David Ruffley MP Holds the Bank of England to Account

Monday, 20 June, 2011

The full transcript can be seen here:


Q297 Mr Ruffley: Dr Hilton, you have painted a picture that really runs like this: financial stability was the collapsed left lung. You think macro-prudential regulation would better sit in an improved FSA. It should not necessarily go back to the Bank, but I think you have nevertheless conceded-I think we all have to concede-that the FPC will sit as a subsidiary or as an entity of the Bank, and then the PRA will be a subsidiary of the FPC. The FPC has to get tooled up properly, doesn't it, and you have given two examples of where best practice might point us in the direction of amendments to the Government proposals. As I understand it, financial crises and unstable events can come at virtually any time, and you have implied there should be more frequent meetings than is perhaps envisaged. Do you think that should be a weekly meeting?

Dr Hilton: I think I would like to get away from the idea of separate, discrete meetings. This is a continuing party. I am not sure even if the word "committee" is quite right; it is a body. It should be a continuing body that deals with systemic stability issues going forward. That might mean that it should be staffed almost on a full-time basis. It certainly should have a full-time staff backing up whoever are the key people on that body.

Q298 Mr Ruffley: I think you also referenced a US practice where a specific-I forget the name of it now-body is responsible for the data collection.

Dr Hilton: The financial reporting office, which is a very interesting initiative. I assume that this has been raised by other people. Nobody quite knows how it is going to operate. It is a creature of the Treasury, but it is independent of the Treasury and it is going to have responsibility for collecting, collating and disseminating data on the stability of the financial system. It will be staffed. The head will probably be an academic, not a career Treasury official, somebody whose experience is in data collection and data management. Most people in the financial regulatory world are looking at this with great interest to see if it works and whether we should bring it in over here.

Q299 Mr Ruffley: Forgive me, but historically the Bank of England has had a very prominent role in financial regulation in this country generally. Why do you think there would not be adequate officials in the Bank of England to do that kind of work on financial data?

Dr Hilton: Because there is so much financial data now. It is at a European level; it is at an international level; it is also at a UK level. There are many competing bodies in this space: the National Audit Office is obviously one; the Treasury has a lot of information; there are all the Brussels agencies and IOSCO. There are dozens of acronyms stacked up to the ceiling, all of which have behind them bodies of data. I think certainly we could piggyback on the work of the office of financial reporting in the US. I don't think the intention is that any of this data should be proprietary. It is public data. Some sort of co-operation agreement with the OFR would make a lot of sense for the UK. We are dealing with international banks and international data.

Q300 Mr Ruffley: I will get on to the Court in a minute, but could I ask for your views on the composition. The shadow FPC has the Governor, two Deputy Governors and the current Head of the FSA. That is four voting members. The Governor can appoint two executive directors on top of that, who will be bank creatures. So that is six insiders and only four externals who will vote, and I think the 11th man is non-voting, but would be from HM Treasury. Does that seem to you an optimal mix: effectively, six insiders on the FPC plus four externals? One might even argue that one of the externals is a bank insider. I think you know who I am referring to. What are your thoughts on that?

Dr Hilton: My thoughts are there are not enough externals, and we have probably at the moment, if the interim FPC is an indicator of what the permanent one will be, probably the wrong outsiders. I think one is an investment banker and one is a former Fed official. So one is a regulator, an American regulator, and one is an American investment banker. I think this is not representative of the kind of skillet that we ought to have from the outsiders on this committee, but I defer to others on this.

Q301 Mr Ruffley: It brings me to my final question. Given that all these things need chewing over in some detail-the frequency of the meetings, the adequacy of the resourcing so that good policy decisions are made, whether it is a permanent body following things in real time, or a secretariat at least, how the externals are performing or whether or not there are enough externals-it seems to me that there are a lot of questions that you have referenced today and that this Committee has looked at, and doesn't that argue for a really high-powered technically informed Court? Because the Court is tasked with being the body under this regime responsible for the FPC. Doesn't that worry you, because in the Court, as currently comprised, there is a lot of room for improvement when it comes to the technical adequacy of some of the members who will, if nothing else changes, be the body to whom the FPC is accountable? Does that really worry you, because it rather worries me?

