Examination of Witnesses (Questions 2320-2339)
MR MERVYN
KING, MR
PAUL TUCKER,
MR ANDY
HALDANE AND
MR ANDREW
BAILEY
26 FEBRUARY 2009
Q2320 Chairman: Governor, welcome to
you and your colleagues to this Banking Crisis inquiry. Can I
ask you to introduce yourself and your colleagues for the shorthand
writer, please?
Mr King: Yes, thank
you, Chairman. On my right is Andrew Bailey, the Executive Director
for Banking, who led the work on the resolution of problems in
Bradford & Bingley. On my left is Paul Tucker, the new Deputy
Governor for Financial Stability, who is just two business days
away from taking up his duties. On his left is Andrew Haldane,
our new Executive Director for Financial Stability who took his
post on 1 January.
Q2321 Chairman: Governor, you may
be aware there is a statement by the Chancellor on the Asset Protection
Scheme today at half past 11, so one or two colleagues will depart
for that but we will keep the session going and I will be here
along with other colleagues. When you were before the Committee
in November you did say that the "single most pressing challenge
to the domestic economic policy" was to get bank lending
going again. I wonder if you still hold this view, although today's
RBS statement after some terrible news indicated that new lending
was going to take place. Are you more confident now? In answering
the question, given the RBS situation, how can we ensure that
we get confidence back into the banking system and trust restored
to the banking system? It was obvious from our session with the
chief executives that they readily admitted that trust has been
lost and it is a very important point to be able to keep the public
with us on this.
Mr King: I think you have hit
the nail on the head in the word "confidence". The developments
since last September/October have demonstrated the extraordinarily
damaging consequences of a loss of confidence. We have seen this
in two quite distinct areas, one of which is relevant to today's
hearing and the other one of which is more relevant to the hearing
we will come back to in March on the Inflation Report. The first
is a lack of confidence in the banking system which became extreme
in the difficult days of mid-September to early October last year.
The other is lack of confidence in the world economy, which fell
off a cliff in October/November last year. Let me stick to the
first. I think the three key principles around the January banking
package to try to restore confidence, of which today's announcement
is the logical extension and, indeed, you can see it as putting
the flesh on the bones of that announcement in respect of RBS
itself, are, first, to actually find out what really is on the
balance sheet of our major banks. That is not something that is
easy to do or can be done quickly. The Government has made a start
on it now, the assessment today is a preliminary assessment and
it will require a much longer and more detailed assessment contract-by-contract
to find out exactly the position of the balance sheet. That has
to take time and, of course, it is affected by the fact that the
losses that could arise on any of the assets on the banks' balance
sheets may change as the nature of the world downturn becomes
either more or less severe. It is not a fixed picture, it changes
over time. There needs to be a continuous process of finding out
what is on the banks' balance sheets to give confidence to investors
and prospective investors in banks. The second is that having
done that it is important that the Government underpins the balance
sheets of the major banks, and it has made quite clear that it
will do that. It can do that in a variety of ways. One is by injecting
capital directly, the other is by providing insurance for a fee
against a certain group of assets and the third is just by being
willing in the end to ensure that if a bank finds itself in a
position where the level of its capital threatens to fall below
the absolute minimum, and what matters here is not the fancy regulatory
capital ratios but just equity, the amount of core Tier 1 equity,
if that falls below a critical level then the Government will
step in and put enough capital into the bank to ensure it is a
going concern. Those two aspects, to my mind, are about all a
Government can do to ensure that confidence comes back into the
banking system by first of all making it absolutely clear that
there has been a thorough, independent audit of the balance sheets
and, secondly, that there is a promise of enough capital to maintain
our largest banks. In return for that and in return for access
not only to the Asset Protection Scheme but also to the Credit
Guarantee Scheme, which is a fundamental part of the package that
was announced in January, which is to enable banks once they have
got enough capital then to go out and obtain the funding that
they need to finance the lending, banks should then sign a lending
agreement. If you put those three principles, if you like, together,
together with detailed proposals for the mortgage market, the
ability of Northern Rock to extend mortgages and the lending proposals
for the corporate sector, that is the asset purchase facility
that we are involved with, those are the five point plan that
was announced in January.
