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Q381 Mr Ruffley: Mr Tucker, on the question of the FPC-the different parts of the Bank all working together with the FPC-you indicated that the Court would be responsible for making sure there was that co-ordinated work. I think that is the justification you gave for the FPC being a committee of Court. Yes? Who is going to be doing that specifically at Court? Is it going to be a small group? Do you know who the individuals are and do you think they will have the expertise to pull all that together?

Paul Tucker: I think the way this will manifest itself is that in the current Bill the Court has a responsibility for ensuring that the Bank as an organisation has a strategy for its financial stability work. This goes exactly with what the Governor was saying about stewardship of resources. Its key responsibility is to ensure that we touch all of the bases. Of course, we, the executive, take a draft to Court and the existing legislation says "consult FPC on that", "consult the Treasury on that", but ultimately it is signed off by the Governor and company, which is Court. Whether or not that is done via a subcommittee; at the moment it is. It is done via something called the Financial Stability Committee that was created during the crisis under legislation. That committee will cease to exist as a statutory committee. It will be up to Court whether they want to create a subcommittee of their own to do that.

In terms of the people on Court, I don't think it is for me to comment on that, quite frankly. Like me, these people are appointed by the Chancellor of the Exchequer. I think it is important that there is a blend of skills. I think it is important that some of them are reasonably expert in the financial services industry. I think it is important they don't have conflicts and have a degree of distance from the day-to-day. I think all of that could be set out publicly, but in terms of the individuals that has to be from the Chancellor and the Prime Minister.

Q382 Mr Ruffley: There could be a subcommittee constituted from existing Court members but that would be up to the Chancellor? I just want to understand the composition of the oversight body at Court. You are suggesting it is Court or it could be a subcommittee?

Paul Tucker: Technically the Court can choose to do it itself entirely or it can itself choose to establish a subcommittee for that purpose.

Sir Mervyn King: Can I give an example, which I think illustrates this very clearly? One of the most important functions of Court, and where I think you do need a body to look at this, is to ensure that the Bank manages the risk on its balance sheet effectively. We have seen an enormous expansion of our balance sheet during this financial crisis, and I hope at some point we will see a contraction. Court was determined to ensure that all the procedures we had put in place for managing the collateral and for managing the risk were done to the highest possible standards. The Audit and Risk Committee of Court is comprised of people with a great deal of experience of both audit and risk management in business and they have gone to great lengths-they meet regularly, they go into enormous detail, and they monitor. The internal auditor of the Bank reports directly to them, to the non-executives, and it is very important that this be done. Although it is not publicised very much, this is an important role of Court. What I would quite like to do if I could, Chairman, is to offer you a short paper spelling out some examples and functions that Court carries out in this process of managing the way the Bank operates.

Q383 Mr Ruffley: Yes. Just finally on this point, when would you expect that body to be constituted after Royal Assent?

Sir Mervyn King: Well, the Audit and Risk Committee works now.

Mr Ruffley: No, the committee that Mr Tucker was referring to that will be overseeing-

Sir Mervyn King: The Court only has eight non-executive directors from outside the Bank, if you exclude Lord Turner. But you have eight non-executive directors appointed with their expertise at running businesses. These are serious senior figures. They are not experts in policy, and I think the mistake would be to believe that they should be second guessing or able to comment on the policy decisions.

Mr Ruffley: I quite understand we don't want any second guessing.

Sir Mervyn King: These eight people can do it in full session of Court, if they want to set up a subcommittee to monitor particular aspects. But one of the things that the Chairman of Court has always done with the Monetary Policy Committee, and I am sure he would do it with respect to the Financial Policy Committee and the PRA board, is to have at least annually, if not more often, private interviews one-on-one between the Chairman of Court and individual external members, and one of the questions he asks them all the time-he has done with all the external MPC members you saw earlier on-"Are you unhappy about any aspect of the processes of the committee? Do you have the resources to do your job properly? Are you worried about how it is working?" If there is any suggestion that they are, he will initially bring it to me and say, "I want you to correct that. I don't want to hear this again" or he will take it to Court for a full discussion if necessary. He always reports back on these interviews to Court. So I think that is another very concrete way in which the Chairman of Court can ensure that these committees can function effectively.

