To be published as HC 224 -i




Treasury Committee

Appointments of Dame Clara Furse, Richard Sharp and Martin Taylor to the Financial Policy Committee

Tuesday 4 JUNE 2013

Dame Clara Furse DBE

Richard Sharp

Martin Taylor

Evidence heard in Public Questions 1 - 111



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Oral Evidence

Taken before the Treasury Committee

on Tuesday 4 June 2013

Members present:

Mr Andrew Tyrie (Chair)

Andrea Leadsom

Mr George Mudie

Mr Brooks Newmark

Jesse Norman

Mr David Ruffley

John Thurso


Examination of Witness

Witness: Dame Clara Furse DBE, Financial Policy Committee, gave evidence.

Q1 Chair: Good morning. Thank you very much for coming in, Dame Clara. Could you begin by telling the Committee how you would respond to the suggestion that your appointment represents an attempt to implement a more Treasury-friendly policy at the FPC?

Dame Clara Furse: Sorry, can you repeat the second bit? I didn’t hear all of the question.

Chair: The allegation has been made that the changes that have taken place on the FPC represent an attempt by the Treasury to secure more Treasury-friendly policies.

Dame Clara Furse: Okay. That is a surprise to me.

Q2 Chair: You don’t know anything about this? You haven’t noticed any of the press coverage on it?

Dame Clara Furse: There was apparently something in The Sunday Times one weekend and I missed it because I wasn’t in the UK, but I haven’t paid much attention to it. Perhaps I should have paid more attention to it.

Q3 Chair: I think it might be helpful to start paying attention to it, Dame Clara, yes. Are you able to tell us about the approach you will take to the job, in a way that can give us comfort on the point of independence?

Dame Clara Furse: I spoke to the recruitment consultant about the role on the FPC, and I have always been very interested in macroprudential policy. One of the lessons for me from the crisis was the fact that we do operate within a very dynamic financial network that is global, and it was pretty clear to me that we run major systemic risk if we have a very open economy, which we do in the UK. Therefore, the idea of playing a role on a body that is responsible for macroprudential policy was very interesting to me.

Q4 Chair: Yes, the subject matter is very interesting. We want to know whether you are going to approach it in an independent way and whether you can give us any comfort on that point. Have you given any thought, for example, to the question of leverage and of whether the FPC should be given the authority to set the leverage ratio?

Dame Clara Furse: Obviously this is a major discussion at the moment. I think the FPC already has a couple of pretty powerful tools. Whether it needs another tool I think is something that is clearly on the agenda. The question is really one of timing. Currently the timing looks like 2018.

Q5 Chair: Before 2018 there is going to be a review to decide whether to hand it over. Were you aware of that?

Dame Clara Furse: Yes, I am aware of that.

Q6 Chair: So it is not in fact the case, is it, that the question is only one of timing?

Dame Clara Furse: It is clearly a live discussion at the moment. I think we should wait and see how effective the tools we currently have will be before we take on another tool. That is my position at the moment.

Q7 Chair: You disagree with the view of the Treasury Select Committee that the power to set the leverage ratio should be handed to the FPC?

Dame Clara Furse: My understanding is it will be handed to the FPC, and the question is whether it is handed to the FPC sooner or later, and whether we stick with a European agenda on timing or bring this forward. So it is not clear.

Q8 Chair: The only question, as you understand it, that the review should examine is whether it should be handed over in 2018 or at a subsequent date?

Dame Clara Furse: Yes.

Q9 Chair: It has no other responsibilities? That is the purpose of the review as you understand it?

Dame Clara Furse: The FPC can request additional tools if it feels it needs them, and as long as the request is-

Q10 Chair: I want to be clear what you think this review is doing, because you come before us telling us, very clearly, that you think the review should not be there to determine whether the FPC should be given power over the leverage ratio.

Dame Clara Furse: My understanding is that the FPC will have power over the leverage ratio. This is part of the new regulatory environment in which we are operating, so it falls out of CRD IV and it is a question of whether we do that ahead of the European timetable or in sync with the European timetable.

Q11 Chair: That is 2018, isn’t it?

Dame Clara Furse: That is right.

Q12 Chair: So, what is the point of having a review immediately prior to it?

Dame Clara Furse: Because we may decide that we need it earlier. We may request it earlier.

Q13 Chair: A few months earlier? The review is-

Dame Clara Furse: Or a few years earlier.

Q14 Chair: Do you think the review should take place earlier than 2017?

Dame Clara Furse: I think it should take place earlier than 2017 if it is clear that that is warranted by events in the marketplace.

Q15 Chair: What is your view?

Dame Clara Furse: My view is that we don’t need it now, that we have two tools: we have the power of recommendation and we have the power of direction. We can make recommendations to the Treasury. We have pretty extensive powers, and I think we need to establish that we can use those and we can use them well. Clearly, we need to be able to request additional powers because circumstances warrant it.

Chair: That is clear. Thank you, Dame Clara.

Dame Clara Furse: I am slightly concerned, Chairman, that I did not answer your question about independence.

Chair: Not really, no, but I had a couple of goes and then moved on to leverage.

Dame Clara Furse: I didn’t quite understand where you were coming from on that because-

Q16 Chair: You have a view on it, yes?

Dame Clara Furse: I do have a view on it, which is of course I will be independent.

Chair: That is a step forward and we have some reassurance.

Q17 John Thurso: Can I ask you about your time at Fortis?

Dame Clara Furse: Yes.

John Thurso: You were a non-executive director there between 2006 and 2009. Can you tell me what particular, if any, responsibilities you had, and which committees you were on and what generally you were doing?

Dame Clara Furse: Yes. I was a non-executive director on the board of Fortis. I was also a member of the risk and capital committee. Fortis had a risk and capital committee before that became a standard practice in the UK following the Walker review. I was part of the board that approved the transaction to acquire ABN AMRO’s retail assets in Holland. The reason I was happy to approve that was because Fortis was acquiring high-margin, high-quality, low-risk retail banking assets, and that transaction was approved in October 2007.

The board did take advice at that point, because it was clear that some kind of storm was beginning to brew on whether it could withdraw from the transaction. The legal advice we received was that we could not, and what then happened was that we got caught up in major execution risk around the funding programme to complete the transaction as markets disintegrated. The net result of that was a state-organised breakup of Fortis, which was devastating for shareholders. Shareholders lost enormous amounts of value, which I deeply regret, but actually taxpayers have done quite well out of it. So the state-organised breakup has meant that the Belgian Government, for instance, owns about 10% of BNP Paribas now and the taxpayer has come out of it quite well.

Q18 John Thurso: Sorry, can I just doublecheck we are talking about the same deal? This high-margin, high-quality, low-risk acquisition was the same one after which the CEO of the partner you had in that, RBS, had to give up his knighthood, and then the bank had to be 83% nationalised, and if I remember, Fortis was fined in 2010 for its actions in 2008, its mis-statements in relation to the market, for giving false information. Are we talking about the same deal?

Dame Clara Furse: Obviously both are bank failures, but there were some key distinctions, I think, between the two. The first one, as I said earlier, was that the transaction was to buy a business. I am not saying the transaction was low risk-there is never such a thing as a low-risk transaction-but the business it was buying was low risk, high quality, high margin: it was a retail banking business. I think the second key distinction-if you look at what the risk and capital committee were looking at very carefully in the run-up to the transaction and throughout the execution process-was solvency. Fortis had relatively high core tier 1-it was 7.4%. Relative to its peers it had very high solvency. This was not a solvency crisis.

Q19 John Thurso: That presumably was its risk rating. What was its leverage ratio?

Dame Clara Furse: Relatively low. I don’t remember that off the top of my head, but core tier 1 was 7.4%, which by industry standards was very high. Its secure-

Q20 John Thurso: Yes. The industry proved to be somewhat wanting right across the board. The interesting point is that those with less leverage are the banks that have come through, so it would be interesting for you to have known what that was.

