Appointment of Robert Jenkins to the interim Financial Policy Committee

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE    To be published as HC 1575

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Treasury Committee

Appointment of Robert Jenkins to the Interim Financial Policy Committee  

Wednesday 26 October 2011

Robert Jenkins

Evidence heard in  Public Questions  1 - 29

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Oral Evidence

Taken before the  Treasury Committee

on  Wednesday 26 October 2011

Members present:

 Mr Andrew Tyrie (Chair)

Michael Fallon

Mark Garnier

Andrea Leadsom

Mr Andrew Love

Mr George Mudie

Jesse Norman

Mr David Ruffley

John Thurso

 ________________

 Examination of Witness

Witness:  Robert Jenkins, Member, Financial Policy Committee, Bank of England, gave evidence.

Q1 Chair: Thank you very much for coming. There is the possibility of a vote at or before 4.00pm, so I thought we should get underway and hopefully we will be through by 4.00pm. We will see what you have to say, of course. Can I begin with a relatively straightforward question? What is the FPC learning that has a basis for action by the FPC as a consequence of the eurozone crisis?

Robert Jenkins: What is it learning at the moment?

Chair: Yes. What is it doing differently or thinking about doing differently that it would not otherwise be doing?

Robert Jenkins: First of all, Chairman, thank you very much for the opportunity. As you probably know, I joined the FPC officially in the second week of July and have attended one set of meetings. So it will not surprise you that the FPC is feeling its way and it will not surprise you that I am feeling my way.

Chair: We all appreciate that.

Robert Jenkins: We had better feel our way pretty fast. I suppose the best way of answering your question is to describe an example, and an example would be the tension that the committee members are very well aware of that exists between inspiring confidence in the financial system, which has obvious benefits, and doing everything possible for a particular business sector or segment of the economy. You probably saw in the minutes of the last Financial Policy Committee meeting a minority view that one might consider rolling back on capital requirements in order to stimulate lending, particularly to the small business sector, and that debate within the Policy Committee was very thoughtful and very difficult.

Q2 Chair: What about liquidity?

Robert Jenkins: My personal opinion is that liquidity though in the long run is as crucial as solvency, liquidity-

Chair: When you were talking about the debate about whether to allow the capital buffers to go in and out rather than act as a ratchet, that is what you just said, and that is the debate you are having. What about liquidity buffers?

Robert Jenkins: The liquidity problem for an individual company is not necessarily a liquidity problem for the system as a whole. I do not think the focus in that particular discussion was on liquidity per se. I think the issue was if more money is put into the system, does it find its way into the small business borrower and if the capital ratios were changed, would that inspire confidence in the market in general and find its way to the small borrower or would it reduce confidence?

Q3 Chair: So the issue of increasing flexibility and liquidity buffers was not discussed at the FPC meeting you attended? That is a very long pause if I may say so. I got to six, I think.

Robert Jenkins: What was discussed is very well articulated in the record of the meeting. The question of whether or not we can get liquidity to a particular sector of the economy more efficiently than is being done today was discussed. The question of whether or not putting money into the system in general achieves that has been discussed. The question as to whether or not that would be as effective as capital adjustments was also discussed. It was just generally felt that it was better, in these uncertain times, to err on the side of generating confidence in the system by securing the solvency and the balance sheet strength of the financial system as a whole, rather than push on a string in terms of lower capital requirements that might or might not find its way into new lending.

Q4 Mr Ruffley: Could I just begin by asking why did you leave the New York-based macro-hedged fund that you were CEO of in July 2011? What prompted that?

Robert Jenkins: I left it in order to take this job. This is an opportunity of a lifetime.

Q5 Mr Ruffley: You obviously have some interest in public policy because of your announcements and also the teaching job you do. How many hours a week-I do not think I am being too personal here-would you say you work in total in all of the voluntary and private sector jobs and roles you perform? What is an average working week?

Robert Jenkins: I do not punch a clock anymore so I suppose-

Mr Ruffley: No, but you must have some idea. Everyone has some vague idea of how much time they spend working.

Robert Jenkins: In some ways it is continuous. All activities that I am involved in are self-reinforcing, so what I learn from my involvement in one area helps my teaching, what I learn in my teaching helps my other network. I intend to give two to three days a week to the Financial Policy Committee opportunity. What I learn in the Financial Policy Committee arena is only going to make me a better teacher at the London Business School.

