Examination of Witnesses (Questions 2340-2359)|
26 FEBRUARY 2009
Q2340 Ms Keeble: Right through this
crisis, and I have listened very carefully, every time there has
been a suggestion that there should be some other measures or
steps taken or something should happen you have been very resistant
to that, I have to say, and it has given the impression that the
Bank is running after the event rather than shaping events.
Mr King: Can you give me an example
of where you think that? I argued earlier than anyone else that
the banks in Britain needed more capital.
Q2341 Ms Keeble: You argued against
the provision of any extra lever to influence the system and you
argued against that quite consistently, I have to say.
Mr King: When you say "any
extra lever", what lever do you mean?
Q2342 Ms Keeble: Anything. It is
in the evidence. I asked would you favour anything other than
the setting of interest rates and you said that is all that the
MPC does because it has responsibility for inflation and that
lever is not working. The impression that is given through all
of that is that the Bank is running after the event rather than
shaping events. I think this was the question that Graham was
asking. We are going to want to fight the next war, not the last
Mr King: With great respect, I
totally disagree with your suggestion. In September 2007, a matter
of five days after Northern Rock failed, I came before you and
spelt out what I thought should be our response. Very largely
what I said to you at that session appeared in the Banking Act,
we do now have a special resolution regime. I said that the banks
in Britain needed more capital and they have now got more capital.
I do not think the Bank has been running behind this at all. What
I was very clear on was that the role of a Monetary Policy Committee
was to set monetary policy and the bank rate and I did not think
that other instruments were appropriate to the setting of monetary
policy, but that is not to say that other instruments are not
appropriate for dealing with financial stability questions.
Q2343 Ms Keeble: When we get to dealing
with the aftermath of what is happening now, not looking at it
with a vast amount of sophistication. it is likely to be high
levels of unemployment, public spending cuts that will depress
demand, very low levels of interest rate deflation and manufacturing
limited, therefore presumably increased pressure for imports.
What are you going to suggest? What proposals do you have for
dealing with the real challenges of ensuring financial stability?
What are you going to ask us for?
Mr King: What you have described
is not financial stability, it is what is happening in the economy
Q2344 Ms Keeble: I know, it is macro.
Mr King: If you want to talk about
the economy at largeI think this is why we are coming back
in Marchwe have already spelt out the right plan of attack
on that front. One is considerable monetary easing, and we are
now moving into a situation where the Bank will be conducting
asset purchases to increase the amount of money in the economy.
Secondly, the measures designed to ensure that banks will lend
in a more normal manner than they have been. Bank lending halved
in 2008 relative to 2007. The commitments that have now been made
will significantly increase that. There has been a measure of
fiscal relaxation. Most importantly, and I would say most importantly
of all, this is a worldwide downturn and it is absolutely vital
that every country around the world plays its part in dealing
with that problem. I went to the G20 meeting last Sunday in Berlin
and every leader round that table was committed to playing his
or her part in taking measures to reflate their economies in order
to limit the length and severity of the downturn. All of them
were very, very clear that this a worldwide downturn which hit
with extraordinary ferocity last October.
Q2345 John Mann: I hear what you
are saying, Governor, and it is easy to pick quotes from the past,
et cetera and say you got it wrong.
Mr King: I am sure we got things
wrong, and obviously so.
Q2346 John Mann: I want to choose
just one, not to say you got it wrong. You were dancing around
a little bit in terms of Graham's question on what powers you
should have or who should have them. In July 2006 the Bank's report
stated: "Several structural developments have helped strengthen
the system over time, including continuing improvements in risk
management and more sophisticated ways of distributing risk".
That did not prove to be particularly accurate. The power to actually
get behind that and see what was happening has to rest with somebody.
Mr King: Absolutely, and it was
the prudential supervisor.
Q2347 John Mann: Are those powers
there in your view?
Mr King: No.
Q2348 John Mann: Are there things
we need to be doing?
