The Committee's Opinion on proposals for European financial supervision - Treasury Contents

Examination of Witnesses (Questions 80-99)



  Q80  Mr Todd: So what should be the British Government's strategy in this matter, because what we appear to be doing is engaging in quite detailed negotiation about the mechanics of this and there has been some useful questioning on some of the clauses within this? I am more questioning whether this is strategically the right place for the European Union to be engaged and how it should deploy its resources.

  Ms Ridpath: It is an awkward thing to answer as a foreigner, I realise, but I think you would do best—

  Q81  Mr Todd: We have had quite a lot of them in front of us.

  Ms Ridpath:— by engaging actively in these new supervisory bodies, as actively as you can as proponents of your system of supervision that has proved quite worthy, rather than try and throw stones at the legislation and get it put out. I think you would do very well by taking a leadership role in these organisations and showing that they are so important that you are going to make them work and make them work to your interest.

  Q82  Mr Todd: That is one strategy.

  Mr Popham: Could I just embellish that if I might, which is that, in pursuing that, what would be particularly useful would be the development of the details of the rules and the application so that one had a much clearer understanding of how and when it would apply and only then can you make the decision whether it is the appropriate—

  Q83  Mr Todd: The very last thing we need is to have some cloudy entity in Europe which will obstruct rapid decision-making and also introduce some intriguing potential moral hazard issues of quite where regulation applies and whether a national regulator, not necessarily thinking of our own but somewhere else, need do its job if there is some second-guessing being done as well.

  Mr Popham: I think we are saying precisely that because there is the obvious likelihood of an interregnum whilst these bodies come into existence but cannot actually do anything. Meanwhile, what happens if a crisis arises? It does not seem to me the best way of launching this ship.

  Q84  Mr Tyrie: Barbara Ridpath was giving the British Government tactical advice, that is, suggesting engagement and leadership rather than throwing stones from the outside, but I think Mark Todd's question was one of principle. At the end of all this does the EU have very much, in an objective sense, that can contribute to the welfare of its citizens by engaging in legislation of this type?

  Mr Gleeson: Can I make a point in relation to that, and that is that from the UK perspective the answer is probably not, because from the UK perspective controlling a crisis means being able to deal closely with the US, potentially with China, India, the major financial centres. If you look at life from a continental European perspective this structure would potentially have been useful in the collapse of an institution like Dexia. Remember that cross-border deposit-taking is much more common across continental Europe than it is between continental Europe and the UK. The answer to the question "what good is this?", is, (a) possibly more good to continental Europe than to us, and, (b) important to ensure that it does work there—because we have an interest in it working there—without obscuring the UK's ability to deal easily and quickly with non-EU global regulators.

  Q85  Mr Tyrie: The second broad question has to be do we need to get this done in a rush or is this something that we should be thinking about very carefully over a longer time frame, bearing in mind that we have just had the crash; the horse has bolted.

  Mr Popham: Assuming there is not another one coming along close behind, the answer must be that it would be better to consider this at some leisure; otherwise the likelihood is we will get it wrong and a statement was made by the previous witnesses to the effect that it would likely address the previous crisis, not the next one.

  Q86  Mr Tyrie: And therefore what explanation do any of you give to what appears to be an extraordinary rush to legislate?

  Mr Villeneuve: The members of my committee are very unhappy about that, of course. That is all I can say.

  Q87  Mr Tyrie: We know that, but I am asking you for an explanation about the foot being on the accelerator.

  Mr Villeneuve: There are many explanations. The Swedish Presidency is obviously anxious to get something wrapped up at the Council by December which is when they leave. Is that a good enough reason to rush it? No, but that is one element. Another element is that there are people, certainly in France and maybe other countries, that feel that while the crisis is still burning in our minds you are more likely to get this sort of movement than before, and you have to recognise that the UK has come a long way in this crisis from where it was before. We have engaged with the other European countries a lot more now as a result of this crisis than we have ever done before. That has been noticed and people feel that striking while the iron is hot may be good.

  Q88  Mr Tyrie: Just to clarify, what you mean by that presumably is that the British are in a weak position because the Anglo-Saxon model is being challenged, so get them while they are down; that is the continental view, or have I been a little pejorative there in describing the continental position?

  Mr Villeneuve: I think it is more that the British realise that we cannot go on the way we are, and other countries, by the way, have realised this too and this is a good moment to get changes made. I am a great supporter of the Anglo-Saxon model. By the way, I do not think there is an Anglo-Saxon model. There is a British model and an American model, if that is what you mean. There is also a German model, but that is something else.

  Mr Popham: It seems to me the only other possibility it might offer is to draw a line under the current crisis and perhaps to allow financial services to return to some element of normality rather than for ever being in the headlines as to continuous crisis.

  Q89  Mr Tyrie: I saw Mr Gleeson trying to get in, so could we have a review on the same question?

  Mr Gleeson: I was just going to make the point that the real issue is, I think, about resources. If these resources are to be devoted to international agreements, is it best for that to be done within the European Union or at the global level? The answer to that seems to me to be clearly at the global level, so this to some extent seems like a second-best option.

  Q90  Chairman: André, so you were roundly rejecting Andrew's scurrilous suggestions in your answer there? I thought you were.

  Mr Villeneuve: I would not have characterised it that way, Chairman. I am for less haste and more careful consideration, just to be quite clear on my answer there. I was just trying to attempt to answer Mr Tyrie's question about why there is— haste.

  Q91  Chairman: Now another attempt for free advice, Simon. Under Article 11 the ESA appears to have considerable arbitration power between two financial institutions. Why do you say it is unclear what power the ESA will be able to exercise? I am thinking of section three in particular here.