Dame Clara Furse: The problem for Fortis was that €13.2 billion of the €24 billion that had to be raised was raised through equity, and the balance was subject to a funding programme that was supposed to take place during 2008, and we all know what happened during 2008.

Q21 John Thurso: Sorry, I just want to doublecheck this. What you are actually saying is the purchase would have been a good purchase if the funding for the purchase had been in place. It was the funding of the transaction that was the problem, not the purchase of the business. Is that the core of the issue?

Dame Clara Furse: That is correct. The other key difference was that Fortis also had a lower than average structured credit portfolio relative to peers, and a very small subprime portfolio relative to peers. It was worth less than €2 billion in mid-2008. So it was not about toxic assets and asset quality. It was not about solvency. It was about the execution of the funding plan during a year when the market disintegrated. As Fortis went to the market to try to explain what it was doing to reconstitute the funding plan, confidence collapsed. We had three CEOs in three months and then, of course, when Lehman went down the liquidity support, the liquidity relationships between the bank and the rest of the market began to disintegrate. Added to that was the complexity of being a Benelux bank with three Governments having an interest in Fortis. So there were some very complex negotiations at the end of the process between the board and the Belgian and the Dutch and the Luxembourg Governments and, as I said, the net result was a state-organised breakup that was devastating for shareholders but has turned out to be quite good for taxpayers.

Q22 John Thurso: As a non-executive director, and as a board, what do you feel might be appropriately seen as the responsibility of the board as opposed to the circumstances in which you were operating? In other words, what responsibility do you and your board colleagues take for what happened?

Dame Clara Furse: We take responsibility for it. The board has responsibility for a company’s strategy and the successful execution of that strategy.

Q23 John Thurso: Let me put it another way. What lessons would you take to considering financial stability from that experience?

Dame Clara Furse: The very obvious one is that, no matter how well considered and well planned, there is always major execution risk around a major transaction, and safety first has to be the starting point. In other words, if Fortis had raised all of the capital that it needed through equity then this would not have happened.

Q24 John Thurso: So the lesson is that in large transactions, setting out to make the purchase and hope you will get the money to do it at a later date is not the best way to behave?

Dame Clara Furse: No, because the assumption that was made was that certain high-quality assets that were going to be sold could be sold.

John Thurso: Could be sold.

Dame Clara Furse: Of course they were sold, but they were sold at a much lower price than the executive had anticipated.

Q25 John Thurso: All right. One last question, if I may. It has been suggested in some press articles that, because you were on the board of Fortis at the time, it puts a question mark over your candidature. Can I give you an opportunity to respond to that?

Dame Clara Furse: I would say it is relevant experience. It certainly sensitised me to all sorts of extreme risks in a way that I think might be quite useful.

Q26 Chair: You will understand that the reason we are asking these questions is because we want to make sure that you will not bring the same misjudgments, which the board of Fortis and others appear to have made at that time, to your current job, but that on the contrary you have picked up a lot from this experience, in which case, like a general who lost a battle but has now learned to fight the next one, you can make a bigger contribution this time. Have you anything further you can say that can give us that confidence, that you are the general?

Dame Clara Furse: I would say that I have been involved in a lot of corporate activity in my career. I had a lot of interesting corporate experiences at the Exchange, and of course I led the merger with Borsa Italiana. So I do understand the risks around major corporate transactions, and I understand those risks obviously far better now than I did in 2007 when that transaction was approved.

Q27 Chair: Can you give us in a few sentences something more concrete beyond giving us a reassurance to grapple with there?

Dame Clara Furse: I am not sure what else I can say. The only thing I can say is that clearly it was a searing experience for everyone involved, in particular the shareholders. There were certainly some new lessons for me. One was around the complexity involved in cross-border transactions. I think this is relevant to us in London, because London is a global financial services centre. One of the things that became clear throughout 2008, which became a huge risk factor for Fortis, was the fact that the Dutch Government, even though they provided all of the necessary approvals for the transaction, were clearly unhappy with the idea of Fortis taking control of ABN AMRO. There were some very small signs of that difficult relationship between the executive and the Dutch authorities that, in retrospect, I suppose we could have picked up earlier.

Q28 Mr Mudie: Dame Clara, when I ask you the questions could you raise your voice slightly? I am sure I am the only one in the room, but I am having difficulty hearing you and I am very anxious to do so.

Dame Clara Furse: Yes.

Q29 Mr Mudie: In your paper to the Committee-I will quote you-you said that, "An evaluation of the importance of the Committee’s secondary objective in underpinning financial stability may be a key challenge in the near term". What exactly do you mean by this?

Dame Clara Furse: What I am trying to say is that there are signs of a modest economic recovery, and I think it is important that what the FPC does does not undermine that recovery. The reason I say that is because I think there is a relationship between financial stability and growth. At one point the remit to the FPC says "can and should be", so those two objectives-the objective to ensure financial stability and the objective to support the Government’s economic objectives-can and should be complementary. What I am trying to do when I say that is make the link between the purpose of financial stability, which is to achieve financial security, and the way you achieve financial security, which is through sustainable growth.

Q30 Mr Mudie: There is some argument about that, isn’t there? There was the fear that financial stability would be stability of the graveyard, and the linkage to economic growth was to persuade them to be a bit more ambitious than that. That was the Chancellor’s objective. It rather suggests that the suspicion that the three members before us today are Chancellor’s people who might be prodding the Bank of England and the Financial Policy Committee to be a bit more activist. Is there any truth in that?

Dame Clara Furse: Not from my perspective there isn’t. What I am interested in is the outcomes, in other words the purpose of ensuring financial stability. It isn’t an end in itself, in my view. The purpose of having financial stability is to ensure that we can have sustainable growth.

Q31 Mr Mudie: But the argument is you can get financial stability with 2 million unemployed, and the Holy Grail is to get financial stability but growth and full employment without inflation.

Dame Clara Furse: I do not think financial stability is sustainable in the medium term without an element of growth. It is about the symbiotic nature, I suppose, of the two objectives.

Q32 Mr Mudie: The second thing I want to raise with you is, you raised that the main danger to financial stability seems to be regulation in your view. You quote it as the main danger, "The accumulation and interaction of numerous, rapidly changing and uncoordinated regulatory initiatives from around the world". That is a possibility, but I could list about half a dozen other things that I would put higher than that and more worrying than that, that the regulators get over-zealous.

Dame Clara Furse: The point I am making there is that an awful lot is happening in terms of regulation, and that there are numerous regulatory initiatives that will come together and interact in a way that I think the FPC needs to consider, because there will be consequences that will otherwise surprise us. We have obviously had huge progress on regulation in the last few years, but if you look at the progress that has been made it is really very impressive. We have had a huge shift on capital, on liquidity. We have leverage coming down the road. We have the net stable funding ratio as well. We have all of those that bite on a bank’s ability to fund itself competitively in a way that enables a bank to lend to the economy. On top of that, we have a lot happening in derivatives, a lot happening in clearing and settlement. We have the prospect of a financial transaction tax. We have changes to compensation. We have a lack of coordination, particularly on derivatives regulation, between the US authorities and the European authorities. This is a real concern because there will be lots of unintended consequences. I think it is important, when the FPC considers its strategic priorities, that we assess the strategic context within which we are operating, because we want to ensure that what we are doing achieves the results that we are aiming for.

Q33 Mr Mudie: Andrew Bailey said that we shouldn’t be fighting the last war, and he thought the FPC had to ask hard questions about the structure of the financial system. What do you think the most important questions are about the structure of the current financial system that the FPC should consider and give priority to?

Dame Clara Furse: He may have been referring to clearing and settlement infrastructure. This is obviously on the agenda, so it will be hitting the FPC agenda at some point in the future. That is obviously important because a central counterparty will be dealing with far more business in future, as a result of the new derivatives regulation. That is part of the essential structure of the financial network that we need to look at.

