Examination of Witnesses (Questions 1720
TUESDAY 18 DECEMBER 2007
Q1720 Mr Dunne: Was it the case that
that precise confirmation from the Bank of England was in limbo,
if you like, over the week leading up to the date on which you
decided that would not be provided?
Mr King: No.
Q1721 Mr Dunne: And, therefore, that
the bidders were being encouraged to continue their discussions
in the hope and expectation that you might come through with that
Mr King: It certainly was not
my understanding. When I spoke to the Chancellor, when there was
communication between my office and his, he also shared my view,
and it was my advice, that it would be most peculiar for either
the Bank or the Government to make a £30 billion loan to
a going company to buy another one when that would have to be
made public long before you could actually be sure the bid was
going to go ahead, and I think the bid was then withdrawn. It
was not withdrawn; it never materialised.
Mr Dunne: I need to move on because I
am short of time.
Chairman: I think we will have a last
Q1722 Mr Dunne: Okay, Chairman. Do
you believe that it is important for the confidence of the financial
system in this country that central bankers serve their full term?
Mr King: I have no idea. In general,
I think central bankers should be appointed and serve whatever
part of that term they wish to see through.
Q1723 Mr Dunne: If you were offered
a second term, would you expect to serve it in full if your health
Mr King: What a depressing thought.
That is something we will return to after Christmas.
Q1724 Chairman: Have a good Christmas.
Mr King: Thank you very much.
Chairman: Okay, Phillip.
Q1725 Mr Dunne: I do have some other
questions. Can I have a very quick question in relation to your
statement today and the operation of monetary policy? Is it your
expectation that the concerted action by the Bank of England and
the other central banks, which was announced last week and is
being implemented today, effectively marks a new direction for
monetary policy and recognises the difficulty of effecting spreads,
which we talked about when we last met, thorough reductions in
short-term interest rates?
Mr King: It is hard to say whether
it would turn out to be an important step. I do think what was
valuable was the demonstration that the central banks were all
facing the same problem and recognised that there was no easy
way through. Indeed, the difficulty we face is that even the operations
we have put in place cannot be guaranteed and, indeed, are unlikely
to bring about a significant reduction in spreads, except in so
far as the operation can improve the confidence of the banking
sector in believing that the central banks acting together will
try to ensure that there is not a serious downturn in the world
economy and, hence, that they should be less concerned about the
capital position of other banks than they might have been in recent
Q1726 Mr Mudie: Governor, in your
October financial stability report you were commenting on the
business model of banks, and you projected three scenarios. Which
scenario would you prefer the banks to adopt?
Mr King: Sorry, the scenarios
Q1727 Mr Mudie: One of them is redesign
the securities so they are transparent and keeping that business;
the second one, which I cannot believe you would accept, is regard
the present situation as a temporary set-back and carry on as
before once the market has settled; and the last one is to settle
back and go towards a more traditional model of banking.
Mr King: I certainly do not accept
the second one, because I think it is very unlikely that we will
come back to that. I do think that the originate and distribute
model has real value, and I would not want to see it disappear.
Indeed, in some ways what happened was that it was not a proper
originate and distribute model because many of the assets did
not actually fully disappear off banks' balance sheets, they were
still kept on through the links, through conduits which had to
be supplied with liquidity facilities and special investment vehicles.
So, I would like to see perhaps a mixture of a return to a more
traditional banking operation. There is a real place for securitisation,
but I do think that what is most important is that we need to
recognise that banks can be rather dangerous institutions at times.
They have extraordinarily highly levered balance sheets, and a
mixture of appropriate regulation and careful management of their
liquidity position by banks is a sine qua non of any healthy
financial system, but in reserve we must put in place those three
changes that I mentioned in my opening statement because I think
they are fundamental to having a banking system where we can have
confidence that, if problems arise, we have a method of dealing
Q1728 Mr Mudie: If problems arise.
That takes us to Mr Ainger's questions. As Governor, if you have
a desired model, do you see yourself as having a proactive part
in ensuring that financial institutions adopt that model or is
it that you are just there to clear up the mess?
Mr King: I think the Governor
does have a role in speaking out, as I did in the Mansion House
in June, but I have to give some serious thought now to how far
we can ensure that our general views and comments are really taken
on board. I do believe that the experience of the last few months
has been a chastening one for not just London but for all the
major financial centres in the industrialised world, and they
will learn lessons. Our task, I think, as an institution that
will be here long after any of us are around, is to make sure
that institutionally we keep coming back to remind people that
these risks and problems can occur.
Q1729 Mr Mudie: Do you think your
only weapon is making a speech? I do not mean to decry making
a speech but can you not be more proactive than that?
Mr King: We have no other policy
Q1730 Mr Mudie: Using your influence.
Mr King: In the end influence
comes down, I think, to making an argument which convinces people.
Our task is not to tell people what to do; FSA are the regulator.
