Financial Regulation: a preliminary consideration of the Government's proposals - Treasury Contents

Examination of Witness (Questions 579-618)

1. Chair: Thank you very much for coming before us this afternoon. I'd like to begin by quoting to you what Xavier Rolet said when he came to give evidence to us. He told us, "Some people"—by which he meant in Paris—"see an opportunity through the regulatory harmonisation process to claw back some business from London". Do you agree with him?

Mr Villeneuve: I am sure that people are attempting to do this and I think some countries are better organised to do this than we are at defending what we're doing.

1. Chair: Can you elaborate a little on our inadequate defences?

Mr Villeneuve: Yes. To take the French, for instance, which I know a bit about and something Xavier obviously knows a great deal about, certainly under Christine Lagarde's—who is the French Finance Minister—reign, they set out very early to have a series of wise men groups that worked on projects to carve out a position for Paris in certain key sectors of the financial services industry. So, for instance, they decided very early on that it was necessary to create more clearing capacity in the Eurozone, particularly over euro instruments, and that Paris was well placed to do this.

So very early on, under the aegis of the French Treasury, they set out a plan of campaign to do more clearing in Paris. It had a financial services dimension and it had a political dimension as well, because using the necessity of doing euro clearing in the Eurozone is not unreasonable politically. It was used as a very good weapon to do this. The interesting thing, Chairman, is that they didn't rely on the industry to get these things going because the industry, in their view, I think, tends to focus on immediate issues. They think strategically for their own companies, but not necessarily strategically for the broad good.

So some of these processes were kick-started by the Treasury itself, by getting this group of wise men to say, "Let's try and get the industry to look a bit beyond what they are doing today and tomorrow, what the clearing activity might look like in five years' time, how Paris would fit into that and how they could benefit from it". We're beginning to see the results of that now.

One of the results, for instance, is that London may be excluded from access to euro liquidity from the European Central Bank. If that happens, the role of clearing in London is seriously under question. The consequence of this is that—to take one example—the New York Stock Exchange, which has traditionally done all its European clearing activity through London, now has to build up a presence in Paris as well as London, because it doesn't know whether the UK is going to have access to euro liquidity from the European Central Bank or not. If it can't, they can't afford to place all their eggs in one basket. I think all this was quite carefully mapped out in the work that was done in the French Treasury—I'm giving you one example—and I'm not sure that we have mechanisms that do the similar sort of work.

1. Chair: So we've been outwitted by the énarques?

Mr Villeneuve: You could phrase it that way. Potentially; I think they have a more dirigiste approach to these things. But I think we need to get smarter about it ourselves.

1. Chair: Rather than pursue that now, it would be extremely helpful, since we have the man whose task is protecting us from such mischief, Mr Barnier himself, coming to see us—we are very pleased that he has changed his mind and decided to come—perhaps you could give some thought to what we should be asking him, and in due course come back to us. Of course, whatever you give us we'll put into the public domain prior to the meeting.

Mr Villeneuve: With pleasure.

Chair: Because I think it would be right for Mr Barnier to have an opportunity to see it.

1. Andrea Leadsom: Rather cheekily, we have Monsieur Barnier, who of course is very influential over regulation in the future for the UK, we have Monsieur Rolet, who is now running our stock exchange, and we have Monsieur Villeneuve. Is there a bit of a conspiracy going on? Is this the mountain coming to Mohammed? Is there some sort of group thing going on here from the French?

Mr Villeneuve: I don't want to bore you with my history, but I was born and brought up in this country and I have a British passport.

Andrea Leadsom: You give a very good impression of having been brought up in this country.

Mr Villeneuve: My parents are French, but they came over here before I was born during the Second World War, thanks to the English, and they stayed.

Chair: They used to be in the Navy, presumably, once?

Mr Villeneuve: Well, I owe my job to the fact that I was hired by Mr Nelson in my first job.

Andrea Leadsom: So there's no conspiracy?

Mr Villeneuve: This is not a French conspiracy.

Andrea Leadsom: Excellent.

Mr Villeneuve: Although I do talk to the French often and I do speak French. If that's held against me, I don't know what to say.

1. Andrea Leadsom: Very good. So just looking then at Basel III, which has a very big impact on the success of the British banking industry, and in a way is seen as perhaps being a bit light on British banks and on the banking system in general. Do you think that it goes far enough? Do you think Basel III capital adequacy requirements go far enough to prevent future problems in the banking system?