Mr King: The powers to set prudential
supervision for individual institutions are there. What is not
there, I think, is the ability for the supervisor to say, "Without
forming a judgment about your individual bank, we think that the
speed at which banks as a whole are expanding is creating risks
and we think that all banks should have higher capital requirements,
if you like as an effective tax on the growth rate of the banking
system". That is the idea behind so-called counter-cyclical
capital requirements and I think there is a very important debate
to be had about the precise form that they should take, but I
do think there is a strong case in principle for introducing something
like that. I am not saying that the Bank should necessarily have
that power, that is an issue to be discussed down the road, but
it is worth working out first what is the right form of the additional
prudential supervision that is needed and then asking the question
who should actually do it.
Q2349 John Mann: What sort of timescale
would you put as being pressing in relation to that?
Mr King: I do not think it is
pressing, we have time to think this through carefully. The reason
I do not think it is pressing is I do not think you will find
many banks engaging in wild risks for some considerable time.
Until the people who can remember this episode have disappeared
from the scene, only then will we find ourselves back in the same
Q2350 John Mann: There appear to
be a number of loose ends that no-one wants to pick up. I will
pick up one, the credit rating agencies and who supervises them,
one can see why they are loose ends, but offshore, not least with
Mr King: All of these things are
Q2351 John Mann: How are we going
to get who should be taking the responsibility for getting behind
Mr King: It depends on which issue
you look at. If you take the question of offshore tax and regulatory
havens, I am now convinced, I think, that Government leaders for
the first time in my experience are determined not just at G7
but at G20 level to do something about this. It is very important
and requires governments to work with other governments to do
something for which there will be significant lobby groups that
will lobby hard against it. I think the experience has been sufficiently
uncomfortable that governments will now work and take action,
but it requires international agreement.
Q2352 John Mann: Similarly with credit
Mr King: In the Bank I think we
are going to think very hard about the extent to which we and
other central banks rely on credit ratings as an indicator of
access to our operations. We do not allow anyone with a given
credit rating automatic access, we always do a second check, but
there is a good deal to be said for downplaying the role of credit
ratings in its entirety. The credit rating agencies did move into
areas where they did not have appropriate expertise and there
were conflicts of interest. The difficulty with them is the last
thing you want is to have government-owned credit rating agencies
because if you do that the government that owns it will never
find its debt ever valued in any way that is accurate and people
will lose faith in the rating. Who rates the raters is a very
difficult question. There are a very small number of them. It
is like accounting firms, we have a tiny number of accounting
firms, so that creates difficulty in having independent switching
between them, and it is even worse in terms of rating agencies.
These are issues that are very important. It would be a mistake
to rush into judgment about the answers to it, but what is very
important is that we ensure that these items do not disappear
from the radar. The danger with taking too long is that people
get bored and forget the question and we must not do that, but
equally we must not rush decisions on it.