Q34 Jesse Norman: Dame Clara, I came here with an independent mind. I must say, I think your testimony has been amazingly unimpressive. You have not been aware of any of the concerns, it appears, that this Committee has had about the independence of members of the FPC. You seem to be very cool, and indeed disengaged, on the issue of the leverage ratio, which is the crucial question that is raised with the FPC at the moment. You have defended Fortis as though it was a matter of financing, whereas in fact we know that the great lesson of the Fortis transaction was, don’t buy a bad bank when the markets are collapsing around you, as they were in 2008. So I just want to say that, as matters presently stand, I shall be thinking very seriously about whether I could possibly support this nomination.

Let me ask you two very quick questions. First, how much information did you have access to, as a board member, when you were voting on the merger of Fortis and the purchase of ABN AMRO? The second is, were you concerned about the level of due diligence, who were your advisers and how much did you interrogate them, and where did you express that concern?

Dame Clara Furse: Let me start with your three points. I think you made three points. The first one was about my independence. I do object to that. I don’t think there is any evidence at all that I am not independent or would not be independent.

Jesse Norman: I did not say that, actually. That was not the question I raised.

Dame Clara Furse: The fact that I missed a Sunday Times article because I was away I do not think indicates that I am not interested in this. Of course I am interested in anything that suggests that I might not be independent, so I would like to state again that I am independent.

The second point on leverage is simply that I appear not to agree with the views of the Treasury Select Committee on this. I do not think it is an urgent requirement for the FPC to have the leverage today.

Q35 Jesse Norman: Do you not think it is a central question about whether or not you have the capacity to take away the punchbowl when markets are getting overheated? Is it just the same as every other issue from your point of view?

Dame Clara Furse: I am saying it is another tool that I am not convinced that we need today. That is what I am saying. There are lots of different views on this, and that is my view at the moment.

Q36 Jesse Norman: What was overall bank leverage in the year 2000? In this country what was the bank leverage?

Dame Clara Furse: Far too low.

Jesse Norman: Just roughly, as a multiple of capital.

Dame Clara Furse: 2%.

Jesse Norman: No. That would be 25 times. It was 20 times, and what was it in 2007? It was 50 times.

Dame Clara Furse: Yes.

Q37 Jesse Norman: The leverage ratio went from 20 to 50 times over seven years.

Dame Clara Furse: Yes, I know.

Jesse Norman: You think it is just another question?

Dame Clara Furse: I don’t think it is just another question. I think it is another potential tool for the FPC. Well, not potential, it is a tool that the FPC will have at some point in the future. The question is, when will it need that additional tool? That is my view. I may change my view. That is my view at the moment.

Q38 Jesse Norman: On the transactions?

Dame Clara Furse: On Fortis, I am sorry that I need to repeat this, obviously. Fortis did not buy a bad bank, it bought a good bank. That was why I was happy to approve the transaction. There is a huge difference between high-quality, low-risk, high-margin assets in a retail bank in Holland and what RBS was acquiring.

Q39 Mr Ruffley: I just have one question, Dame Clara, on independence. Who interviewed you for this post? Did you speak to the Chancellor of the Exchequer in an interview, or was it just Sir Nicholas Macpherson? Who interviewed you?

Dame Clara Furse: There was a panel consisting of two people from the Treasury and Baroness Hogg, who I think is on the Treasury board.

Q40 Mr Ruffley: Who were the two from the Treasury?

Dame Clara Furse: John Kingman, Charles Roxburgh.

Q41 Mr Ruffley: Final question. How many times, either in a formal setting or a social informal setting, have you met the Chancellor of the Exchequer in the last 12 months?

Dame Clara Furse: Not once.

Mr Ruffley: Thank you.

Chair: Thank you very much indeed, Dame Clara. We are going to go straight on to the next session, which is with Richard Sharp.

Examination of Witness

Witness: Richard Sharp, Financial Policy Committee, gave evidence.

Q42 Chair: Mr Sharp, you will have seen the press reports about your donations to the Conservative Party.

Richard Sharp: Yes.

Chair: One of the issues that you need to reassure the Committee is that those donations do not in any way imperil your independence. Perhaps I could invite you to comment.

Richard Sharp: I intend to be, and I will be, completely independent in fulfilling my duties as a member of the FPC. The overriding issue for the FPC is to play an incredibly important role to protect the nation with respect to financial stability, in the context of the problems we have had in the past, and to get the balance right, in terms of some of the issues we face presently, both as a nation and as a result of the global dislocation that is happening. That is of overriding importance, and that will be of paramount importance in executing my role.

Q43 Chair: Do you think that it has created a perception that your independence may be compromised?

Richard Sharp: Having been a donor to one party, I think it is perfectly legitimate for this question to be asked. I can give you my assurance that I will be independent. In addition, you are aware that the FPC is going to be scrutinised and I am prepared to answer any questions to verify my independence to you.

Q44 Mr Mudie: Who interviewed you was the same as for Dame Clara?

Richard Sharp: Yes.

Mr Mudie: Can you go through the names, because you talk a bit deeper than Dame Clara and it will be useful?

Richard Sharp: Charles Roxburgh, John Kingman, and there was Baroness Hogg as well. There was also a fourth member of the Treasury in the room, I think, taking notes.

Q45 Chair: Who approached you initially?

Richard Sharp: I was approached by head-hunters initially.

Q46 Mr Mudie: So you were approached. Was there a public advert or something, or were you approached?

Richard Sharp: I get approached quite often by head-hunters. I have been approached in the past, with respect to a Bank of England position, by a head-hunter. I was not surprised when I was approached. I thought about it and decided to apply.

Q47 Mr Mudie: So you put in a written application-you were invited to put in a written application?

Richard Sharp: Yes, I did. Yes, absolutely.

Q48 Mr Mudie: What was your understanding of Baroness Hogg’s role? Why was she in the room?

Richard Sharp: I understood Baroness Hogg’s role there was as a non-executive member supervising the Treasury to make sure their processes were appropriately followed.

Q49 Mr Mudie: You had an earlier role, I think, somewhere in the papers, in terms of, was it the DTI or was it the Treasury, similarly?

Richard Sharp: I was approached to play a role as an independent member as part of the prior spending review where they had a concept called the Independent Challenge Group, where I worked with two civil servants in looking at a Department’s spending plan to try to see and evaluate what the opportunities were for them to create a budget for themselves that would conform to the Treasury’s aspirations with respect to the then spending review. I worked with a civil servant from the Ministry of Defence and I worked with a civil servant from the Home Office, and I reported to the Chief Secretary of the Treasury. I was one of three external independents as part of their process.

Q50 Mr Mudie: You were approached by head-hunters or direct from the Treasury?

Richard Sharp: For that role-I will have to come back to you on that. I have actually forgotten. That was some time ago.

Q51 Mr Mudie: Do you remember filling in an application form or anything?

Richard Sharp: For that role, no.

Q52 Mr Mudie: So it was just casual. For example, Baroness Hogg is married to an ex Cabinet Minister, is it, certainly a Conservative Member of Parliament, and she was a special adviser for Kenneth Clarke when he was Chancellor. Do you think the fact that you gave this money, and you clearly have close connections to the Conservative Party, was useful or a hindrance to you in getting both of these posts?

Richard Sharp: I don’t think it was relevant. When I applied before for a position at the Bank of England my application was not taken any further. I also had been approached for another position to apply to work at the BBC as a non-executive and my application was not taken any further. So I am quite content that the processes that are adopted are objective, and obviously you will have to talk to Baroness Hogg about her approach. In addition, it was a highly competitive process, as I understood it from the head-hunters, for these positions.

With respect to the other allegations you make about Baroness Hogg’s independence-

Q53 Mr Mudie: Sorry, what allegations are you suggesting I made?

Richard Sharp: Her marriage. You said her marriage might compromise her independence.

Q54 Mr Mudie: No, I asked for your opinion. I did not suggest that. I said, did you think it was a help or a hindrance-why does that become an allegation?

