Examination of Witnesses (Questions 1840
THURSDAY 10 JANUARY 2008
MP, MR JOHN
Q1840 Chairman: In our visit to the
United States, Chancellor, we did pick up quite a lot of good
information on that area taken from the American Bankers Association,
who are very keen on the upfront system from the point of view
that in the good times you can give it but in the lean times not
so much so. In principle they were very, very keen on that and
they did say in passing that British banks which have branches
in the United States are very happy with that system. I just put
that to you.
Mr Darling: I think that is true.
British banks are always happy to operate within the rules and
regulations locally. I think the BBA does not quite share the
views of its American counterpart.
Q1841 Chairman: I just mention that.
Mr Darling: I think opinion is
divided here, depending on whether you are paying it or not.
Q1842 Mr Simon: The FT report
you in your interview last week as having told them "that
other measures would give greater power to the FSA to gain access
to the information it needed in assessing a bank's liquidity situation",
which is a slightly elliptical formulation. Do you envisage a
supervisory role of individual banks in the provision of liquidity
for the FSA?
Mr Darling: The FSA does supervise
individual banks. This is the point that was raised just a few
moments ago which Clive gave an example as to where the FSA does
not think it has enough powers at the moment. I just want to make
sure that the FSA has got the powers it needs to find out the
health of the institution that it is regulating so that it can
take appropriate action.
Q1843 Mr Simon: A lot turns on what
we mean by "supervise", I think. The language that you
used to the FT or that they report you as having used is purely
about access to information. It seems to me there is a slight
difference between merely accessing information about what is
happening and a more proactive concept of supervision which actually
ensures liquidity. Is the FSA going to intervene in order to
Mr Darling: In a proportionate
way, yes. What we want to do is to make sure that the FSA has
got sufficient powers to be able to say to an institution, for
example: what steps have you got in the event that you cannot
get access to your funding? What is your fall-back position? What
is the extent of your exposure and then, of course, to act upon
Q1844 Mr Simon: The FSA to act upon
Mr Darling: Yes. The primary responsibility
for these matters rests with the Board of the institution concerned,
but the supervisor has to react according to the information that
they get. It is not just a question of collecting information,
putting it in the cupboard and saying, "Well, that is very
interesting", it is a question of collecting information
and then, if it is appropriate, taking action. What I should say,
as the FSA and others have said, nobody can guarantee nothing
will go wrong in the future. You cannot guarantee that a bank
or institution will not fail. What I think you can expect is that
the supervisor is able to get the information they need to adequately
discharge their duties, and that is what I want to ensure.
Q1845 Mr Simon: Professors Wood and
Buiter in evidence to us identified what they called a provision
of liquidity as the key weakness of the working of the Tripartite
arrangements, and they recommended that the single, best way to
address that would be (to quote them) for the Bank of England
to take over the supervision, for liquidity purposes, of individual
banks. Why the FSA rather the Bank?
Mr Darling: Because the FSA is
the. There are two reasons. The FSA is the supervisor of
individual banks. It already is responsible for looking at things
like capital adequacy, looking at standards, a whole host of things,
and it would seem to me to be very odd to have another institution
responsible for just one aspect of supervision, that of liquidity.
The second thing is that the Bank of England has a more general
responsibility about ensuring, if you like, the stability of the
financial system as a whole. I do think, especially if an institution
gets into difficulties, that we need to do more to ensure the
Bank has access to information about individual institutions because
that actually might have a bearing on their overall stance, but
what I do not want to do is to go back to the old days up until
1998 where you had a profusion of regulators looking at different
aspects of financial institutions, because I think that is likely
to cause us more problems rather than less.
Q1846 Mr Simon: Is not what they
were assuming that the Bank has a greater history and more competency
in what you might call more active supervision than the FSA, which
is a more passive regulator?
Mr Darling: The Bank of England
was responsible for the prudential supervision of the banking
system at a time when there were less significant institutions,
and they were mostly based in the UK and pretty much what they
did in the UK, and in those days it was the case that the Governor
could simply raise his eyebrows at the Chairman of the bank and
they all knew each other and they got on fine and that was wonderful.
The world has moved on since then. London is the pre-eminent financial
centre of the world at the moment. All of our banks actually trade
across the world. If you speak to the chief executives of a big
bank here, they are as much bothered about their shareholders
here as in America, Hong Kong and across the world. I think the
world has moved on. I cannot speak for Professor Buiter, but I
do not think there is any significant body of opinion that believes
that the Bank of England should go back to being the prudential
supervisor of banks, not least for the reason that the neat line
between banks and insurance companies is no longer there; a lot
of these financial institutions cover a whole host of activities.