Mr Villeneuve: I would start by saying I'm not an expert on capital adequacy. I chair a group that covers a whole lot of subjects. There is always a trade-off between regulation and growth, and there needs to be a trade off, and the question is: do they have it about right? me. The view I'm hearing from the banking industry on my group at the moment is that it's probably a bit heavy in its current versions, rather than light, that there will be an impact on growth. They haven't quantified this yet in the way that I would recognise.

Different banks have different models and the original proposal of Basel III didn't recognise that adequately. It is viewed that it recognises it extremely adequately now, because I think the timescale goes up to 2020 for, say, French and German banks to apply it. There is a question mark about whether the Americans are going to apply it. I'll stop, because you don't like long answers.

1. Andrea Leadsom: Okay, so just to reiterate, do you think Basel III could contribute to preventing a future crisis,? Do you think it is part of, or a full, solution?

Mr Villeneuve: I am told by people more expert than me that raising capital standards, and looking at liquidity standards and leverage, should help prevent a future crisis. Nobody has told me what the magical point is at which it does. We're talking about 2 percentage points or 3 percentage points. I don't know whether 8 is good or 11 is good. I'm not expert enough to be able to answer it in those terms.

1. Andrea Leadsom: Do your UK banks tell you that Basel III will harm their future profitability in a global sense, or help it?

Mr Villeneuve: All the banks that are on my group recognise the need to raise capital standards. All of them also say that raising capital standards will mean they will have less money to lend. So yes, there should be a bit more comfort with higher capital standards. Yes, it will have an impact on the economy.

1. Andrea Leadsom: So it is a trade-off between the security of the system and the prospects for lending to companies to enable growth in the domestic economy?

Mr Villeneuve: That is broadly the way it has been put to me, yes.

1. Andrea Leadsom: Thank you. Do your banks tell you that the European regulatory changes are compatible with what we're proposing to do in the UK?

Mr Villeneuve: Are you talking about the new supervisory authorities?

1. Andrea Leadsom: Exactly, yes—the new supervisory regulatory reforms coming through from Europe. Are they seen by your banks as being compatible with what we're proposing to do with the new—

Mr Villeneuve: We do not mirror what has happened in Europe. In fact, I do wonder whether this paper was written even with Europe in mind, because it was clear when the paper was written what Europe was moving towards. So no, we don't mirror it ,and this has shown up very clearly—as Xavier, I think, pointed out to you as well, if I read his thing correctly—in ESMA, which is the European Securities and Markets Authority. We have a very puzzling situation as to how the UK is going to be represented on ESMA. The proposal, as I understand it, is that the consumer authority will represent the UK on ESMA. Now, you have to bear in mind that the UK is by far and away the biggest international wholesale securities market in the world. So it's really a wholesale market and it is being represented by somebody that is essentially consumer.

So the question then comes: how broad is the remit of the consumer agency here—the CPMA—in as far as it represents the UK in this essentially wholesale set of discussions? Most other European regulators are not as concerned with the consumer as we are, so it won't be a consumer discussion, it will be a wholesale discussion. If the remit of the CPMA is very broad, then the delineation between the CPMA and the prudential regulator becomes challenging again, because where do you draw the line? If it's quite small, then our representation on that group is going to be fairly meaningless, because other regulators may not take very seriously a UK representative that is totally focused on consumer issues in the wholesale equities market discussion.

1. Andrea Leadsom: So would your banks then say that we have it wrong, that our proposed regulatory structure in the UK is wrong, or that the proposals in Europe are wrong, or is it just an observation?

Mr Villeneuve: None of my banks say that anything is right or wrong, because they're focused more on outcomes than they are on structures. Every structure has its upside and its downside. You have one tripartite system being replaced by another tripartite system, essentially. It is very difficult to find the perfect model, so I think my members recognise the difficulty in finding the perfect model. The problem then is: what remit do you give these different groups and how do you make sure that they are as effective as possible in fulfilling their duties?

1. Mr Umunna: While capital adequacy is extremely important in ensuring that we don't have a repeat of the mistakes that were made over the last two or three years—and it is something that has preoccupied a lot of regulators and those who work within the financial services sector—the one issue that is brought up, more than anything else, in respect of the banks and the sector by our constituents, is the remuneration of those who work in the Square Mile in particular.