Q6 Mr Ruffley: But two to three days a week, so what sort of hours? At one level I understand you cannot quantify these things precisely, because you are presumably at weekends thinking great thoughts about macro-prudential regulation, should you take up this job, but what would the two to three days a week, in your words, equate to in number of hours? What is the intensity of those two to three days?

Robert Jenkins: My wife would say that I am working harder than ever before but I also have to say I have never enjoyed it more, so I cannot honestly say it is work. She would say that I start at 8.00am in the morning and I do not finish until I go to bed.

Q7 Mr Ruffley: How many days a week is that? Six days?

Robert Jenkins: No, not six days a week. There are times when I am on holiday, there are times when there is no compelling deadline to meet. I do not mean to dodge your question.

Q8 Mr Ruffley: It is simply if you ask most MPs how many days a week they work they would probably say six days a week, meetings, doing things where he has to put a suit on, and then the seventh day you are probably thinking about what you have done in the preceding six days. My answer to the question would be six days a week, and you are saying two to three days, and I simply asked you how many hours on average. The reason I ask this is because there is a question that we have to address here. You have quite a few other outside interests, don’t you; would you care to list those for the Committee?

Robert Jenkins: Yes, just to clarify-

Mr Ruffley: Private sector.

Robert Jenkins: Just to clarify though, the two to three days a week is what I estimate I will be contributing to the FPC only, not to-

Mr Ruffley: Sorry, that is what I mean. We are talking about the two to three days a week.

Robert Jenkins: I have four activities, one of which is the Financial Policy Committee. The London Business School, I am an Adjunct Professor of Finance. I teach a class twice a year in investment management. That class is what they call a block week format. It means it is a total immersion of one week concentrated course that begins 9.00am Monday and it finishes on Friday evening. There is a week of preparation before it and a week of decompression afterwards so that is three weeks, twice a year, so that is six weeks. Inevitably I get involved with students, I support them, I help the school in any way I can. I cannot put a number on that.

I am a non-executive director of a small investment trust, which is described in the papers. It is an Asian equity trust, it meets formally on schedule five times a year. It might or might not meet more often if there is a problem. At the moment there is no problem so it is five times a year, five board meetings for which there is the normal board preparation, which is probably two days for every board meeting, so call that 18 days a year.

I am on retainer for something called CBC Capital Partners. CBC Capital Partners is a global private equity group. It was founded in the UK. It is headquartered in Luxembourg. They have offices around the world. I am an advisor in particular to what they call their financial institutions practice, and more specifically I help them think through the trends, challenges and opportunities that might or might not occur in the asset management world. That is no less than one phone call a month and it can be more activity if warranted or I am called upon. That probably has not been more than 10 days a year, in the last two years, that I have been involved with them.

Q9 Mr Ruffley: Ten days a year? Could I just ask, can you assure the Committee that in acting as an FPC member, if a crisis were to break out you would be able to rejig your existing other commitments to devote your undivided attention to the FPC work, there would be no difficulty in doing that?

Robert Jenkins: The FPC comes first.

Chair: Thank you for that clarification.

Q10 Mr Ruffley: I just have one final question, very quickly. Just on policy, Adam Posen has been suggesting, and others support him, that there should be a public bank or some public authority, taxpayer-backed in any event, to create lending facilities to small or medium sized enterprise. Just to get a feel for what your ideological and practical view of these matters is, do you think a proposal like that confuses the role of the Government on the one hand and the Bank of England on the other, when it comes to managing fiscal policy and when it comes to managing monetary policy? Would you have any issues with that, and if so, why? Discuss.

Robert Jenkins: If the Government chose to create an agency to facilitate a particular sector I certainly would not necessarily see that as a problem for financial stability.

Q11 Mr Ruffley: What I am driving at here is the interface between Government and the Bank of England.

Robert Jenkins: I watched the video footage of your session yesterday with the Governor and I think there was a good exchange, which revolved around the issue of whether the Bank should be in the business of backing a particular sector or not, and what occurred to me at the time when I was listening to that was that the Bank is not equipped with credit analysis skills at the company level in order to choose winners and losers.

Chair: Neither are Governments.

Robert Jenkins: That is correct. The Government does own one bank and has a great deal of influence with another and, in theory, those banks have that expertise. I would probably agree with a number of others who say it should be used.

Q12 Michael Fallon: What is the particular role of an external member, in your view?

Robert Jenkins: I think it is to bring skills, knowledge, contacts and ways of thinking that might not be available in the internal organisation, and to have enough confidence from that knowledge and from one’s position to be able to challenge the thinking that might be on the table.