Q2322 Chairman: Just to be realistic,
Governor, you mentioned what is on the balance sheets and that
will take time.
Mr King: Yes.
Q2323 Chairman: We have found in
this Committee in terms of statements and accounts of banks it
is very hard to read and when the KPMG chief auditor said that
he could not fully understand after a night's reading, say, HSBC's
accounts, there is an issue here.
Mr King: It requires a detailed
forensic analysis of exactly what is on the balance sheet.
Q2324 Chairman: This will take quite
a bit of time, six months or a year maybe?
Mr King: It will certainly take
many months in my view. You can form a preliminary view and you
need to put in a provision to underpin the balance sheet now.
How much capital banks will need in the end is impossible to tell
because in large part it will reflect developments in the world
and our own economy that are impossible to predict with any precision.
There needs to be this combination of underpinning the balance
sheet and getting this process going of an independent exhaustive
analysis of what is on the balance sheet.
Q2325 Mr Fallon: Governor, looking
back over this mess, it was the Tripartite—yourselves, the
FSA and the Treasury—that were supposed to be holding the
system together. Sir John Gieve, the Deputy Governor, said "The
Tripartite's footwork may have owed more to John Sergeant than
Fred Astaire". John Sergeant became a joke, was the Tripartite
a joke?
Mr King: I thought John Sergeant
was rather popular actually so I think it is a rather inapt comparison.
You need to recognise that the Tripartite is not a decision-making
body, that is the most fundamental thing to recognise. It is a
body which communicates among the three players involved in this,
each of whom have distinctive responsibilities and you hold accountable
for the decisions that they take. You cannot have the Tripartite
taking decisions which are the proper responsibility of each of
them. It is a body which shares information and communicates what
each player is doing, but it is not a decision-making body.
Q2326 Mr Fallon: There were ten big
banks and at the end of it five have now collapsed. Whatever the
system was it did not work, did it?
Mr King: That has been true around
the world. Around the world, wherever you find people doing banking
supervision, running finance ministries and running central banks,
they all have to talk to each other. That is true in the United
States or Canada or Germany or France. You have got to have some
mechanism by which these bodies talk to each other. We call it
the Tripartite, but it exists in every other country and in every
country these same problems have been observed.
Q2327 Mr Fallon: It does not seem
to have done anything, does it?
Mr King: I hope in this hearing
we can try and get to a discussion of what were the problems that
arose. I do not think that you should see either the cause of
the problems or the answer to those problems in terms of a process,
a process of communication or committee.
Q2328 Mr Fallon: It was nothing to
do with the architecture then. Andrew Haldane, in your speech
last week you talked about the credit boom and you said: "A
collective blind eye was turned to the resulting risk". Does
that include the Bank of England?
Mr Haldane: I was referring in
there very largely to the private sector banking community rather
than the authorities. Certainly within our Financial Stability
Reports from 2003 onwards we spoke with increasing volume and
force about the build-up of risks within the system. Looking back
at that, all we had really was our communications through things
like the report but in those reports we tried to lay bare what
we thought were the emerging build-up of system-wide risks.
Q2329 Mr Fallon: You do not accept
that the Bank has any collective responsibility for the blind
eye that you referred to?
Mr Haldane: The Bank has a responsibility
for contributing to the assessment of system-wide risks and through
our reports that what was what we did. As I say, the limit of
our actions are that we can communicate about those risks rather
than necessarily impose different outcomes ourselves on individual
institutions, that is not our responsibility. I think we played
our part in alerting the banks and the wider world to what some
of those emerging threats were. There is a natural limit to how
far those words can take you in addressing those risks, I think.
