Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 1740 - 1749)



  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 to fail?

  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 insurance—the moral hazard risk—it 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 for banks.

  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 act.

  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 regime.

  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.

previous page contents

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2008
Prepared 1 February 2008