Richard Sharp: Maybe I misheard you. I thought you stated that the fact that she was married to a Conservative MP meant that she might not be independent.

Q55 Mr Mudie: Going for an independent post, that the adverts stress the individuals must be, I think it is a bit tactless to have the main non-Treasury interviewee so closely connected to a political party. Regardless of who the individual in front of you is and the political party, it seems a bit insensitive to do it, and places you in a position you would not wish to be in. You would rather be considered on your individual merits and history.

Richard Sharp: I believe I was considered on my merits. Maybe I flatter myself that I was considered on my merits.

Mr Mudie: Yes. I think you were unfairly treated, insensitively treated by some of your earlier friends in the party you contributed to.

Richard Sharp: Okay.

Q56 Mr Newmark: Mr Sharp, just to counter Mr Mudie’s points, all I care about is your skill sets. From people that I know at Goldman, I know you have an extraordinarily high reputation and you reached the dizzy heights that you did at Goldman Sachs because of your talents. So I am interested in focusing on dealing with the challenges the UK faces rather than on who you have given money to and who you are friends with. You said that one of the most significant risks to financial stability facing the UK is operational risk at systemically important institutions. Is this in relation to large individual trading losses such as JP Morgan’s London Whale losses?

Richard Sharp: Yes, I think it is. It certainly is. We also have other examples-UBS, and the challenges that HSBC has faced in its operations in Mexico. I think one of the legitimate issues when we move beyond "too big to fail" is "too big to manage", and particularly in the context of financial institutions that may be operating on very little capital in relation to some of the risks they face. When you read the CIO report, the full board report, on JP Morgan-and I would encourage you, if any of you have not read it, to read it-it is a very chilling report, in the context of an extremely well run organisation and how information, as it has to pass through layers of command, can be distorted so that risks are not understood where they need to be understood within the organisation. That obviously begs the question how even the regulator can be on top of that, if the organisation itself can’t be on top of some of those risks.

Q57 Mr Newmark: I am throwing this out: do you think that this is a problem generally in banks? I spoke to somebody at Bear Stearns who was very senior on the board who said to me that none of the main board members understood how the derivative traders were making the money that they did, even though a significant portion of their profits were being made there. Do you think another sort of challenge that banks have is that people get promoted through the system on areas of responsibility but don’t quite understand where the people below them are making the money and therefore don’t understand the risks associated with that?

Richard Sharp: I think a major issue of the quality of governance in large financial institutions is, do they have the information, do they have the expertise, are they able to exercise the role that they need to play to protect the institution? Take the risk committee of an organisation, for example. A non-executive who is sitting on the risk committee of a very large organisation is ill-equipped to really understand the details of what sits in a multi-trillion dollar derivatives portfolio. I worry that the auditors are ill-equipped to see what is in a multi-trillion derivative portfolio. I think the JP Morgan experience also indicated that even the executives were ill-equipped to see what was in a multi-trillion portfolio.

Q58 Mr Newmark: Do you view yourself as poacher turned gamekeeper in coming into this role?

Richard Sharp: No, I don’t entirely, because one of the things that I do believe is that we within the FPC have a shared interest with the non-executives on the boards of the companies. I think in terms of protecting shareholder value there is no doubt that the risks that have been borne by shareholders have destroyed a lot of value. I do think the non-executives have a shared interest with us, so it is not just polarised as poacher turned gamekeeper. What I hope is that through some sophistication that I have I can help with this.

Q59 Mr Newmark: If I can just drill down for a second there. You have identified there are operational risks. Those operational risks probably still exist today. If you were to identify three tools at your disposal to focus on when you are on the FPC to deal with these risks-that is what I am concerned with and that is what I think members are concerned with here; it is what the public is concerned with so we don’t repeat the mistake again-what would those tools be, given your experience?

Richard Sharp: If we go back to Basel I, the simplicity of leverage is one of the most important tools. I do believe that we need to move to a system where if organisations choose to conduct highly complex transactions on operating environments where capital is dispersed, that simple leverage and capital protection need to be in place to protect the nations within which they operate and the taxpayers of those nations. I think it is also in the interests of the shareholders.

Q60 Mr Newmark: One final question-if I am straying, Mr Chairman, slap me down. There are reports coming out in the media that RBS is to be split between a good bank and a bad bank. What do you think of that?

Richard Sharp: I think the question is, what is the goal, and there may well be a number of goals. There is obviously a value issue for the citizens, there is the question of what is the financial strategy and the effectiveness of RBS in the economy and to what extent it is constrained by the legacy of a bad portfolio as it tries to work it through, and there is also the question of competition as to whether or not too much activity is concentrated in one bank. There are a number of issues that need to be addressed in assessing this. RBS themselves would also, I am sure, add these in terms of the timeframe or the cost associated with it. However, certainly history has shown, for example within the Scandinavian context, that the removal of the bad bank assets does allow a bank to operate more effectively. It is slightly complicated by the fact that there is a minority interest of non-Government shareholders who may then get a gift if the Government in some sense absorbs it, but we have also seen in Japan the consequences of-

Q61 Mr Newmark: Yes, but who holds those toxic assets? At the end of the day it is the taxpayers, so other shareholders, other people who are there are benefiting from that. Yes, there is hopefully a better propensity for the bank to lend-that is one of the arguments, that it has a cleaner balance sheet-but on the downside UK plc, which is ultimately taxpayers as the shareholders of UK plc, is stuck with a bunch of toxic assets that look like they are continuing to diminish in value rather than accrete in value.

Richard Sharp: I would argue at the moment they own 85%, or whatever that percentage is, of it anyway, so that is why I think there is a broader issue of what is in the interest of taxpayers. I don’t have all the data, I don’t have the facts, and I would quite happily discuss it further with you when I have the facts, although the FPC’s remit is not to focus on any one organisation.

Q62 John Thurso: Can I ask a quick follow-up question to George Mudie’s questions? It is a matter of open record, it is in the register that you have been a donor to one political party for a number of years. How do you give us an assurance that you are independent in the terms that all of the appointments we have made to FPC, MPC and all the others are independent? I think you are the first person in my seven years of doing these hearings who has that in their public record. How do you straightforwardly deal with that?

Richard Sharp: The context in which the FPC is operating is that we have an unresolved European debt crisis; we have an experiment in regime change in Japan, which it is possible could have serious implications for the banking system; we have growth in the UK, which even the OBR a year ago, for this year, missed its forecast by two percentage points; we have low growth; we have a Government debt level that is certainly a difficult issue; we have a public sector deficit that may be the highest in the eurozone for this year; and we have an FPC that is charged with financial stability and is seeking to bring on board external members who bring some expertise. My paramount concern is to make a contribution to financial stability in this country and to bring that expertise to bear. That is my paramount concern. I can’t deliver the counterfactual to you. All I can tell you is that I will be observed and I will operate that, and I will be accountable to you.

Q63 John Thurso: Thank you. Secondly, can I follow up on the answer you gave to Brooks Newmark, which I thought was quite fascinating when you said that basically-and I may have this slightly wrong so do correct me-the interests of the FPC and the interests of non-executive directors of banks should broadly be aligned. It is a very interesting thought. Clearly in the past, had the FPC existed, that would not have been the case because the non-executives were completely in a different space. Secondly, it is quite clear that boards of banks in following shareholders have not supervised their balance sheets and the overall general stability of their organisations in the way that they should have. I would like to just explore the statement that you made and ask you whether it is that if the FPC is working well the non-executives should be grateful or whether the FPC should be following the way non-executives think, which would be a different thing and one that I would think much more questionable?

Richard Sharp: I should be a little bit more specific than I was to Mr Newmark. This is a moment in time when we are aligned with non-executives. I can envisage circumstances where there is exuberance and there is a failure to anticipate risk, where in pursuing profits with a high multiple there could be a sense that a countercyclical constraint from the FPC is actually reducing the shareholder value in the short term. If we put our minds back to 2006 when the Royal Bank of Scotland was contemplating ABN AMRO, at that period of time had the FPC moved against what the shareholders were pressing for, which were synergistic acquisitions, we would not necessarily have been in tune with the non-executives as they then saw it.

