Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 1840 - 1859)

THURSDAY 10 JANUARY 2008

RT HON ALISTAIR DARLING MP, MR JOHN KINGMAN AND MR CLIVE MAXWELL

  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.

  Chairman: Exactly.

  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 it.

  Q1844  Mr Simon: The FSA to act upon it?

  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 out.

  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 it.

  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 today.

  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 right.


 
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