Dr Hilton: In my opinion, there has to be that body. Whether it should be the Court, I don't know, or whether it should be a parliamentary committee. There are various ways of skinning that particular cat. The Court, as currently constituted, would not be a satisfactory body for that kind of role, but I am inclined to share the view of my colleague that perhaps that is not is the role that the Court should really be filling.

Jane Fuller: I think you need more external input on two counts. One is to get the right sort of expertise as the external members of the FPC. Arguably, I think that it should be at least as many external members as internal, and that they should be people more from the real world, in terms of spotting credit bubbles. That is the thing we are most worried about.

The second thing is that you do need a counterweight to the bank. Mervyn King chairs virtually every committee. He and his executives dominate, they are in the majority and they have all the resources, and from a governance point of view it looks as though we are lacking challenge and counterweight to the Executive.

Q302 Mr Ruffley: I agree but, given that this structure or something very like it will be enacted-let us just assume that-the role of the Court becomes even more important. I wondered what sense any of you on the panel have as to how we could beef up the technical adequacy and proficiency of the overseers of the FPC, monitoring the performance of the externals and the resourcing of the Secretariat that will supply FPC members with data. It seems to me that to understand whether the FPC is doing a job or not-and the Court has been tasked with that-would require the Court members to be technically more adept and competent than certainly we have reason to believe they are at the moment.

Professor Garratt: As statutory directors of the Bank of England, they have a 24/7 responsibility and I think their commitment to that is as important as some of the technical skills. I am not saying that technical skills are not important, but it is the whole ethos that is created around that Court and the whole way in which you fight that was mentioned in the papers-the group think and all those elements-that is so important. I can think of many ways in which it is possible to build really effective boards like that. In my limited experience of central banking, the most extreme was in Saudi Arabia but there it was wonderful. They simply said, "We will choose the best people in the country and it will be an honour for them to be invited to join in this activity. They will be heavily monitored." They also had some sense of being able to say, "And money is no object". It was key to getting really motivated people into those roles, then to get those folk excited about the development of the banking supervisors and then below them the banking inspectors, so that the whole thing began to work as a hugely proud and committed organisation.

Professor Lastra: On your question of the composition of external/internal, I think it should be finely balanced. I think the externals are very important to avoid the group think. At the same time, you need the internals because you need intimate knowledge of monetary policy. There are a few synergies between monetary policy and financial stability that perhaps were missed before the crisis-let us make sure that we do not miss them again.

At the same time, the Court needs to be responsible to Parliament. It is like having a layer in between that goes, "Who guards the guardians?" and that is why I keep coming back to what is the standard in other countries, which is to have-particularly in the United States-greater mechanisms. Parliamentary accountability through reporting, through witnesses, and sometimes through having a dedicated committee of people who are technically competent to match the expertise of the Bank people who will be coming here to give evidence to you on how well or how badly they have managed to conduct financial stability. I would say that financial stability is as important as monetary policy, and that the neglect of one or the neglect of the other can be very detrimental for the country.

The Banking Act 2009, which gave the Special Resolution pretty much to the Bank of England, is one power too much, because now the Bank of England has four hats: it is the monetary authority; it is the supervisor both of macro-prudential and of oversight of macro-prudential; it is a lender of last resort; and it is in charge of the Special Resolution Regime. I have always worried that if an institution wants liquidity assistance from the Bank of England, it may be wary of doing so if the Bank of England is going to exercise the Special Resolution powers, which were given to it by the Banking Act. I know that the debate is about accountability, but that is what I think, although it goes beyond your question: it is one power too many.

Q303 Mr Ruffley: Again, to focus the question, do any of you think that the Court of the Bank of England, as currently composed, is adequate, is up to the job, is a body fit for purpose, to scrutinise the work of the FPC?