Q64 John Thurso: That is a very important qualification. I am glad you made it, because of course the important thing that we are looking for is precisely that action from the FPC when the moment comes. That brings me to my final question. In your answers to questions from us, you had one in which you said it would also be useful to have a tool to adjust the minimum leverage ratio for the UK banks. How important do you think that tool is, when do you think it is likely to be required, and why do you think that the Government is so resistant to giving you that tool?

Richard Sharp: First of all, I should say I have not had my first meeting yet, so I am learning in terms of how the Bank of England operates, but I do believe from what I have seen, and you will have seen from the recent announcement, that the Bank of England is operating effectively in terms of looking at banks and requiring them and pushing them to build up capital, and having a dialogue with them that is very constructive in that direction. Secondly, I would agree with Dame Clara that the toolkit that the FPC has needs to be both put into operation and fine-tuned. Do I believe that a logical part of that toolkit can and should be leverage? Yes, I do. Do I think that it is absolutely required now? No. Would I prefer that we had it? Yes. I happen to think that we have a moment now where the markets are somewhat benign and there are still risks ahead of us that are unresolved. So it would be good to see more capital coming into the banking system but I don’t sense that there is a frustration at the Bank of England or the PRA in terms of their dialogue with banks to obtain more capital.

Q65 John Thurso: I agree with you it is not needed now. We are in a capital building phase and that is taking place over time. The concern is that if we get back to more exuberant times and you do not have the tool then it will be very difficult to actually give you the tool. The pressure will come on, the lobbying will come on, and it may well be that people say, "It has worked fine without it, so why do it?" The benign conditions we have now seem exactly the right moment to put in place tools that may never be needed-because they exist they may never be needed, whereas if they don’t exist they may be needed. Is that a view that finds sympathy with you?

Richard Sharp: Yes, I am sympathetic with that view.

Q66 Jesse Norman: Mr Sharp, you spent a lot of your working career at Goldman Sachs, which has been in the press a lot recently, including for issues relating to potential tax evasion and tax avoidance. Are there any experiences that you have had there that if it was made public might embarrass you or embarrass the bank or the FPC?

Richard Sharp: No.

Jesse Norman: Thank you very much.

Q67 Andrea Leadsom: You said in your written evidence to us that you are not a technical expert in bank capital and banking or insurance regulation and that you are currently receiving an education from the Bank of England before commencing your duties, which is refreshingly frank and open. In what way do you expect to focus your contribution to the FPC?

Richard Sharp: I think it is my duty to develop that expertise for starters, and I am certainly being assisted in the bank in that process. As Dame Clara said, the complexity is multi-layered. We don’t just have Basel, we don’t just have national issues, we also have European issues to address and we also have conflicting objectives around the world. There are some organisations or some nations that seek capital to suit their national interests that may mitigate against global capital suiting what we need. First of all, I do need to get to grips with this in order to be in a position to reassure your Committee and also fulfil my duties in the FPC with respect to ensuring that the banks are stable and well capitalised.

The expertise that I would hope to bring above and beyond that will be to do with the fact that in seeking external members, I imagine that in addressing me and satisfying themselves that I fulfil that role they are looking for somebody to bring experience of global and external markets to this, to have the ability to look at the horizon and some of the risks there when maybe some people are focused a little bit nearer in terms of the distance of the risks that they are concerned about.

Q68 Andrea Leadsom: What would you expect your first speech to be about?

Richard Sharp: That is a good question. I think this issue of communication is a very delicate one. You will have seen today, for example, that because of the spillover effects of US monetary policy, a speech by the San Francisco Fed in Stockholm had an effect on the Bund market. Whenever members of the FPC talk, there is a risk that it could be uncoordinated and there is no doubt that it can have an effect. There are certainly some things that I care deeply about. In terms of how I develop my integration-

Q69 Andrea Leadsom: Such as? Can you give us a for instance?

Richard Sharp: Yes. I am particularly concerned by the unresolved nature of the euro crisis and the short-term feeling that the problems have gone away when in fact I regard them as still unresolved in the periphery and therefore there could be some serious consequences both for those nations and also for the banks at the time.

Q70 Andrea Leadsom: Yes. I think we certainly would agree with you. In an earlier question you were asked if you were poacher turned gamekeeper. You must accept that with a lack of experience of the technical aspects of macroprudential policy and so on that you must be being recruited as the poacher who is going to be on the inside to try to explain the market perspective. As you said yourself, one of the things you are interested in is the market effect of the eurozone crisis, and we have all seen what happens when the market loses confidence in the political will to sort things out. You must accept that you are fulfilling the role of poacher turned gamekeeper, don’t you?

Richard Sharp: I did say that the FPC at the moment is clearly aligned with the non-executives. I think within any organisation executives seek to make profits. We have seen in the financial services industries people make mistakes in seeking to make profits and we have also seen people behave inappropriately in seeking to make profits. It may well be, for example, that if the FPC is asking banks to pull back from certain activities by changing capital charges that that diminishes profit. So I do see that in my role in the FPC there are going to be times that what the FPC is asking for will move against the executive desire to make profits.

Q71 Andrea Leadsom: Do you see that as a conflict with your day job?

Richard Sharp: No.

Q72 Andrea Leadsom: Do you think that you can continue to be in a role in a financial institution while making decisions that affect remuneration and regulation and so on?

Richard Sharp: Yes.

Q73 Andrea Leadsom: Just one specific question, in 2012 the interim FPC called for the PRA to assess the capital adequacy of UK banks. The PRA found that UK banks had an aggregate capital shortfall at the end of 2012 of around £25 billion. However, RBS and Lloyds, who have the largest shortfalls, recently announced that they agreed with regulators that no further equity was needed. Do you suspect that the banks are simply running rings around the regulators, and do you think that being somebody from the poaching side yourself might enable you to see through, perhaps, some of the games that banks have obviously very successfully played in the past?

Richard Sharp: I have had a number of meetings with the PRA and I am certainly satisfied, from what I have seen for the moment, that the PRA is pressing the banks and they are not running rings around the PRA in the way you described. The FPC, as I mentioned, are not empowered to look at individual banks but to look at the system, and I think it is important to know that the PRA is positioned in a constructive but adversarial way to satisfy itself. I have had a meeting since that note came out and I understand the mathematics of why we have got to where we have got to. I think you will have gauged from my earlier comments that in general I would be in favour of banks obtaining more capital as much as they can.

Q74 Andrea Leadsom: Specifically, if you were to feel that the banks were running around the PRA-let’s say that you did think that-what would you as a member of the FPC do? Is it none of your business because you are not there to look at the specifics, only the general? Would you be taking on the PRA? Would you be speaking in public about the fact that you suspect the banks are running rings around it? In your role as a market practitioner do you see you have a unique duty to perhaps shine a spotlight on things where you think, "Come on, guys, this is surely not right"?

Richard Sharp: I regard myself as accountable to you and accountable for financial stability, and if financial stability is not preserved then I will have failed. The FPC delegates the specific authority around individual banks to the PRA so we don’t get two microprudential regulators. However, because of the concentration of banking we have in this country, you can’t escape from the view that if one large bank were to fail that is in itself a source of inherent instability. Given that I am accountable for that, if I felt that there were processes that were in place or policies that were likely to create that kind of financial instability then obviously I would make that known in private, and if necessary, if I didn’t feel it had been fulfilled, of course I would step down.

Q75 Andrea Leadsom: You are talking about policies and practices but what I am really talking about is, if you think in your judgment as a market practitioner that the banks are just pulling the wool over the eyes of the regulator, do you see it as your job, as part of the FPC, not part of the PRA, to say, "How can you be so stupid, PRA? How can you be so naïve as to think that this is fine?" What I am trying to get at is, first of all, do you, as a market practitioner, have a unique perspective and secondly, as a member of the FPC, do you feel that there are risks that there is a big gap between the PRA and the FPC where everybody sits there thinking, "That is not quite my job so I had better not stray there," and then you end up with things falling down the gaps?