Q2330 Mr Fallon: So you are not accepting
collective responsibility for the blind eye that was turned?
Mr King: I think the Bank of England
has accepted responsibility for those things for which it was
responsible. I do not think we can be responsible for actions
taken by others.
Q2331 Mr Brady: You now have a statutory
responsibility to protect and enhance the stability of the financial
systems in the United Kingdom. Once the current crisis is over
where do you see the main thrust of that work being?
Mr King: I think the first thing
I would like to say to the Committee is that it is pretty clear
that you and others will expect the Bank to play more of a role
than in fact we did, but you also need to recognise that we do
not have any powers at all other than dealing with banks that
have already failed. In terms of dealing with banks that are growing
and living, we do not have a single power now that we did not
have before. We literally have the power only of our speeches,
our reports, and the words that we use when speaking to others
in the Tripartite process. I hope you will remember that when
you try to hold us accountable for things where we simply have
absolutely no powers to take any actions. We have clearly put
in place a mechanism now for implementing the special resolution
regime, for which we are statutorily responsible. We have a new
responsibility for the oversight of payment systems, or will have
when that comes into effect later this year, but insofar as ongoing
banks are concerned we do not have any more powers at all. We
are still very much at the point where we will have to channel
our thoughts and views through the Financial Stability Report
and through speeches.
Q2332 Mr Brady: Are you saying you
should have additional powers in that respect?
Mr King: That is a matter for
you to decide. I hope that your inquiry, when you reflect on this—
Q2333 Mr Brady: As part of that inquiry
I want to know what your view is.
Mr King: I do not want to judge
that and it is not really for me to say. I do think what does
matter, and this is a point I have made before, is that there
has to be a matching between responsibilities and powers.
Q2334 Mr Brady: Governor, you said
that when we seek to hold you accountable for any future events
that may take place we must be aware of the fact that you have
not got these powers. What powers would you like to have?
Mr King: I am not saying necessarily
the Bank should have powers. First of all, we should ask ourselves
what are the lessons from this and are there powers that someone
should have that did not exist before. We had the same process,
if you remember, after Northern Rock when I said to you that the
most important lesson from that was that Britain did not have
a special resolution regime which other countries had. I went
out of my way to say I am not saying the Bank should have that
power, but somebody should have it. You then wrote your report,
it was very influential and we have the Banking Act now which
creates those powers and means that the trigger is with the FSA
and the actual decisions on how to resolve that are with the Bank
of England. That may or may not be the right outcome, but at least
it is clear who has got the responsibilities. All I am asking
you to do is to be very clear, going back to Mr Fallon's question,
that you hold people accountable for things for which they have
powers, not for things over which they have no influence or control
at all.
Q2335 Mr Brady: Is there a danger
that after this crisis has passed that financial stability might
drift away from being the focus again? How do you stop that happening?
Mr King: No. I think it will be
a very long time before that would happen. It will be very much
part of our focus. Mr Tucker is thinking hard about the increased
resources that we need in order to do that and we have already
allocated more resources to that work. To repeat, all I would
say is that apart from the special resolution authority and the
oversight of payments system, more involved though we might be,
we are still limited in the end merely to writing reports. I want
that to be clearly understood because it is no good coming back
to us in a few years' time saying, "Why didn't you do this,
that and the other?" when you in Parliament—it is your
vote, not ours—voted for an Act that very clearly defines
our powers. I am happy with that, but do not hold people accountable
for things for which they are not responsible.
Q2336 Mr Brady: Conversely, in the
past one of the things you have perhaps been criticised for was
being excessively focused on monetary policy. Are you at all concerned
at the moment that there is not sufficient focus on monetary policy
and the danger of inflation coming back in the future?