Q13 Michael Fallon: What public responsibility do you think you have for the committee’s decisions-to explain them or, for example, to set on record your disagreement with them?

Robert Jenkins: I think there are two responsibilities publicly. One is to convey to the public, to help explain to the public, what it is that we are facing and how we are coping with it and what the issues are. I suppose should there ever come a time when a voice of dissent is not being listened to internally within the meeting I would go public.

Q14 Michael Fallon: You would make a speech or statement or whatever?

Robert Jenkins: I have a number of articles, which are in the pipeline, and I have made one speaking engagement since I joined in September and have two more lined up, so I would use those podiums.

Q15 Michael Fallon: But would you use them without a disagreement? Would you use them in the normal course of your membership to explain your thinking?

Robert Jenkins: Yes, both. For example, I will be addressing an annual meeting of something called the CFA Institute in France. The CFA is the Chartered Financial Analysts Association. It is in many ways the premier body representing the investment management profession. I have great concerns about the way incentives are structured in the banking profession and I am going to make an appeal to that investment community to change it.

Q16 Michael Fallon: Yes, but that sort of speech you would place it on the Bank of England website, would you?

Robert Jenkins: Some of them will be and some of them will not. To the extent it is a crafted speech before and publishable, yes. Some of them will not.

Q17 Michael Fallon: What resources have you been promised inside the Bank to support your work as an external member?

Robert Jenkins: Everything from a desk fully equipped, to access to the secretariat, which represents the research pool within the Bank. Expense reimbursement for those things that I feel I can justify or are necessary to my activity.

Q18 Michael Fallon: But on the research side, do you feel you can commission your own research within the Bank?

Robert Jenkins: I have already made use of the secretariat to do research to support some of the views on the incentive compensation theme. They have been very helpful, very good, but I am obviously not limited to those resources. I have my academic community that I can rely upon and the private equity investment community that I can rely upon.

Q19 Michael Fallon: Prior to your appointment there was a lot of discussion here about the Bank’s so-called group think. Have you come across any evidence of group think in the Bank?

Robert Jenkins: I have not come across evidence of group think within the Financial Policy Committee.

Q20 Michael Fallon: You have found it elsewhere in the Bank?

Robert Jenkins: I have not been inside the Bank long enough to tell you, but I will tell you if I find it.

Q21 Michael Fallon: How do you challenge it?

Robert Jenkins: First thoughtfully and quietly, and then a lot louder.

Q22 Jesse Norman: Let me give you one area of group thinking about what to look at, which is whether or not the FPC is going to be able to command the same kind of authority and resources that the MPC commands. I am just offering you one. We are obviously concerned about independence of the non-executive members. You do not seem a shy man but it would be very interesting to get a sense from your personal background of a time when you have found yourself in conflict with an employer and had to manage a solution that, as it were, led to your view being successful.

Robert Jenkins: That is a very perceptive question, and I think the background would be relevant, although the position is different; I do not have an employer.

Q23 Jesse Norman: I suppose fighting an existing view that would give us some sense that you would be sticking up for your position and able to succeed, not merely in articulating it, but on the merits, if you like.

Robert Jenkins: I can give you examples. I took over a trading room in Switzerland, interestingly one of the desks was completely out of control. That desk had been headed up by somebody who has now been appointed the chief executive of a systemically important financial institution. The desk thought it was very profitable. It was in a very fashionable area called Japanese Warrants. I stopped trading on the desk against huge protests. They insisted that I did not know what I was talking about or doing, and by the time we got to the bottom of the excessive trading we found that 36 million Swiss francs of excessive profits had been booked and had to be reversed and the whole operation had to be cleaned up.

It was not a popular decision to shut down what appeared to be the most profitable desk at the time, so that is perhaps one example. I can give you others if you would like.

Q24 Jesse Norman: That is plenty. Thank you very much indeed for that. Finally, very quickly, are you happy that the FPC is now fully seized and has been able to ensure the Bank and the Treasury are fully seized of the importance of developments in the money markets over the last few weeks?

Robert Jenkins: The importance of-

Jesse Norman: Developments in the money markets over the last few weeks, and in particular bank funding. Because my impression is that there were large chunks of the Government that were not as on top of the issue as they should have been six weeks ago or two months ago.

Robert Jenkins: I have been impressed so far with the degree to which the people around the table are aware weeks in advance of what then becomes public.

Jesse Norman: Sorry, I missed the last thing you said.

Robert Jenkins: I have been impressed on a couple of occasions, particularly with respect to liquidity and bank vulnerability in Europe, the degree to which that knowledge has been available in-house long before it hit the public purse.