Richard Sharp: I am accountable if they fail, as far as I am concerned, and therefore-

Q76 Andrea Leadsom: You are accountable if the PRA fail?

Richard Sharp: Absolutely, in the way I described it. If a major systemic bank has a problem then I would have failed in my duty to you and my performance as an FPC member. So, while it is delegated, I can assure you that the discussions that we will have, or certainly that I will have, will be to ensure that I am satisfied that the processes are such that the PRA is fulfilling its role. As far as I know, they welcome that engagement.

Q77 Andrea Leadsom: It is great to hear that, but just really specifically you have also said if you felt that the PRA was clearly getting it wrong and no one is listening when you tell them so in private, you would stand down. Is there a circumstance where you would go to the press and say, "Look, this is ridiculous," or not? The reason for mentioning that is, when we had the pre-appointment hearing with the new Governor we asked him would he be willing to say publicly that the Germans need to start paying themselves more and spending more and he said, yes, he would. He clearly felt that it would be reasonable for him to poke his nose in other people’s business. Do you feel it is reasonable to do that as an FPC member, or is it a matter that if you don’t like what is going on you quietly resign and just remove yourself from the party?

Richard Sharp: I have historically worked and I work on a consensus basis, that we can argue the facts and address them. The difficulty is not about the facts, it is often about the future and the circumstances. It is not my nature, it would not be my nature, to go to the press as a means of communication, and I would certainly believe that a dialogue with the Governor, who chairs all the committees, should suffice.

Q78 Chair: You have given some very interesting and thoughtful replies to a number of questions. I just want to follow up on a couple, if I may quickly. Have you discussed with any other existing members of the FPC the point that you have made about the delegated responsibility to the PRA and your sense of direct accountability for mistakes they make?

Richard Sharp: No.

Chair: Do you think that they might feel the same way as you? If you have not asked them I suppose it is a difficult question.

Richard Sharp: You can ask them, and you have one more person to ask, but I would imagine that they would feel the same way, through a discussion. I would be interested to know if they did not feel like that.

Q79 Chair: It is important elucidation of a relationship between two bodies. You quite rightly said a moment ago that you do not want to conduct disagreements by megaphone. You did not use that phrase but that is basically what you were saying. I would like to prompt you on whether you feel it should be part of your duty to contribute to public discourse on the stability of the financial system more widely, even where your views may disagree with those of the zeitgeist at any given time, in other words to enable people to see the range of arguments as far as it is possible without prejudicing stability. Do you see that as your role?

Richard Sharp: There is a balance, and the reason that there is a balance is that one of the things that may well be holding back growth in this country is confidence. 60% of our GDP comes from consumption, and if you look at the latest report from the Deloitte CFO survey you will see that it is not the availability of liquidity that is the problem, it is the willingness of companies to invest. If that is the issue, it is not helpful if there is a cacophony in the country from the major institutions, so I do think that FPC members need to be very careful. I know that this Committee in the past has been concerned about groupthink and the feeling that people who may have different views do not have the opportunity to air those views. I think there is an overriding issue that is more important than that, which is stability and a sense of confidence in the institutions that provide that financial stability and that can be a contributor. So I think there is a balance.

Q80 Chair: Are there circumstances in which you might feel you would need to communicate those views privately to us or to this Committee in one way or another, short of public discourse?

Richard Sharp: There could be.

Chair: Very helpful replies. Thank you very much, Mr Sharp. We are going to go straight on to Martin Taylor.

Examination of Witness

Witness: Martin Taylor, Financial Policy Committee, gave evidence.

Q81 Chair: Good morning, Mr Taylor. Could I begin by asking you whether you think your experience at Barclays and your time there is something you will be drawing on extensively in doing your job on the FPC?

Martin Taylor: My experience at Barclays was what I suppose got me sucked back into this industry through the Vickers Commission in 2010, and so I began to think quite hard about a lot of subjects that I had not thought about for five or six years, and I dare say I shall continue to think about. The Barclays experience has great relevance to the present circumstances, but one has to remember also that it was 20 years ago.

Q82 Chair: Do you think that many of the concerns that you clearly had at the time that you were at Barclays have subsequently been borne out?

Martin Taylor: Unfortunately, yes.

Q83 Chair: Which were those?

Martin Taylor: The uncontrolled risk appetite of investment banking mostly was my greatest concern at the time, and the risk that that threw on the whole organisation. Those concerns have now become commonplace, well understood, and things have been put in place to handle them.

Q84 Chair: What about the management structure, corporate governance of a complex organisation?

Martin Taylor: We look forward to the report of the Parliamentary Commission on Banking Standards. Yes, all of that too.

Q85 Chair: You will have seen in the press, and elsewhere too, concerns expressed about alleged prejudice of the FPC’s independence in recent months.

Martin Taylor: I did.

Chair: What do you think you are going to bring to the piece to give us assurance that independence is maintained or has not been prejudiced?

Martin Taylor: On the question of the supposed desire of the Treasury to have a more pliable committee, I think I would say two things. First of all, in the interview that I had with the same group as my two colleagues, there was no suggestion that the Treasury was dissatisfied with the interim FPC and wished to have a different kind of member, absolutely none. Had they wished to have a different kind of member, I think I have expressed views inconvenient to the Treasury on enough occasions for them probably not to have chosen me.

Q86 Mr Mudie: You heard me question Mr Sharp. You share some of Mr Sharp’s history, don’t you? Does it worry you that both of you were Goldman Sachs people? It seems Goldman Sachs and Eton are two characteristics of anybody the Government favours these days.

Martin Taylor: Yes. Well, the Church wouldn’t have me. I knew Richard well when we were at Goldman Sachs together. I was merely an adviser to the firm rather than a proper executive, but I did spend six years there.

Q87 Mr Mudie: Seriously, Mr Taylor, the question of Goldman Sachs is, you were an adviser during a very serious time; what did you advise them on? You did not advise them to get involved in subprime, for example.

Martin Taylor: No, indeed not. I was the chair of the audit committee in Goldman Sachs International in London from about 2002 to 2005 when I left, and so I was able to observe at first hand the build-up of leverage in the market that was getting under way, which was a matter of great alarm to me and to many of my colleagues at Goldman.

Q88 Mr Mudie: As the chair of the audit committee, what did you do about it?

Martin Taylor: Well, make sure, in so far as I was able to, that Goldman Sachs didn’t get itself into trouble.

Q89 Mr Mudie: Could you just expand on that? As far as you were able? You were the chairman of the audit committee.

Martin Taylor: I was the chairman of the audit committee of the international subsidiary, and I think that the committee was taken very seriously by the market people in Goldman. The market people in Goldman, as it turned out when things went wrong and certainly by 2005, which was after all three years before the Lehman crash, were running their positions very intelligently. There was a great deal of concern about the way that some of the other people on the road were driving, if I can put it that way, so we were aware of the risk.

Q90 Mr Mudie: I think we had the chief executive in front of us. Was he not the one who said you keep on dancing until the party stops or something?

Martin Taylor: No, that was Citibank.

Q91 Mr Mudie: Goldman Sachs were still selling this stuff. Aren’t they in court in America for still selling this stuff while they were getting rid of it from their books?

Martin Taylor: Apparently that was going on in 2007. I was two years out, and it was not going on in the London subsidiary.

Q92 Mr Mudie: It is conventional wisdom now, and it is easy to say and everyone understands what you are saying, when you say the FPC is there to take the punchbowl away, but with this secondary objective it does raise the question that it is not only about sitting there and making sure nothing overheats and exuberance is curbed. Surely it is also about having an operation that is different when we are in troubled times economically. That relates to the second objective. Can you tell me a couple of things that you have seen the interim FPC do that contribute to growth and the recovery of the economy? I can only think of one but I would welcome enlarging my information base.