Q384 Mr Ruffley: It is a very helpful answer. I think we are all agreed, we don't want anyone at Court second guessing on policy. I think we are all agreed on that. I just wanted to understand better than I did how this oversight function is going to be constituted and I think, Chairman, it might be useful if we had that committee in at some stage, whenever it might be constituted.

Could I just move on, Governor, to the first point you made in your very helpful opening remarks, that you didn't have an information power and that you would have to go to the PRA? Could you just flesh out what you meant by that?

Sir Mervyn King: I think that one of the things we were concerned about in setting up the FPC was obviously one area the FPC has to look at, which is the boundary of regulation. Indeed, it has the right to recommend to the Treasury whether that boundary should be moved. It will be the case from time-to-time that we will need information on institutions other than regulated institutions. But even where it comes down to regulated institutions, it does seem to me that it would be proper for the FPC to be able to say, "Well, look, we need these data" and be able to go to institutions. We can use the current data collection methods in the Bank in our unit that collects data from banks, but to have to go through the PRA always raises the difficulty that the PRA will say to itself, "This request has come in from the FPC. Is it really within the vires of the PRA to ask for these data?"

It seems to me, the only way to clarify this unambiguously is to give the FPC an information collection power. It may seem a small thing, and in many ways I don't anticipate great practical problems, but it has the potential at some critical point in the future where the PRA hesitates to collect data. We did see this with FSA in 2007-08, where we wanted data and they were reluctant at some point to collect it, under the very reasonable view that they had not seen the need for it and it wasn't clear to them that for their statutory purposes they should be collecting these data. It was just that the Bank wanted the data. I think it helps to have a greater clarification of the specific powers of MPC, FPC and PRA in respect of data gathering.

Q385 Mr Ruffley: Yes. The IMF have set up the Independent Evaluation Office to conduct independent and objective evaluations of Fund policies and action and the US Treasury has set up the Office of Financial Research for independent investigation and fact-based policy analysis. Do you see any merit in a similar arrangement being set up to evaluate policy work at the Bank?

Sir Mervyn King: To be honest, I think the evaluation of the policies that we carry out should be done by you. The question is whether you need a unit of that kind to help you. The reason the IMF needs such an Independent Evaluation Office is precisely because it isn't accountable to anyone else. It has an executive board but that is not-

Q386 Mr Ruffley: What about the US Treasury?

Sir Mervyn King: The US Treasury is not an accountability body. The US Treasury is a body to do with collecting information. I think it is very easy to set up committees and say, "Let's collect lots more data". I honestly don't think that is the solution to better policy. If we felt we needed more data then we would collect it ourselves, but the important thing is that you should feel content that you are able to evaluate the policies of MPC, FPC and PRA, not in a sort of technical second-guessing sense, because there is no point in that. I have always felt that far and away the most effective kind of accountability is when people ask very simple questions, not complicated technical questions but very simple direct questions. The question that came earlier this morning saying, "If your aim is to hit the inflation target, why is inflation so high?" That is not an easy question for us to answer. We have explanations and I think what you should be trying to do is to get us to explain what we are doing and why, in words and terms that everybody can understand. That is what I feel is policy accountability to Parliament.

Paul Tucker: Can I just add one thing on this, which is that the US Treasury body created in Dodd-Frank is, I believe, in part a product of just how many agencies there are in the US involved in financial stability. There is a commodities regulator, a securities regulator, three bank regulators, state-wide insurance regulators, and the Financial Stability Oversight Committee embedded in the Treasury is attempting to pull all those together. It is a bit like a tripartite committee for the US with, I think, more than a dozen members. In the UK we are taking a different approach. Other than the use of public money, all of the financial stability tools will exist in the Bank of England group. Therefore, we will produce the data publicly enabling us to be held to account, and if we don't we can be held to account for that.