  Mr Gleeson: It is the same basic issue, that they may adopt an individual decision addressed to a financial institution, that is certainly true, but the substance of the decision they can make is to require the institution to comply with its obligations under existing law.

  Q92  Chairman: Yes, but it says here, "The Authority may take a decision requiring them to take specific action or to refrain from action in order to settle the matter".

  Mr Gleeson: Yes, in compliance with Community law.

  Q93  Chairman: Yes, but it is going to arbitration because there is a doubt and they are suggesting that there is specific action required.

  Mr Gleeson: Yes.

  Chairman: That seems simple enough to me as a non-lawyer.

  Nick Ainger: That is your first mistake!

  John Thurso: That is why you are not paid as much!

  Q94  Chairman: I am too diplomatic to say that. Come on.

  Mr Gleeson: The issue is that you start by creating a disagreement between competent authorities. Now, assume that that disagreement is wholly synthetic and constructed for the purpose of enabling an order like this to be made. I agree that you can do that, but what that involves is something which is close to a conspiracy between the authorities and the Member State to agree that the law says something which either it does not say—the situation where the FSA says, "This directive means X" in such a fashion that the rest of Europe can say, "It is clear beyond doubt that the FSA is just making this up and it does not say that at all", is a very hard set of facts to imagine.

  Chairman: Oh, forget it! I am going back to bed!

  Q95  Nick Ainger: I do not know if you heard the evidence that our previous academics gave in relation to the ESRB and its construction. Professor Willem Buiter has given us a memorandum and he describes the construction of the design as a shambles. He says it is ludicrously lob-sided in favour of central banks in general and the ECB in particular, and it is high time to have a re-think before the EU adopts and implements a financial and political disaster. Would you agree with the eminent professor?

  Ms Ridpath: I would not entirely. I think the ECB has done a fairly remarkable job in only ten years of demonstrating its independence and its integrity, so I think that, even though there are some who are quite angry at the things the central bankers did not do, having now the banks in large part at the helm of this I think is a good thing.

  Mr Villeneuve: I also agree with the point that one of the academics made, and I cannot remember which, that you have got to have a trade-off between having everybody you would want there and the viable size of a committee. In my view you run a good size committee here but I cannot imagine, on something as important as a financial crisis, having 100 people in the room, albeit desirable participants, and getting a reasonable quick answer. I think there has to be a trade-off, and if it revolves around central bankers so be it.

  Mr Popham: I think particularly if we are looking at macro-prudential activity then central banks are most likely to be the focal point for national representation and for national implementation. Once it goes a little bit broader than that they may not be, but one assumes that it should be possible for the Governor of the Central Bank to take account of other people's views before he comes to the table. As you say, however, trying to construct what I have described before as half an ark where you have got one of everything is a recipe for a very slow-moving exercise, and 27 countries are 27 countries.

  Q96  Nick Ainger: All I would do is paraphrase what Professor Buiter says, that the central banks have not got a very good record of identifying systemic risk, have they, or else we would not be in the position we are now?

  Ms Ridpath: They have not had a very good track record of acting on it. Actually, the financial stability report of the Bank of England was very good at identifying it. They just did not do anything about it and that was true of several people at the BIS as well. The question is the tools to act on it, not identifying it, I think.

  Q97  Nick Ainger: Do you see the difference being, as the Chairman referred to earlier, that people were blowing whistles but nobody was listening and that the ESRB will be able to blow the whistle and presumably people will listen this time? That is the theory, is it not?

  Ms Ridpath: I remain concerned whether people will listen.

  Mr Popham: I think as an observation it will rather depend on who it is that is blowing the whistle, not which organisation is blowing the whistle. If these organisations are staffed with people who are well respected across the financial communities then they will be heard. I do not know what the opposite extreme is but ultimately if they are nothing more than bureaucrats who nobody recognises they will not be heard.

  Q98  Nick Ainger: The ESRB will have these powers—its only powers—to issue warnings and recommendations, and everyone is concerned that those warnings and recommendations will be adhered to, but in your memorandum to us, Stuart and Simon, you say you raise concern about its effects on Member States' governments. First of all, should we not want that to happen because what is the point in issuing these warnings and recommendations otherwise?

  Mr Popham: I suppose it depends whether you agree with that. If you think it is all designed to and will achieve a better degree of supervision, yes, good thing. If you think otherwise, it is an undue interference, bad thing. The question is to what extent they should overrule national regulators in that sense or, more to the point, not so much overrule as just undermine and question and slow down the process.

  Q99  Nick Ainger: But if they are right then should it not have that effect? What is the point otherwise of this body?

  Mr Popham: If we might go back one step to what André said at the beginning, which is that this needs to look at things on a global basis, there should be other people presumably observing and discussing and communicating at this stage. We are talking about a crisis and a crisis not just of an individual financial institution presumably but a country-wide or a regional-wide or a global-wide crisis, and therefore one is hoping that you are going to get the most effective way of getting a co-ordinated whistle being blown rather than some itinerant one that you have not really seen coming and does not seem to be in any sense co-ordinated with the overall markets. That is the risk. The structure being put in place sounds good. The question is how well it will operate in practice. I come back to my earlier point, which is, if there are at the moment no rules, no real definition of its ambit, no definition of what the financial crisis might be, it is very difficult to assess in advance how well it is going to work. We would all want one if it is going to work well.

  Mr Gleeson: There is one other small point there, which is that it is very easy to misunderstand macroeconomic regulation by assuming the market is even. If you imagine, for example, that this body decides that there is too much credit in Europe and bank capital adequacy requirements should go up, if at that time the UK, for example, is in the middle of a deep recession and increasing capital adequacy requirements for UK banks would have the effect of making that recession much worse, then it probably should not be the case that that determination by this body should effectively determine the action of UK economic and monetary policy.

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