Martin Taylor: The FPC starts in a position where the banking system came out of the crisis seriously under-capitalised, and there are two stages to getting the bank capital right. One is repairing the legacy wounds, and that is what I see the interim FPC was doing. The next issue, of course, is the trajectory to the new international standards that will be in place five years from now, and I am sure we will be watching that very closely. I don’t share the widespread view that strengthening banks’ capital position weakens their desire or ability to lend.

In fact, the Chairman asked me about my experience at Barclays. I became CEO at Barclays at the end of 1993 when the bank had a very weak capital position. It had cut its dividend the year before and it was not able to participate in the run-up in lending in the mid-1990s because its capital position was too weak and needed to be repaired. I think there has been a great deal of concern at the Bank of England-you have heard the Governor say it-that some of our bigger banks are not going to participate in lending with the vigour that we would all like until their capital position has been repaired. So I think that the recommendation by the interim FPC, which the PRA has been carrying out, although it may appear to be a drag on lending growth, is actually going to be quite the opposite.

Q93 Mr Mudie: As we sit, do you think they should be doing anything, being more active? Is there anything they are not doing that you think would help the Chancellor in his quest for growth?

Martin Taylor: That the FPC should be doing?

Mr Mudie: Yes.

Martin Taylor: I don’t know. One of the difficulties of the timing of today’s hearings is that we have not yet had a formal FPC meeting. Over the next two weeks we shall be bombarded with papers and we shall prepare for the meeting in the middle of June, so I don’t know yet where the agenda sits, nor do my colleagues.

Q94 Mr Mudie: The Chancellor, with the MPC and with the appointment of Carney has indicated his wish for a more activist policy that helps him with his problems with the economy. Do you think that there is the same wish and that the FPC would be receptive to the Chancellor? Is this new blood coming on, as Mr Carney appears to be coming on to the MPC? Are you going through the door thinking, "We have to get some growth and get this economy moving and what can we do?" or is it simply that you are repairing the banks, which is wonderful, and then you can sit back and just watch for over-exuberance instead of actually playing a part as a partner in the economic exercise?

Martin Taylor: I think it depends what everyone else is doing. The FPC, in my opinion, is likely to be more hawkish if all other indicators are very pro-growth. If there is not enough growth and not enough is being done about growth I would expect the FPC to be more tolerant. I think that in a sense the big issue about bank capital is the timing of the build-up. We are all being very careful, and the Vickers Commission was extremely careful, to put a reasonable end date on the build-up of capital rather than requiring it all at once. We are very sensitive to this.

Q95 Mr Ruffley: Mr Taylor, I was struck by comments you made in a BBC programme broadcast this year, Bankers - Episode 1, Fixing the System. In relation to the lowballing of LIBOR submissions in 2008 you appeared to say, this is in the transcript, "I don’t regard that as a serious offence or even an offence at all." And then you went on to say in the same paragraph, "I have a lot of sympathy with then the…editing of the rates, shall we say". First of all, I would like to confirm that that transcript is true but, secondly, don’t you think it is an odd thing for someone to say of a scandal that precipitated the fall of the chief executive of Barclays and indeed was the major reason that George Osborne set up the Parliamentary Commission on Banking Standards last July?

Martin Taylor: I don’t know exactly how much of my-

Q96 Mr Ruffley: Do you agree with the words that I just read out?

Martin Taylor: Yes, I do, but I would like to put them in context. What I was trying to do-and I don’t know whether this was broadcast or not-was to distinguish between two quite different episodes of the LIBOR affair. It seems to me that one of them was very serious indeed and one was not. I have no sympathy whatever with the trader-based manipulation of LIBOR in the years running up to 2008. What happened in the autumn of 2008 at a time of screaming financial crisis, when probably there was virtually no interbank lending going on anyway and rates had to be put into the market, at that stage it seems to me-and this is the point I was trying to make to the BBC-that putting low rates into the market acted to calm a period of great instability for a short time and I can’t get excited about that. It seems to me to have been a help to financial stability rather than a hindrance. That is not why Barclays lost is CEO, the 2008 affair.

Q97 Mr Ruffley: Sure, but do you think that a distinction between, if I can put it this way, good LIBOR rigging, because of the situation of crisis that you have described, and bad LIBOR rigging is the distinction that the FSA made when it fined Barclays-I hasten to add when you were not there, you had long since gone-£59.5 million for its role in LIBOR? Do you think that is what the FSA indicated, that there was good LIBOR rigging and bad LIBOR rigging?

Martin Taylor: No. Rigging LIBOR is not a good thing to do or to have done. I simply was trying to explain, and it seems to me to be a very important distinction to make, that there was a very serious offence and a trivial offence. If one simply takes the view that, "These are all offences, that is appalling", I don’t think one is really understanding what went on.

Q98 Mr Ruffley: To your knowledge, is that the distinction-and you have described the distinction very clearly-the regulators have made when they have been fining Barclays and many other banks as well? If not, why do you think they have not made that distinction?

Martin Taylor: I would have expected them to have been aware of the subtleties when they were deciding on the fine.

Q99 Mr Ruffley: Although they did not make the distinction, did they?

Martin Taylor: I don’t know. I think they probably did, didn’t they?

Q100 Chair: Why do you think the Bank of England went so far out of its way to say it had nothing to do with what you have described as good LIBOR rigging?

Martin Taylor: I think that was David Ruffley’s description and not mine.

Mr Ruffley: It was my coinage, Chairman.

Martin Taylor: I am not going to talk about good LIBOR rigging, Chairman. There is not such a thing.

Chair: Less bad LIBOR rigging.

Martin Taylor: Less bad, yes. A venial sin. I don’t know. The Bank of England got drawn into a media storm over it and I think it was quite understandable that it wanted to distance itself from the issue.

Q101 Chair: What you are saying, I hope, on LIBOR-not to put words into your mouth-is that we should take into account in mitigation the circumstances of the time, that it was a good idea to go and rig the LIBOR market?

Martin Taylor: It was not rigged. LIBOR rates were frankly invented, and it seems to me that at time of financial crisis, putting rates a little bit lower rather than a lot higher was a sensible thing to do. One needs to keep in historical perspective just how dangerous that period was. It was very dangerous indeed.

Q102 John Thurso: I watched the programme and I got the context you were putting it in.

Martin Taylor: You did? Good, thank you.

John Thurso: First of all, I remember when Michael Cohrs came before us for his interview before going on to the interim FPC I asked him about how many speeches he intended to make and how often he intended to go out. His answer at the time was more or less, "I wasn’t thinking of making any speeches," and we more or less said, collectively, "Well, you jolly well ought to." Subsequently he has made some very good speeches and privately commented to me that it was a good thing that he was egged on to do that. How many speeches do you intend to make? How often do you intend to talk publicly and how will you fulfil that role that we look for, as we do for members of the MPC, for members of the FPC to communicate regularly as part of the necessary function that they perform?

Martin Taylor: I think it is an important and necessary function and I shall certainly not expect to be inactive once I have my feet under the table. I should imagine there would be four or five appearances a year, something of that sort, maybe a bit less, maybe a bit more.

I do think that the parallel with the MPC, although a useful and important one, is not entirely accurate because the MPC has a lot of economists on it and there is an economic argument, almost an academic argument, which it is quite easy to have in public, particularly given the voting patterns. Although what the MPC does is incredibly important, it has a relatively narrow field of focus. The FPC has a rather frighteningly wide field of focus and I think one of the jobs we shall have, and something that I am sure the new Governor will get very involved in, is trying to work out where we should focus and what we should do. At the moment it seems to me that the principal bit that is missing is an explanation and an understanding of what the FPC is there for and how it carries out its job, quite elementary stuff. If you go back to the early days of the MPC, 15 years ago MPC members went around the country saying what the MPC was, what it did and how it worked. They don’t do that any more because everybody knows, but a lot of people, having learned about my appointment to the committee, who are quite well informed in general, have said, "Oh, so you will be involved in setting interest rates." That suggests that we have some communication to do.

