Examination of Witnesses (Questions 1740
TUESDAY 18 DECEMBER 2007
Q1740 Mr Todd: The FSA have defined
the role of the Financial Services Compensation Scheme as being
not able to deal with all potential failures in financial terms
nor to be a crisis management tool. Should it be more comprehensive
in its coverage of potential crises in financial services providers?
Mr King: I think that will depend
on where the special resolution regime authority were to reside.
We look to you for guidance on that, as I said earlier, but what
is most important is to recognise that deposit insurance for banks
is, in my view, rather different from insurance of other types
of savings products and investments. It is not obvious they need
to be in the same institution.
Q1741 Mr Todd: At the moment there
is some lack of clarity as to what such a scheme would cover.
If it is purely designed for some very small institution of some
kind and has no ambition to cover anything very much larger, then
that begs the question of where the liability for resolving the
future of larger institutions should lie and, if one wants to
control the risk of that lying in public hands, how we seek to
minimise the risk of that occurring.
Mr King: I think any such reform
to bank deposit insurance ought to cover all banks. That would
be the sensible thing. It is a practical matter. It is much harder
to resolve problems with big banks than with smaller ones, but
that is a question of effort and scale, not a question of principle.
Q1742 Mr Todd: The British Bankers
Association in one of their submissions to us has said it is self-evident,
and in this current environment it is difficult to envisage the
UK authorities allowing the failure of implicitly any retail deposit-taker.
Are we in a position where no deposit-taker could ever be allowed
Mr King: I think if we had a repetition,
for example, of a BCCI case, where it became clear that the bank
was totally and wholly insolvent and there was no possibility
of salvaging it, then I think there would be little point in saving
it, but in terms of banks that seem to have a prospective future,
as the Chancellor said, the guarantee that was extended to Northern
Rock would be available to other banks if they were to find themselves
in a similar situation. That is why I think it is critically important
to move to a permanent regime with a special resolution regime
for banks and a reform of deposit insurance, because that is the
exit route from where we are now to go into that new regime.
Sir John Gieve: If you were setting
up something more like the FDIC in the UK, I think it would make
sense for that also to do the deposit insurance, and especially
if you were having payments in advance into a deposit insurance
fund. So, I think the future of the FSCS depends on whether we
are doing that.
Q1743 Mr Todd: What I am asking about,
and you are conceding this, is the linkage between deposit insurance,
which is a way of reassuring the consumer, depositor, and the
public policy issue of how you ensure that a financial institution
continues in being if one takes the view that all but those which
are insolvent should remain in being, and then the difficult issue
of moral hazard, in which, if you have made that public policy
commitment that these institutions should continue in being, how
you control their behaviour, since they are, by implication, passing
on risk direct to the taxpayer?
Mr King: That is why it is so
important not to rely just on deposit insurance. If you have deposit
insurance, there is no point having 90%, because that will not
stop the bank run, as we saw, it has to be 100% but only up to
some limit. In order to prevent banks taking excessive risks on
the back of that deposit insurancethe moral hazard riskit
is much more important to have in place the special resolution
regime whereby the authorities can get control of a bank that
has been taking too many risks, particularly on the liquidity
front. That is why, as John says, the FDIC mechanism does naturally
go hand in hand with the deposit insurance for banks, but only
Q1744 Mr Todd: If you like, that
is the trapeze safety net, but there should be some mechanism
to ensure that people are not actually playing the high trapeze
Mr King: That is regulation.
Q1745 Mr Todd: Because we have got
to find a means of controlling the risk to the public sector.
I think most of my constituents would be alarmed to think of the
scale of commitment, which some of the earlier questioning amplified,
that their tax had been guaranteed towards already in this particular
crisis or that w could end up actually owning a bank as an outcome.
That would be a considerable surprise to most of my constituents.
Mr King: Indeed, but that is why
I think the only way out of this is to move to a carefully designed
special resolution regime for banks and associated deposit insurance.
Only once you have got that in place and you get away with tax
Q1746 Mr Todd: And a regulatory regime.
Mr King: Yes, and a regulatory
Q1747 Mr Todd: To reduce the risk
to the public purse to a point that people would regard that as
a very unlikely eventuality to arise anyway.
Mr King: Yes. The price for having
effective implicit support from the public sector is the acceptance
of sufficient regulation and, crucially, the ability to intervene
in a failing bank before the point of insolvency.
Chairman: Graham with the final question.
Q1748 Mr Brady: One last question
on Northern Rock. Sir John, you used an interesting phrase earlier.
You said if there is net asset value in Northern Rock. What is
the Bank's assessment of that?
Sir John Gieve: We believe there
is a net asset value in Northern Rock, and the default record
so far on its loans is pretty good by industry standards. However,
you can never be certain of these things.
Q1749 Chairman: Governor and Sir
John, can I thank you for your evidence this morning. We have
had an invite for Christmas drinks at the Bank of England tonight,
but you will have to take my apologies. I have got a more important
agenda going to a concert in my local constituency, but I am sure
you will all keep yourselves fit, ready and proper to read our
report when it comes out in January!
Mr King: We look forward to reading
it. We hope you will be writing eagerly over Christmas!
Chairman: Thank you.