As I said at the start, I think the basic architecture is right,
but we do have gaps in the law at the present time which we need
to fix and that is what I want to do.
Q1847 Mr Simon: The FT also
says that you want to move to a Cobra type arrangement where the
other Tripartite partners advise you more and you ultimately make
the decision more. Is that right?
Mr Darling: I will be publishing
proposals in relation to the Tripartite system. I think essentially,
as I said to you, the primary duties on the FSA and the Bank of
England are right; they must retain responsibility for that. Where
I think the Government clearly has an interest is, as in Northern
Rock, that once you start providing support the taxpayer has a
real interest, but I think what we do need to do is to have a
situation where, if you have got three people in a room, it must
be within the people's contemplation at some point, especially
when you are dealing with an acute situation, that somebody has
to at the end of the day say, "Okay, we have listened to
all the arguments; this is what we are doing", which is essentially
how the Cobra system operates.
Q1848 Jim Cousins: Chancellor, you
have just described London as being the pre-eminent financial
centre. Do not you think that either the nationalisation of a
bank or the arrangement which you yourself have put in front of
the Committee this morning whereby banks' deposits are seized
and put under separate control would be disastrous to that reputation?
Mr Darling: No, I think in relation
to the deposits, in America at some time, in Canada, in fact in
many countries, there are provisions whereby, if a bank gets into
difficulty, you can get the depositors' money out. It is not exactly
seized, it is returned to the people whose money it is so they
do not have to worry about it. I am not in favour of a scheme
that simply, apropos of nothing in particular, you can just turn
up and grab assets, but we are not talking about that at all,
we are talking about a situation where, in order to ensure that
you can maintain the financial system if an institution gets into
trouble, there are tools at your disposal. They have this, as
I say, in many developed countries but, as I said, and I think
I said this in the FT as well, whatever we do has got to
be proportionate. I do not want to get ourselves into a situation
that the Americans got themselves into after the Enron affair
where they introduced legislation which was well-intentioned at
the time but which has actually resulted in business coming across
the Atlantic. That is fine for us, but I think we have to make
sure that we do not reverse that, and we do need to do things
that are proportionate but at the same time we have also got to
protect depositors' interests in this particular case as well
as taxpayers' interest.
Q1849 Jim Cousins: Chancellor, I
take your point about the need for patience in these matters.
Do you yourself accept that patience may be required to get the
Government's money back out of Northern Rock, certainly if Northern
Rock is to survive as a sustainable business, but even if it were
to be broken up it might take years for the money to come back
Mr Darling: I think I remember
I was asked this in the Commons in the autumn. Our prior is to
get our money back and I think you would want to avoid a situation
where at its extreme, if you attempted to realise all the assets
on day one at the present time, then I suspect the price you would
get is rather different to the one that you might get at a more
opportune time in the market, but that is a judgment we will have
to reach as and when we reach a conclusion.
Q1850 Jim Cousins: A member of the
Committee has raised with you the issue of the EGM of Northern
Rock next week.
Mr Darling: Yes.
Q1851 Jim Cousins: You have made
your position clear on that, but if, as a result of the EGM, you
took the view that your own options were limited or cramped in
some way by its decisions, would you form that view quickly and
report to it Parliament?
Mr Darling: As I have always made
clear at each stage in relation to our policy in relation to Northern
Rock, I have made a point of coming to the House of Commons and
I attach a great deal of importance to keeping the House informed.
Q1852 Ms Keeble: You told us in October,
Chancellor, that there needs to be better regulation to stop banks
hiding things off balance sheet. What type of regulation are you
thinking of and how do you see it operating without stifling innovation?
Mr Darling: I am all in favour
of innovation, but what we need to be wary is of innovation that
means that people do not actually know the true picture in relation
to a bank. I think there are two aspects of this. One is our own
domestic legislation, and that is something that the FSA is looking
at, but crucially also, I think this is something where the international
work is very, very important because this is an international
problem. The Forum for Financial Stability is looking at this,
it is also being looked at at the European Union level, I will
be discussing it with my French, German and Italian counterparts
next week and, when the Financial Stability Forum reports at the
G7 in Japan in February, I hope we will have proposals in front
of us not just in relation to the off-shore SIVs but also in relation
to credit rating, in relation to early warning systems, a whole
range of matters which need to be looked at and which, frankly,
we can deal with to some extent here in the United Kingdom but
we actually need international co-operation.