If by giving speeches which are sufficiently compelling and through
the financial stability report and the work from John's team we
can convince people that what they were doing was to take risks
that they did not fully understand, then maybe we will bring about
some improvement, but I do feel that in the last few years we
are seeing a certain degree of hubris, and it is never easy to
persuade people suffering from that to think deeply about risk.
Alan Greenspan was not very successful in getting across the idea
of irrational exuberance. We have to keep plugging away and trying,
but I think trying to win the argument is our main weapon.
Q1731 Mr Mudie: I think he got out
in time though!
Sir John Gieve: Can I just mention
three ways in which I think we can have influence. First the FSR,
for which I am responsible, is a good analysis, widely recognised
as such, but we can probably do more in the market. For example,
talking to analysts, and so on, who themselves comment on banks
to try and ensure that they are aware of our view of the vulnerabilities.
We can do, and are doing, a lot in the international policy arena,
so through Basle and the FSF, which I have spoken about, to change
international policy. And thirdly we can consider whether we can
take this analysis down a level; we have been deliberately careful
under the MOU not to get involved in assessing individual institutions
because that has been the FSA's job, but there is a question about
whether it would be helpful for us to go a little bit further
in drawing out the lessons for particular institutions where that
would help the FSA in their task of identifying vulnerabilities.
Chairman: Thank you. Jim and then Mark
Q1732 Jim Cousins: Governor, you
told us this morning you think this is a crisis at the heart of
our main financial centres, and we have seen in the last week
or two co-ordinated action by a group of central banks to put
cash support into the banking system. Why did it take other central
bankers to force you to give up the principle of the penalty rate?
Mr King: It did not, and we have
not given it up, in the sense that the auction this morning that
was conducted did produce an effective penalty rate. Those Banks
who obtained money against wider collateral paid an interest rate
of around 60 basis points above Bank Rate; so the mechanism for
doing it did, in fact, produce exactly that; but the nature of
the problem in the last four to five week has changed quite markedly,
and when that changes we too will change. When I sent my document
to you in September before coming on 20 September,
I made very clear in it that the judgments we were making about
the nature of operations are ones that we looked at almost daily,
and in the last four or five weeks there has been a palpable sense
ofI use the wordfear in financial markets about
the capital position of banks, and that was a point where I think
all of us in central banks decided that, collectively, we needed
to take action. That had not been done before; no central bank
had acted in concert with others in August or Septemberthere
appeared no need tobut now there was a collective feeling
that we ought to do that together, and we have.
Q1733 Jim Cousins: Do you think more
action by central banks or other international financial agencies
will be required. This is not the end.
Mr King: It is not end, and I
do not know. I do not think the provision of liquidity in this
form is the be all and end all. It is not a simple answer. I very
much doubt that of itself it will lead to a significant reduction
in these spreads in the inter-bank market, but I think the demonstration
that central banks are working together is important.
Q1734 Jim Cousins: Governor, I must
put this to you. Do you not think that your colleagues in central
banks will start to have worries about our central bank because
of its communication failures and because of the leaks with which
it has become associated?
Mr King: I do not think it has
become associated with leaks, and I do not think there are communication
failures. I said to you that I wish I had spoken out in August.
I felt that there were enough people speaking in August; it did
not need more; but I wish I had spoken out in August. What we
have been trying to do is to clarify how these money market operations
work, and they do not work by injecting extra liquidity into the
system, they work by substituting one maturity for another or,
in some cases, using different ranges of collateral, but it is
not a case of injecting additional liquidity. We are the only
central bank that injected a significant extra amount of liquidity.
Q1735 Jim Cousins: You told Radio
4, "It became evident that many of the funders of British
banks around the worlds were no longer willing to fund British
banks." Do you not acknowledge that your own performance
and your own judgments are now a market factor which is affecting
Mr King: No, I do not accept that.
I certainly accept that the fear of Northern Rock has led to difficulties
for the British banking system. As I have explained, I think the
real cause of that was the fact that it entered August 9 with
a very weak liquidity position and that after August 9 the authorities
together had no effective tools with which deal with a bank in
that position. That is why the changes, I think, are so necessary
in the long-term. Those were the causes.
Q1736 Jim Cousins: Sir John, you
have heard all the discussion about the nationalisation of Northern
Rock and you have a considerable knowledge yourself of Northern
Rock. How easy would Northern Rock be to denationalise?
Sir John Gieve: As you know, plan
A is to complete the Virgin or Olivant approaches.
Q1737 Jim Cousins: I know about plan
Sir John Gieve: Plan B: if we
are forced down the road of nationalisation, it would clearly
be, as Mervyn said, as a temporary measure to then relaunch it
in some form. I do not know whether it would be easy or not. We
are concentrating on the bids we have got rather than the bids
we might get in those circumstances.
Q1738 Jim Cousins: Do you think there
could be a problem with denationalisation?
Sir John Gieve: I am pretty sure
that if the bank either went through an administration process
or was nationalised, it would be possible to pass many of its
activities to other institutions in the private sector.
Q1739 Jim Cousins: How many of its
Sir John Gieve: I really could
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