, coupled with proper consultation with the industry, as the industry knows whether something is going to do the right thing or not do the right thing. There will always be differences of view but it is how it works practically that is important. Bringing a recognition of co-ordination together into the minds of countries and various authorities is work which is on-going. I suspect that if the Northern Rock has done us any good it has actually brought that recognition very strongly into play in more than one area—that co-ordination between authorities is essential, and it is essential locally, it is essential regionally, and it is essential internationally as well.

  Q1606  Chairman: Just a last question to Angela. Mention has been made, as George said earlier, about the warnings that were sent out from the FSA and the Bank of England, regarding Northern Rock's business model, there were comments in the market about that type of model and about the growth and the fluctuations in the share price. Why were these things not picked up? Was it the mentality of a second-tier financial institution not getting into trouble and all the focus being on the big institutions?

  Ms Knight: I think there is a number of reasons. Clearly the big institutions are always there in terms of the systemic risk that they would create if they get into difficulties and the sheer numbers of individuals and consumers in the retail business that they do. Thus there is an inevitability that they will always be crawled over by regulators of the highest calibre, and I think that is right. It does seem to us though, Chairman, as far as the Northern Rock is concerned that the regulators maybe only looked at two parts of the business, they did not look at the business as a whole, and that the process whereby the regulators looked at the risk assessments and scenarios that Northern Rock had been undertaking were not strong enough. I do not have any particular additional information, but this is how we see it externally. Also that maybe steps could have been taken when there was a realisation of the impact of the Northern Rock's total exposure to the wholesale market that. Instead action was not taken; rather the situation was left as one of wait and see. Wait and see can bring problems and that is why we believe that, as part of either your inquiry or a further inquiry, it is essential to do an exercise to show what would have been the results if action had been taken earlier by the regulators. If perhaps they had followed through on the general warnings that they gave to the market, and if changes had therefore been made in advance of the problems of late August and September.

  Q1607  Chairman: Adrian, do you want to add anything before we finish?

  Mr Coles: The only thing I would add to what Angela has said is going back to a question that George Mudie was asking, where will banks go and is there likely to be a retreat into the more traditional banking model. I think one of the conclusions that building societies have reached over the last three months is an absolute vindication of their decision to retain the traditional model that has worked very well for them over the last 100 years or so and will continue to work well for them into the future.

  Chairman: Thank you very much for your evidence, it is very helpful to us. Thank you for coming.





 
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