Q25 Jesse Norman: That is very helpful. Final, very quick question: it is obviously a source of great concern to us that the FPC should have a proper so-called dashboard set of tools to do the job and should be making recommendations to Government as to what shape that dashboard will be. Do you share that view; are you happy that it is starting to take shape?

Robert Jenkins: I share that view and I would recommend, I am sure you will do it anyhow, but I would recommend you continue to ask that question at every FPC encounter. That will be an evolving exercise. I was looking at the financial stability reports to see whether or not the indicators they have used historically could be in fact that dashboard and the challenge will be to make sure that the tools that we ultimately recommend to you are grounded in such indicators.

Chair: You will understand that with the creation of macro-prudential tools it is particularly important for people in your position to speak out and offer us a clear view.

Robert Jenkins: Be careful what you wish for.

Chair: We are looking forward to getting our wishes fulfilled.

Q26 Mark Garnier: I am going to ask you more about this very point, if I may, because I think the role of the FPC will have a particularly profound effect on our economy. Obviously there are going to be a set of tools and indicators that you will be looking at, and presumably there will be a number of parameters upon which you will be setting where you intervene one way or the other, and indeed how you intervene. Do you think that toolkit should be made publicly available and do you think the parameters at which you will be setting your intervention should also be publicly available before you make the intervention?

Robert Jenkins: I think you are going to the heart of the issue to what extent there should be transparency in the decision-making of the FPC?

Mark Garnier: Yes, absolutely.

Robert Jenkins: I do not mean to answer a question with a question, forgive me, but I would be very curious as to how you reacted, for example, to the record of the minutes of the last meeting. It was my first experience and I found them incredibly detailed and accurate, and I think one of the things I can assure you here is that the minutes are a very faithful and detailed reflection of what went on in the Committee. So to the extent you want to understand the blow by blow of what happens within the Committee on the key issues, that record is a very good example. It should be continued and I understand that the Governor, as chairman of the FPC, will give a press conference at least once a year. You might or might not encourage him to do that more often.

Q27 Mark Garnier: One of the things that has struck me about this, is that if you are looking at a housing bubble or a credit bubble and you have a dashboard that tells you when it is happening, if it is publicly known that at a certain point in a, say for example, a ratio of averaging, that you will intervene does it then mean that the FPC becomes a self-fulfilling prophecy in terms of the fact you do not have to intervene because the market will naturally adjust?

Robert Jenkins: You are making a very good point. This is a problem that central banks and particularly the Fed used to face. If only they would tell us exactly how they make their decisions then we will have the elements, we can forecast the elements, we can anticipate and then it becomes no longer a big secret. We are not there yet. Again, the financial stability report probably includes all of the different indicators from which we will ultimately have to choose, but there are so many of them as to be totally useless for this particular type of prediction and forecasting, so we are going to have to focus on those that support the tools that we will have to act upon.

Q28 Mark Garnier: Is it your gut instinct to have full accountability? Would you want every decision to be made available within, say, 30 days like the MPC has? Do you think that is a good idea or do you think there are going to be occasions when the FPC are going to want to intervene in a slightly covert way because it might have subsequent implications elsewhere?

Robert Jenkins: That is an excellent question and I think as much as I would like to think that every single decision could be aired instantaneously, inevitably there are going to be some issues where if revealed it would contribute to instability rather than stability. I would favour indulgence from time to time, perhaps a private briefing to assure you what is happening, but public is different.

Q29 Mark Garnier: But it makes a very interesting point about accountability because some are going to be accountable, others are going to be unaccountable. Some should be subject to maybe a 30-year rule, who knows. Ultimately, I think what I am trying to get from you is how do you think you kind of square that circle? How do you get to the point where you have proper accountability without necessarily hobbling yourselves from being able to do your job properly?

Robert Jenkins: I am sorry, could you just-

Mark Garnier: What I am saying is that I have heard absolutely, and I am very grateful for your very candid responses to my questions, but I think what I am trying to see from you is if you think there is an answer to this very difficult question of being accountable in a manner that gets around the fact that some things you just should not have to, or you should not need to, talk about, and other things are very free. How would you address that? Do you think there is an answer?

Robert Jenkins: Can we define that line in advance and get your blessing for it in advance?

Mark Garnier: Yes.

Robert Jenkins: I don’t know the answer to that. It is a very a good question and perhaps I can come back to you on it.

Chair: Thank you very much for coming before us. The Committee will now go into private session.

Prepared 1st November 2011