Q1853 Ms Keeble: Are you concerned
that your own (and I think it probably chimes with the wider public
mood as well) interest in having more effective and tougher regulation
does not rest perhaps quite so well with the FSA's move towards
more principle-based regulation, which is actually quite a difficult
move in quite a turbulent time?
Mr Darling: No, I am very much
in favour of the principle-based regulation. I have never believed
that you can ever have a rule and regulation for every eventuality,
and nor would you want to because you would end up putting people
in such straight-jackets you would pay very dearly for it; so
I am very much in favour of principle-based and I am in favour
of principle-based proportionate regulation, but I am also in
favour of making sure that if we have got a gap in the law, if
the regulators do not have the tools to do the job, that they
should have the tools to do the job.
Q1854 Ms Keeble: If we look specifically
at the liquidity rules, and I think your colleague is just getting
Mr Darling: He cannot wait.
Q1855 Ms Keeble: It is on page five.
There are very general principles there about liquidity: a firm
must maintain adequate financial resources and so on, and a firm
must conduct its business with due skill, care and diligence.
Do you think that a move towards giving priority to those quite
general principles is going to provide the kind of robustness
people expect in dealing with what was the root of this problem?
Mr Darling: I think so. Clive
may want to say a word in a moment, but what we want to do is
to make sure there are clear principles which firms understand,
particularly in relation to liquidity. As I said earlier, this
is just an important as making sure you have got adequate capital.
In particular, if you take the Northern Rock example, if Plan
A fails, what is your Plan B, and if you do not have a Plan B,
what are you going to do about it?
Mr Maxwell: I think what is set
out here by the FSA actually explains how it looks at these things
in the context of its principles, but it then goes on to say that
it believes that in some areas quantitative arrangements and requirements
are also necessary and that they fit into those principles. So
just as it is impossible always to rely on quantitative elements
in taking these sorts of decisions, you need some sort of qualitative
assessment as well. It is also important the other way round to
make sure you have got some measurements and then different sorts
of standards being used here.
Q1856 Ms Keeble: You have also talked
about the changes that you would like to see in bank behaviour,
which I assume is to deal with the originate distribute model,
and you referred also to the Credit Ratings Agency, which is around
risk assessment and measurement in-house. How do you see as a
government that you are going to be able to influence that very
complex and difficult area?
Mr Darling: In terms of supervision,
that is a matter for the Financial Services Authority in this
country and its corresponding organisations elsewhere, and the
Government does not get into that detail of regulation.
Q1857 Ms Keeble: No, but it is influencing
behaviour, is it not?
Mr Darling: What we do not want
to do is to stifle innovation. Nor do we want to get ourselves
into a situation where we prescribe the way in which mortgages
have to be funded, for example. What I think we can expect the
regulators to do is to ensure that people understand how these
things are funded and understand the risks to which they are exposed
and, therefore, can price those risks accordingly, but that is
something for the FSA to do.
Q1858 Ms Keeble: You mentioned the
need for the international agreements, which can sometimes take
an inordinately long time, but you also said you hoped to see
progress in February. What is your timeline for getting some agreements
through the international machinery and getting it into effect?
Mr Darling: I think that because
so many countries are affected by these problems, different aspects
on a different basis, there is a political momentum which I think
is very helpful. The very fact that I can meet my three counterparts
next week, all of whom have got concerns, and the fact that I
am in regular touch with Hank Paulson, the Treasury Secretary,
because the Americans have got concerns there too, means that
I hope we will push this forward. We have also got to make sure
we get it right. I mentioned to Mr Cousins the example of how
you can get it very wrong with the Sarbanes-Oxley legislation
in America. We have got to get it right, but I think people, not
just people in general but I think institutions themselves, realise
that as a result of what has been going on over the last three
or four years it does no-one any good to have a situation where
people do not fully understand the risks to which they are exposed,
and that is fundamentally is why we are in the position we are
Q1859 Ms Keeble: Is it this year?
Mr Darling: I hope so, yes. I
hope we can make very substantial progress this year, because,
frankly, we do not have ten years to get this right. You are probably
thinking of Basel, which is an example of where it did take ten
years to implement it. I do not think this is something you can
pursue at a leisurely place, but it is important also to get it