We have the next bonus round about to start in a few weeks. I know the FSA are just completing, I think, their consultation on the new code that they intend to put in place. We've had the Capital Requirements Directive coming out of Europe, which suggests a whole raft of measures. Do you think the new rules, which are being implemented at the moment, will help prevent a repeat of the financial crisis we saw emerge over 2007-08?

Mr Villeneuve: Let me start by saying I'm not a banker and I don't get bonuses and I don't even get paid for what I do, so let's be quite clear on that. In our group, we try and cover issues that cross sectors, but on remuneration, we have left it to the trade bodies to represent their own interests, because they're different. The British Banking Association is putting representations of bankers; the ABI is putting representations of insurers, and so on.

Where we do come in is in the range of institutions that the FSA is proposing to cover, and here it differs from just about every other country that I am familiar with. Most other countries—or all other countries in Europe, anyway—that are dealing with this are focusing on a very narrow range of banks and a very narrow range of people within their banks. The FSA has decided to go ahead of the pack and they want to cover 2,400 institutions, as far as I understand, which includes fund managers, insurance companies, which are not, as I understand it, covered in France or in Germany—certainly not in the US, which isn't even trying to micro-manage remuneration in this way—and this is worrying. The FSA is seen as being too far ahead in this debate of other countries, so the end result is whether the level of remuneration here is appropriate or not. We may end up being very uncompetitive with other countries in what is essentially a global market, and we're an international centre, so we have to be interested in what the global markets are doing.

1. Mr Umunna: Following on from that, in April 2009, we had Jacques De Larosière carrying out various reviews of these types of issues, in addition to Lord Turner, whose paper, I think, was tabled at the G20 in April 2009. Given what you say, do you think that the Government have done enough to lead on this issue at a G20 level, and—I happen to think Europe generally is on the right course here—do you think enough is being done to ensure that the standards that we're looking to put in place here are also followed by the SEC and others in the States?

Mr Villeneuve: This is a very important question you raise, because it has broader issues than just remuneration. I think what we have at the moment is a European approach on remuneration. We have a UK approach on remuneration, which looks at this stage to be a lot harsher than the European approach, although that remains to be seen. The American approach is to rely largely on shareholders, and not micro-manage remuneration from the centre, so they're encouraging shareholders to challenge the remuneration committees of banks. The Asian approach is open season.

Now, the issue is then: where does the G20 come in if you're worried about being an international financial centre? The Prime Minister told us last night that he wanted London to be an international financial centre that was as competitive as anyone. So this is a very important issue, because there's no evidence at all that the G20—other than the principles that they laid out very early on, about how much was going to be paid in cash and how much should be paid in deferred stock—are going to be applied universally throughout G20 countries. In fact, there's a lot of evidence that that won't be the case.

1. Mr Umunna: But just going back to my question: do you think they need to take more of a lead? I mean, in some respects, they're in the perfect position to do so, simply because of the City of London being here and it being rather unique as a financial centre. Do you not think they're in a good position to lead on this issue and do you think they are providing sufficient leadership on it, given the concerns that you have raised about the UK going it alone, in some senses, with a tougher regime? Not that I'm saying I agree with that, but that's what you seem to be saying.

Mr Villeneuve: I have to say I don't think the UK is taking an adequate lead in the G20 in general about this, because what we're seeing now is fragmentation in the G20 on remuneration and on other issues—which I won't go into now—and therefore we are going to get regulatory arbitrage and remuneration differences, for instance, between the Asian centres and the EU on the one hand, and possibly with the UK at the extreme of the EU on the other. I think that if the UK doesn't take a tougher stance with the G20, or recognises that this can't be managed, which is quite possible, because the Asian countries are looking at very different objectives in all this, we need to draw the consequences of what it means for an international centre which has to live with a world regime, not just a UK or an EU regime.

1. Mr Umunna: Can I just ask one last question, and this is something that I suppose has happened quite recently? We saw reports yesterday that the British Bankers Association informally—I know it's denied formally doing this—has sought to reduce the level of bonuses that are due to be paid out in the imminent bonus round. We have seen—which they have said is speculation and nothing more than that—figures of £7 billion being bandied about, and the reports were that they were trying to reduce this to something in the region of £4 billion. Granted that this could involve on their part breaching certain regulations if they're not careful, do you welcome a move collectively by the sector to try and rein in bonuses, as the rest of the country looks to tighten its belt? That doesn't really do justice to what is about to happen.