Q2353 John Mann: Clearly people can
blame politicians, Parliament, governments, for not highlighting
these questions more succinctly and as a higher priority previously,
so we should not be ducking our responsibilities. My final questions
are on the Financial Services Authority where the Bank has a place
on the board. In their Financial Outlook it seemed to me that
Lord Turner is trying to do your job. They seem to want to go
into governance and your role rather than their role. There seems
to be an inherent reluctance there to have regulation as if in
some way regulation is a dirty word that must be avoided. Do you
have concerns about the way in which they are attempting to usurp
Mr King: I do not think it is
to usurp the role. Up until 2007 I worked very hard with Callum
McCarthy to ensure that we did not have the sort of traditional
turf battles that I have seen very often in government. I thought
it was very important that we not have those turf battles. In
retrospect, I rather regret that because I was held accountable
by this Committee and many others for things which had absolutely
nothing whatsoever to do with the Bank of England. The fact that
it was not on paper our responsibility made no difference at all
to whether you thought we had played a role in it or should be
held accountable for it. It would have been better had we probably
played more of a role. To that extent, having some overlapping
responsibilities in an area where if things go wrong it proves
very critical maybe better with two people looking at it than
just leaving it to one person. What are the incentives? When we
produce a macroeconomic assessment for monetary policy we are
concerned to look at the most likely outcome and the balance of
risks around it. When the FSA look at the macro outlook they are
bound to want to focus on the worst possible outcomes and what
could go wrong. That very easily leads into the press being able
to say, "Oh, these are different assessments". They
are not different assessments. We have to look at all the range
of outcomes when setting interest rates; they are only concerned
with the worst possible outcomes. I am very happy to engage with
the FSA in a debate about what the outlook is and what the consequences
would be for the banking system. I think, and I have talked to
Adair Turner about this, that he would welcome the Bank's team
under Andy Haldane saying to the FSA, "Look, our judgment
is that this group of banks or the banking system as a whole seems
to us to be facing some quite serious problems which you have
not really taken on board" and maybe that will be a better
Q2354 John Mann: My final question
is on the same theme. Adair Turner used the term "mis-selling",
which the FSA uses a lot. Should they not have been looking at
mis-lending, in other words a consistent policy in certain financial
institutions to be mis-lending to consumers, the totality of which
has created a particular problem, only one part of the problem
but a significant part of the problem? If they had regulated properly,
and if they do regulate properly, would not that element of it
be rather easy to do something about if the regulation is strong
Mr King: I agree with the objective,
I am not so sure how easy it will be to do it. In some ways we
have been through a natural experiment. We have been through a
period in which the UK had light-touch regulation, the Americans
had pretty intrusive regulation, hundreds if not thousands of
bank examiners sitting and working full-time inside the banks,
in Europe we have had governments deeply involved in the banking
system and different systems in Asia. Every single one of them
failed to spot the seriousness of the risk-taking that was going
on. The lesson I would draw from this is not to expect too much
from regulators. The real problem that any of them would have
faced was that if they had said to banks in the City before 2007,
"You are taking big risks", they would have been seen
to be arguing against success. The people in the banks would have
said, "Well, who are you to say we are taking too big risks?
We have got far brighter and more qualified risk assessors than
you have got. We have made massive profits every year for almost
ten years. We have paid big bonuses. The City is the most successful
part of the UK economy. How dare you tell us that we should stop
taking such risks. Can you prove to us that the risks we are taking
will necessarily end in tears?" and of course they could
not. For an ordinary regulator going about their business, they
would have been confronted with this massively difficult task
of actually persuading people, persuading you, that they should
have been taking action against institutions that looked very
successful and highly profitable. I think the same was true of
employees inside the institutions and from anyone outside. Any
bank that had been threatened by a regulator because it was taking
excessive risks would have had PR machines out in full force,
Westminster and the Government would have been lobbied, it would
have been a pretty lonely job being a regulator.
Chairman: We heard that from Adair Turner
Q2355 Mr Mudie: I think this has
been a very thoughtful and useful session because it is unimportant
now and it is not on to start looking for scapegoats and who did
what to whom, it is really looking to the future to see where
our institutions are best positioned to deal with it. You have
only made one suggestion as to how it could be improved in terms
of the Bank of England. We now have an overlap in financial stability.
It is interesting how John Gieve described it in his speech. On
the question of your last remarks you said that you are in a better
position and you have pointed out the regulator cannot do it.
You said at one stage it is for this Committee to decide what
the responsibilities are or how they should be changed, et cetera,
but you are in a key position in terms of being the Governor of
the Bank of England, the most important position, the most influential
position. It would be useful if your colleagues could put a paper
up to us. You referred to discussions with the FSA. Governor,
the FSA have put 300 new staff on. They are pre-empting decisions.
They have spent £80 million-odd in their budget putting staff
on. How does Paul deal with financial stability against that army?
It would be very useful if you were prepared, with the support
of your colleagues, to put a paper up to us with some discussion
points that we might want to knock about and even discuss in this
sort of session with other witnesses.