Q103 John Thurso: Let me go on to a question I asked Mr Sharp earlier, because I think it is one of the areas where communication will be needed, which is the whole question of a tool around leverage ratios. In your written evidence you stated that not granting a leverage ratio tool was a major weakness in the FPC’s toolkit. Could you expand on that and explain why?

Martin Taylor: The interesting thing about the absence of a leverage tool is that it is not just something that nobody asked for. It is something that the interim FPC asked for and was not granted, so it is something that was withheld as opposed to something that they just did not think about. First of all, I am not quite sure how important it is going to be to have the tools. If the only way that the FPC can be influential is to be directive then I think we are probably not doing a very good job or there is something seriously wrong with the financial architecture. I should imagine that the powers of direction will be used quite sparingly. I may turn out to be wrong about that. There is nothing as things sit to prevent the FPC from making recommendations about leverage, and indeed the interim FPC in its March committee did refer to leverage and said that it wanted the PRA to take particular account of banks that were excessively leveraged and consider raising their capital requirements more. It will be interesting to hear when the PRA reports back to us what they are doing about that, because that is a comply or explain requirement.

So I think we may be able to be influential on leverage without possessing the formal tool, but I do agree with what I think you were saying when you questioned Richard Sharp that the best thing probably is to have tools that one does not need to use because one has them.

Q104 John Thurso: Legislation is littered with nuclear options that have never been used and have never been used because they exist. The powers of direction of the Crown Estate are an obvious example. They have never ever been used, but the fact that they exist can be exercised by the Secretary of State for Scotland or the Chancellor of the Exchequer, meaning that the Crown Estate have a great deal of regard to what is said to them. What I am putting to you is that if a fairly full toolkit, including those what we hope would be nuclear options, are not available, then the natural tendency of the banks in the exuberant times will be to go pounding up to and over the limit, whereas if the tool exists and the FPC collectively raise their eyebrows they may well desist. That is the theory. Is that a theory that commends itself to you?

Martin Taylor: It is a theory that broadly commends itself to me, and you know from my former evidence to the other Committee that I believe-

John Thurso: I am leading the witness, yes.

Martin Taylor: -that getting gross leverage right is of great importance, and I urge the Treasury to be sterner about this. I also think, as Richard Sharp said, that the time to do this is when balance sheets are relatively restrained. It is easier to put a cap on when the cap is not too tight.

Q105 Andrea Leadsom: Good morning. Can I ask you, Mr Taylor, whether you consider that from your experience of Barclays 20 years ago things have worsened in the interim period? You have been dipping in and out of the financial services sector since then. Do you think that in those good old days things were better, there was more observance of a kind of banking ethic that there has not been in recent years? I do not want to put any words in your mouth but what is your perspective on the way that the ethics in banking have changed over that period?

Martin Taylor: I recall a very interesting piece of evidence about his time at Barclays, given I think to the Commission on Banking Standards, by Alan Budd, who was at Barclays just before I was. He made the remark that certainly resonated with me that in the early 1990s the memory of pre-big bang London was still alive and people’s behaviours were still influenced by the way they had behaved when they were in smaller firms, rather as when I joined Goldman Sachs as an adviser in 1999, soon after that firm’s IPO, the firm’s culture was still that of a private partnership. The great thing, of course, about a private partnership for risk management is that all the partners’ money is at stake and they are much more careful than when they are dealing with other people’s money, as we all know. So I do think that there was a deterioration and I think there may now be an improvement going on. I hope so. A lot of people have been working hard to bring one about.

Q106 Andrea Leadsom: Just to press you slightly on that, I was in Barclays as well, as you know, from the late 1980s, and working in the financial institutions area. During the early 1990s was the period when all the partnerships got bought out, they did IPOs, they floated, so they went away from that "you mess up, you lose your shirt" environment to the "heads I win, tails the taxpayer loses" that we know to our cost. Do you think there is some merit in attempting some kind of return to that level of accountability where partners or executives somehow have more on the line than just next year’s bonus?

Martin Taylor: Absolutely.

Q107 Andrea Leadsom: My next question is a more general one. Who decides the agendas for the FPC meetings?

Martin Taylor: I think the answer to that at the moment is probably the Governor.

Q108 Andrea Leadsom: Do you intend to insist that you as external independent members will have an opportunity to propose agenda items and might that be something that you might have a unique interest in addressing?

Martin Taylor: We have already had that. There was a pre-meeting chaired by the Governor in early May at which we were all invited to put forward subjects that we felt should be studied and discussed, either at the upcoming meeting or at ones later in the year. Sometimes there are things that need more work before you bring them to a committee. It is the same with a company board, "Let’s bring this in December," that sort of thing.

Q109 Andrea Leadsom: Would you expect this Committee to hold the external members accountable for what issues they have raised at the FPC and why they have raised them? What I am getting at is your unique contribution will be the fact that you have been in the banking system from the poacher end from quite a long time ago and throughout the period in which there is a quite well documented sense that things have got worse not better. It is entirely plausible that your unique contribution might be to try to address what has gone wrong and why.

Martin Taylor: Insofar as that is relevant to the FPC work, yes. I know that is very relevant to the banking standards work and, as I said, I very much look forward to that. I was thinking about this when you asked Dame Clara her view on this. The outsiders have a number of roles. One is to have a chance to question Bank of England group think, not only on what the right answer is to every question but what are the right questions to be asking. One of the most remarkable things about the financial crisis is how pretty much everybody missed it. Central banks around the world missed it and they are not staffed with lazy and incompetent people. They are staffed with very hardworking people looking in great detail at what is going on. When you look back at what was allowed to happen it is astonishing, isn’t it? I don’t think we can easily put ourselves up as people who are going to see through things next time round, and of course the thing that will trip us up next time round, if we are still members of the committee, will be something different, but I think that is what we should be trying to do.

Q110 Andrea Leadsom: Do you now have a sense of what things might trip us up next time round? Do you have some particular specific concerns from a systemic point of view that you are personally thinking about?

Martin Taylor: I do think, as I said in my answer to the questionnaire, that we have not yet repaired all the legacy issues of the crisis and we need to get that thoroughly done. I think the interim FPC made a great step forward in doing that and I agree with Richard Sharp’s view that the fact that Lloyds and RBS have not had to raise new equity does not mean that the PRA were soft on them. They are making quite violent adjustments to their business models to get their capital ratios right and I think that is something where a piece of macroprudential work has taken place. We shall be watching that with great care. The danger, of course, is that as you regulate the banking sector more and more thoroughly the shadow banking sector expands and pops up somewhere else. That is something we shall certainly be looking at. I want to understand much more than I do-I think it is in the questionnaire-the issues surrounding the insurance industry, which has been almost overlooked by regulators for very understandable reasons. They have a huge crisis in the banking industry to deal with, and we should not take our eyes off that.

Q111 Andrea Leadsom: One final question, very quickly, in the context of the LIBOR fixing. For me the astonishing thing about it was that LIBOR submitters were the bearders with the cardigans who were the very long-standing, loyal people. It always seemed to me the least likely-that if you were to pick what you would fix it wouldn’t be LIBOR. It is also not that lucrative. It is much more lucrative to fix a gilt-edged auction or a gold price or indeed, as we have seen, oil price. Do you worry that there is more to come? Do you think there has been more bad practice that has not yet come out?

Martin Taylor: Probably. I note that the interim FPC, which presumably did some work on this, when it came up with its number for new capital took conduct costs, as we now call them, into account, clearly expecting there to be more to come out. I know the PRA would have been talking to the individual banks about this, but it wouldn’t be surprising, would it?

Andrea Leadsom: No, indeed. Thank you.

Chair: Thank you very much, Mr Taylor, for coming in to give evidence.

Prepared 5th June 2013