Mr Villeneuve: I don't think the industry has handled the remuneration issue very well, but I won't make moral judgements to this Committee. It's not my role and all the rest of it. The real issue is that these people have to deal in a world environment—a lot of them are international banks, or if they're just UK banks, for certain activities they have to fish in the same pond as international banks; fishing for people. So that has to be recognised. Whether that is a good or a bad thing, it has to be recognised. I can tell you that having just come back from 10 days in the US with my colleague at the City of London, who is chairman of the Policy and Resources Committee, we went to see a large range of top banks, fund managers and markets and they are completely mystified by the UK approach, the FSA's approach to remuneration.

Mr Umunna: In what sense?

Mr Villeneuve: They just think it's far too prescriptive, far too micro-managing and they don't think it's appropriate for remuneration levels, beyond what was agreed at the G20, to be set by Government. They think it's much more appropriate that the shareholders should be involved in that.

1. Chair: They are getting their shareholders involved, are they, in the US? That would be a first, wouldn't it?

Mr Villeneuve: They're trying to.

Chair: It would be a first.

Mr Villeneuve: Well, I sit on the board of a big US company and I can tell you that shareholders are getting a lot more aggressive in the US than they used to be about these things.

1. Mr Umunna: Are you more aggressive? As one of those shareholders, as you were just saying, are you raising questions in the way that the US regulators seem to think you will do?

Mr Villeneuve: As a shareholder? I'm a tiny shareholder of US companies. As a director of a US company—but it's not in financial services and therefore has a very different profile—yes, when I joined this board ten or 11 years ago, the remuneration committee did its work almost in a closed environment and the other board directors were just told what the result was. We are now all involved in discussing the conclusions, at least, of the remuneration committee before they're agreed. So there has been progress in the US.

Mr Umunna: Sounds like a small amount.

John Thurso: I just want to follow up on this question of remuneration, because it seems to me there is a fundamental problem that exists in banking that doesn't exist to the same degree in non-banking companies, which comes from the history post-big bank. The vast bulk of merchant banks, both investment banks in America, and merchant banks in this country, were unlimited liability partnerships, where the entire wealth of the individual was on the line.

In that circumstance, if they took the profit and split it all among themselves, that's fine. There is a direct correlation between risk and reward. These have all either now become, like Goldman Sachs, stock companies with shares, or they have been absorbed into, in the case of most of our big banks, companies with shares, but they took the same rewards as they used to when they had all that risk. They don't have the risk now—we have it, because they are all attached to retail banks and if they go belly-up, we rescue them. It seems to me it's a fundamental flaw in the capitalist model that the reward is no longer following the use of capital, and that has to be wrong and has to be changed. How can that be done unless either the City of London or the FSA, or somebody, steps in says, "Enough is enough"?

Mr Villeneuve: First of all, I recognise and am personally very sympathetic with what you said, and I think the change to that model was very fundamental.

John Thurso: It was Warren Buffett who came up with it first during the Salomon deadline.

Mr Villeneuve: I think if it can be changed by international agreement, that is one thing, but I think that all that will happen if the UK goes it alone, because it can't persuade other major countries to follow its lead on this, is that we will just lose out and I don't think that's good for the City.

1. John Thurso: Would we lose out? If you follow that line of argument, then all it takes is one relatively major financial centre somewhere to say, "We're not going down that route" and everybody else can't do it. If America or Singapore or wherever says, "We're going to go on paying at that rate" that argument seems to say that nobody can change unless everybody changes.

Mr Villeneuve: We are talking about major centres here, but I'm afraid all the evidence indicates that the US, to take one example—and we have a big US bank presence in this country—is not going to go this route. Unless you found something I didn't find in the last 10 days, they have no plans, particularly after the results of the mid-term elections, and particularly with the new influence of the Republican Party in Congress, to go this route. So the reality is whatever we do here, we'll be doing it alone if it exceeds that, unless we can negotiate with the Americans to change their view.

1. John Thurso: Just so I have got this straight our choice is: follow the Americans or give up being a banking centre?

Mr Villeneuve: I think that's drawing the wrong conclusion from what I said. You mean give up a banking centre, in the sense that we lose people?