Mr King: I certainly am concerned
that people who try to influence the way the Bank evolves may
say, "This is a great opportunity to change the focus of
the Bank". Our clear and unique responsibility is for monetary
policy and we must never, ever forget that. I can give you my
personal assurance and that of every member of the Monetary Policy
Committee that we are totally focused on that and we are not going
to allow a great inflationary surge. The problem at present is
not that the amount of money in the economy is growing too rapidly
threatening a big inflationary surge, it is that the amount of
money in the economy is growing too slowly. That is why we have
asked the Chancellor for powers to engage in asset purchases in
order to increase the amount of money in the economy and I would
expect that to happen over the next few months.
Q2337 Chairman: Governor, just to
clear this up because I have heard murmurs from some of my colleagues,
you did say "we only have the power of our words". Mindful
of your comments to us when you came on Northern Rock and the
limitations, legal impediments, EU directives and whatever, if
you are not clear with us at the moment and legislation is put
in place which is inadequate you or your successor can come back
and say, "Well, my hands were tied because of A, B, C, D
or E". Are there more powers that you would like?
Mr King: There are two things
I would say at this point. One is that the Act does not give the
Bank the right to request information from banks. I regret that.
I think the FSA have clearly said that they will try hard to give
us the information that we want but I find it very hard to see
why, if people feel the Bank should play a major role in financial
stability, we should not have the right to request information
from banks. We do not have that. We have to persuade the FSA that
the data to be collected are appropriate and they have to make
their own mind up on that. More important, I suspect, looking
ahead, and I hope this will be the subject of your inquiry, is
that we should ask ourselves what are the lessons behind this
financial crisis, are there powers that somebody needs to have
in order to try to lessen the risk that this will recur, and once
that has been sorted out then and only then should you come back
to the question of who should exercise those powers. In some ways
it is less important who exercises the powers and more important
to think through the question of what those powers should be.
Chairman: That has been helpful.
Q2338 Ms Keeble: You said that you
had the power of words and you said just now you needed to know
what is on the balance sheets of the banks and there needs to
be the promise of enough capital to protect the major banks and,
of course, there is the announcement that is coming later today.
At the end of 2007 you said: "The UK banking system as a
whole is well-capitalised. They have a large capital cushion,
they can take the conduits and vehicles that they set up in recent
years back onto their balance sheets. It will take a little time
and the banks will have to make lower profits than they would
have wished, but there is no threat to the stability of the banking
system". Given that you might not get all the information
that you want, but you do get an awful lot of information, how
could you have got it so wrong?
Mr King: All the central banks
asked the regulatory bodies around the world, not just the UK,
we asked the US regulators, the European regulators, the Japanese
regulators, and their view at the time was very clear, that in
August 2007 they said banks are well-capitalised and the losses
that will occur are not large enough to erode the capital cushion.
What I think no-one anticipated at that point was that the risks
to the balance sheet as a whole became larger during 2008 and
became horrendously high in September 2008 after the failure of
Lehman Brothers. The leverage in the banking system was sufficiently
high that what started off as looking a well-capitalised banking
system quite quickly became an under-capitalised banking system.
One of the lessons from this is that the amounts of capital that
banks were required to hold were simply too low.
Q2339 Ms Keeble: As my constituents
tell me always you are not responsible for global, you are responsible
for here. Given that we have a very sophisticated banking sector,
and I have always thought of it as being the best in the world
and that puts you in a very privileged position as the Governor
of the Bank of England, were there no discordant voices in the
Bank or was the information not analysed properly that you did
not see the storm that was coming and said there was no threat
to the stability of the banking system?
Mr King: That was the view of
the regulators who were looking at the capital around the world.
It was not a UK view and we were not the regulator. This was the
view of the people who actually had the information about the
balance sheets and the losses at that point. At that point, if
you worked out the potential losses on sub-prime lending then
they were not large enough to erode the capital cushion of banks,
but what happened was that the risk premia in the world changed
and that reduced the value of the assets to the banking sector
and meant that their liabilities had not fallen but the assets
had and that clearly eroded significantly. If you remember, I
came to you in January 2008 and said that the banks at that point
needed more capital.
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