Mr King: Let us start to try and
put some points forward now. It seems to me there are three big
lessons from the recent experience. The first one, and I have
made this point before, I do not want to labour it, is I do think
that failures in the international monetary system led to imbalances
in capital flows between countries that created the conditions
of remarkably low interest rates and encouraged risk-taking and
that has to be tackled somehow. It is not a question of financial
stability but it is vital. It is getting back to the objectives
of Bretton Woods that were never achieved of imposing symmetric
obligations on surplus countries and debtor countries. Deep down,
if that had not been the problem I think we would not have seen
a lot of what we are seeing in the financial sector. I think that
is fundamental too. The second one is in terms of regulation.
I repeat the comment I made just now that with the best will in
the world I find it very hard to think that we will solve the
regulatory challenges by creating more committees, processes,
etc. Committees are useful and they have their place and they
are important, I am not saying we should not have them, but they
are not the answer to fundamental challenges to regulation. No
regulatory system in the world really dealt well with what happened.
Why was that? I think that was because the nature of risk is very
hard to assess and you cannot easily prove a counterfactual. It
is very hard to say to someone who appears to be very successful,
"What you are doing is potentially damaging to the rest of
the economy". The conclusion I draw from that is there is
a lot to be said for trying to build in very simple, very robust
mechanisms to put some sand in the wheels of the expansion of
the financial sector. We have to say to ourselves one of the lessons
that old-time bank supervisors always used to say, and I remember
when I joined the Bank, that there are only two kinds of banks
you need to look at, banks that are losing money and banks that
are making a lot of money. Those are the two kinds of banks you
have got to regulate very carefully. If the banking system is
expanding too rapidly we must not be taken in by the promotion
of, "Our financial centre is so successful that we should
indulge in self-congratulation", maybe we should just say,
"Hang on, perhaps there are too many risks here" and
build into the system the kind of proposal that Professor Goodhart
and a group that he wrote a report with made about trying to raise
the capital requirements as the growth rate of the Bank increases.
Keep it simple. The Basel regulation, for example, achieved nothing
because it was wildly too complicated.
Q2356 Mr Mudie: Going away from regulation,
on financial stability now it is a statutory duty and it seems
to be limited to bank notes or something like that. Is it not
the case that this is not the time now to beef that up and explain
to you what we wish of you to do in terms of financial stability?
Mr King: Yes.
Q2357 Mr Mudie: Giving you the responsibility
and, just as we have with interest rates, giving you the independence
to do it because that is the answer to no regulator, nobody would
be able to cool the economy down when you thought it was "excessively
exuberant", which is the phrase, is it not, but you can because
you do it all the time with interest rates.
Mr King: Yes, absolutely right.
The trouble is that what you have given us now is a statutory
objective of financial stability but without any instrument to
use. I hope your inquiry will look at what are the right kinds
Q2358 Mr Mudie: Can you not suggest
Mr King: We can. Counter-cyclical
capital requirements and there is the business of whether you
have dynamic provisioning of reserves. It is a bit glib somehow
just to use these phrases because one of the things you immediately
realise when you use the phrase "counter-cyclical capital
requirements" is that a cycle is not the same everywhere
in the world. One of the big challenges we have got is how on
earth do you reconcile international banks with national regulations.
Are you going to have a bank that operates in two countries where
in one country the cycle is expansionary and in the other contractionary
and one authority tries to ease the capital requirements because
of the state of the cycle and the other one tries to tighten them.
There are major issues here about the extent to which banks having
become internationalised are then outside our ability to impose
Q2359 Mr Mudie: On a bank level,
when you consider Lloyds before they took over HBOS, how they
were run whilst everybody was getting exuberant, if we as a country
were less inclined to get exuberant whilst the others were doing
it we might end up in a better position as Lloyds did before they
took over HBOS.
Mr King: I do not think you will
find a central banker will disagree with the proposition that
we should never get over-exuberant.