1. John Thurso: We lose out.

Mr Villeneuve: In that sense, yes. We lose people, and it's simple. By the way, we were told in no uncertain terms that the banks that we saw in America already had their plan Bs worked out, so that's the way it's going.

1. Andrea Leadsom: In my past career, I used to write quantitative compensation schemes in a fund management company. It's always seemed to me that that a far more acceptable route is to force, if you like, to legislate for banks to have to have a quantitative compensation scheme. I think when they're making money and the risk is not high, it's a reasonable bet. The problem that I think we have is where people are taking enormous risks and being compensated, regardless of the risks that they're taking. I wonder if you could comment on that?

Mr Villeneuve: I think the remuneration boards need to do a lot more work on banks. I believe that they are doing more work on banks. That includes the US, by the way, because although they're not as hard-line as we are, the shareholders are beginning to get pretty agitated about some of this. So I don't think the remuneration boards should continue in the old way, I think they should set standards and benchmark properly and not just say, "Because he's paying that, we have to pay that", but look at risk and all sorts of other issues as well.

Chair: Drop us a line with the proposal to galvanise shareholders and we'll be very interested.

1. Mark Garnier: I want to keep on with the competitiveness of the City of London. The cost of financial regulation: do you have any estimates at all of what financial regulation is costing the City of London?

Mr Villeneuve: No. You seem to be another Frenchman like I'm a Frenchman, if I've understood your name.

Sorry, I don't. I have been trying to make an assessment of this. The answer is that when the financial crisis hit, the FSA roughly quadrupled the amount of work it was doing in each bank, so the amount of regulatory and back-office staff, that the banks had to take on to be able to respond to this increased substantially already at that point.

What is not clear is whether, as a result of these new proposals, there will be further increases. I am being told in the insurance industry, for instance—I sit on the board of an insurance company—the answer to that question was no, probably not. I have to see the detail, but they don't think it will affect it very much. The banks I have spoken to think they will have to make a few small adjustments. It won't be big, because the big adjustments have already been made, but I think, pending final review of all this, I don't know that we have the final answer. But you should not underestimate the ramp-up that's already taken place as a result of the process.

1. Mark Garnier: A four-fold ramp-up sounds quite sort of scary.

Mr Villeneuve: That's what has happened. It's done.

1. Mark Garnier: What on earth did they do before that? Was the FSA really that wrong?

Mr Villeneuve: They were more pragmatic in their approach to regulation than they are now. I think the—

Mark Garnier: I bet they regret that, in retrospect.

Mr Villeneuve: Yes. By the way, this is being replicated in other centres.

1. Mark Garnier: This is what I am coming to. What I'm particularly interested in is the cost of financial regulation in the city and the changes that are about to come through. Notwithstanding everything else that is going on, are they going to make the City of London less competitive compared with somewhere like Paris or Frankfurt or New York?

Mr Villeneuve: I don't sense this from the people I've talked to. Their concern is, "We are where we are now." They have had to ramp up already. One bank said to me, at a very senior level, "We're prepared to take a small extra cost, as long as the new system is efficient". So the efficiency is the thing they focus on more than the extra cost.

1. Mark Garnier: You have, to a certain extent, duplication of the regulatory system and if you're an investment bank, I think you're regulated by both the CPMA and the PRA.

Mr Villeneuve: Yes.

Mark Garnier: Again, that in itself must have an increase in the costs of regulation.

Mr Villeneuve: We need to look at the details of it. I imagine there will be some rate of increase, but how big it will be, in proportion to what has already increased, I don't know. I have to say, of course, that international banks don't just worry about what is happening here. They have increase in regulation all over the world, so if you take their regulatory costs as a whole, they have gone up massively, but I think they just see that as the cost of doing business.

1. Mark Garnier: I just want to get an idea of how expensive the cost of regulation is. Would you have any idea of what percentage of a bank's overheads are relevant to regulation, compared with everything else?

Mr Villeneuve: No, but I can try and get a figure for you on that.

Chair: Would you? We would be very interested.

Mr Villeneuve: Yes.

What I will say is this: that in the US, a typical bank—and I had this conversation the other day, actually—deals not with two or three or four, but with 27 different regulators and supervisory authorities, if you include all the exchanges. So they have the CFTC, the SEC, the Fed and the New York Stock Exchange, and so on. I won't go through the list, but there are 27, and the figure is bigger here. Of course, a typical European bank has to deal with regulators all over Europe, of which there are a greater or lesser number in different countries. So the proportion of the UK part of the regulation in all this—and I am not saying it is not insignificant, of course it's very significant—in the context of all the regulators that they have to deal with for an international bank, I'm not sure is that significant.

1. Mark Garnier: The gold standard we would be looking for, though, would ultimately be—following on from what you were just saying—a very comprehensive, efficient, but simple regulator: one regulator, one set of contacts, one department that is doing it, that covers everything without duplication or having to pick up 27 different telephone lines to go and talk to someone.

Mr Villeneuve: Yes, that would be nice, but I think the issue the banks have here—and I don't know whether I should go this route—is combining that with monetary policy. As you know very well, our Central Bank is going to be by far and away the most powerful central bank in the civilised world—maybe not; I don't know how China operates. Certainly in this country, it will be easily the most powerful, because it combines monetary policy with regulation. So in France and in Germany, monetary policy is done by the European Central Bank but here, it's done by them.

Now there is an issue of accountability here. To fire a central bank governor who is independent and responsible for monetary policy, you can do it, but it has a significant impact on sterling, possibly, or on the view of the international markets on the UK's standing. On the other hand, he also has a supervisory role now, so the question I think is: how do you hold him accountable for that supervisory role? Can you fire him without damaging his position as head of the monetary authority? I don't know how that's worked out.

1. Mark Garnier: You're opening a fascinating avenue of debate, which I am tempted to follow with the Chairman's permission.

Chair: We are running up against time, so perhaps if you have further thoughts on it, you can come back to us.

Mr Villeneuve: I'll raise the questions. I don't have the answers, but it's an important question which is not answered—

Chair: It is fascinating, I agree. It is curious that we've moved from having one of the weakest central banks in the world, just over a decade ago, to having the strongest.

1. John Cryer: The competition in the banking sector, or the lack of it, has been one of the greatest controversies in the last few years. Do you think any of the new bodies should have responsibility for promoting competition in banking and finance?

Mr Villeneuve: Yes, I think they should have responsibility for growth and competitiveness, which includes competition, as well as for financial stability and prudence, and they don't, as far as I know. By the way, I think the individual who is worried about pension funding, or savings or mortgage instruments, would benefit from the banks he goes to being supervised in that way, so that they're not just supervised from a prudential stability point of view, but they're also supervised from the point of view of are they providing the right range of instruments in a simple form to their constituency?

1. John Cryer: Do you think if the proposed bodies are purely going to look at what instruments they provide—[Interruption.]

Mr Villeneuve: Sorry, could you start that again? That's fine, thank you. Sorry.

John Cryer: Is that a spacecraft going off?

Chair: We still have tea trolleys in the House of Commons.

John Cryer: Yes, we do. Yes, we like things like that.

If the proposed bodies are purely concerned with the instruments, then will that be sufficient to promote competition, or does it have to go further than that?

Mr Villeneuve: I haven't seen papers that address this properly. All I have seen are papers that address the financial prudence and stability issues. I haven't seen papers that address the role of these bodies in, say, growth and competitiveness. I don't think I've seen anything that suggests that they do this. Maybe I haven't read all the papers properly but, for instance, just to take it at a very crude level, the Federal Reserve Bank in the US is responsible for growth as well as for financial supervision. The Bank of England absolutely is not. Now, the question is, as a result of this new structure, do you change that? Do you then spread it beyond economic growth responsibilities, to at least take them into consideration, to competitiveness, take that into consideration, and how far do you go down the competition and competitiveness route?

1. John Cryer: How would you go down that route?

Mr Villeneuve: I would go down that route. Given the huge remit that this organisation has now, you could have a serious mismatch between an organisation that is totally focused on financial prudence and the impact on economic growth, competitiveness and the range of products that are being provided to the consumer.

1. John Cryer: How would you promote competitiveness? It might not be in any of the papers, but how would you do it if you had a free hand?

Mr Villeneuve: Well, I think—this is a long question—if you would prefer, I will try and do a written submission on that. What I'm saying is you should develop criteria to do that. I'm not personally expert enough to tell you off the top of my head what those criteria should be, but I'm saying that, in addition to financial prudence, there should be criteria on economic growth, competitiveness and competition.

John Cryer: I think we'd all be interested to see that, wouldn't we?

Chair: Very much so.

1. John Cryer: I'll tell you what springs to mind, and this is relevant. When Northern Rock was rescued, the EU rules meant that the Government had a responsibility to make it less competitive. That was the bottom line. It had to be made less competitive. At the same time, Alistair Darling, while having to make it less competitive according to EU rules, of course had to try and make it a going concern. Now, when you have rules applied like that, it seems to me that is just round the bend. So, I can't see us going down that sort of route.

Mr Villeneuve: I like the first part of your question, if you see what I mean, and I would think that we'd have to look very closely at how we could encourage these things. I think a narrow remit for these bodies is not a good idea. I don't think in the end it would produce the environment you want, and I'm not even sure it would de-risk things, because if you look at financial prudence too narrowly, you don't necessarily end up de-risking everything.

1. John Cryer: Do you think British banks are now too big to fail?

Mr Villeneuve: Well, too big to fail is interesting. Was Northern Rock too big to fail?

John Cryer: Apparently.

Mr Villeneuve: Yes. So the answer is "yes".

1. John Cryer: Yes, and do you think that is a good thing?

Mr Villeneuve: No. I mean, I think it's an interesting question, because when people talk about "too big to fail", they're talking about the big banks, and when they talk about SIFI — I've forgotten, it's an acronym basically for the big banks—Systemically Important to Financial Institutions, I think it stands for. When we look at SIFIs, we're talking about 50 or 60 banks globally. But effectively, Northern Rock was a SIFI, because it was considered important enough for the Government to step in and rescue the whole thing. So you wouldn't have said that was a systemically important bank, but it turned out to be very much in the UK interest to rescue it.

1. John Cryer: I think it was too big to fail, and I think that the Government was right, but the last time there was a run on a bank was, as you probably know, was Overend, Gurney in 1866. That was allowed to just go down the tubes. Now, that could not happen today. It simply couldn't happen.

Mr Villeneuve: When you see queues round the block of branches on television, it becomes too big to fail.

1. Mr Mudie: Yes, I was interested in what you said about the bank pay, the bonuses and so on, because I have thought since we started this, that whatever position we took on regulation, in all its aspects, we may have to roll back when we see what our competitors are doing, and you've mentioned American terms of bonuses and even central banks. What other areas do you think we may have to roll back on, in terms of stances we've taken so far?

Mr Villeneuve: On remuneration?

Mr Mudie: No, on general dealing with the crisis and changing the regulatory structure.

Mr Villeneuve: I think we have to look very much at the detail I was talking about earlier, about how we're represented on the European bodies. What I didn't say, of course, is that I think we've done a poor job in making sure that we have the right people in the Commission and on these new bodies, and I have evidence for that. In fact, I brought the figures with me. Just to give you a crude example, Britain has 2.9% of the people who work in the European Commission, Italy has 6.1%, Spain has 3.8% and Germany has 4.6%. More worryingly, if you look at the grades of people coming in—in other words, the new blood that is coming in—we're the lowest by far. We're roughly equivalent to Lithuania in the number of people now coming into the Commission from the UK. The result of this is we don't have the right people in position there. I don't think we've done a good job on this and I think we have to sharpen up our act. That's not in any of the papers that I've seen.

1. Mr Mudie: On that, when you were speaking about that first, you said you had set up this group in Paris, and they worked out a strategy, of which this was one particular point which you raised. Is this strategy in writing and are there other areas listed?

Mr Villeneuve: Sorry, I didn't understand the strategy one.

Mr Mudie: You were speaking about how well the French had prepared for it in Paris, and you said they had a strategy; you raised one point and expanded on one point. That wasn't the only one point in the strategy, was it?

Mr Villeneuve: Oh, I see. Well, if you want a letter with more examples, I'm happy to give them.

Mr Mudie: That would be very helpful, thank you.

Chair: Thank you very much for coming before us today. You've been asked to provide a lot of further written information, but it's such a vast area, I hope you understand those demands.

Mr Villeneuve: Of course. We do it with pleasure.

Chair: We're very grateful. Thank you very much indeed.

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Prepared 3 February 2011