David Ruffley MP questions Sir Roger Carr and Sir David Lees on accountability of the Bank of England

Tuesday, 15 March, 2011

On the 15th of March David Ruffley MP questioned Sir Rodger Carr and Sir David Lees on the accountability of the Bank of England.

Q37 Mr Ruffley: I would like to talk about the history before we get on to the future. This is really for Mr Barber, Sir Roger and Lady Rice. Sir Roger, can you confirm that part of the 1998 Act puts a duty on the Court "to review the bankÕs strategy in relation to the financial stability objective"? That is very much the CourtÕs role; in fact, Mr Barber talked about a report in 2006. Who were the executives in the Bank who were doing work on financial stability?

Sir Roger Carr: Well, there are a group of executives in the Bank.

Mr Ruffley: Who were they?

Sir Roger Carr: The Deputy Governor.

Q38 Mr Ruffley: Just for the record, could you give the names of the people that you were scrutinising?

Sir Roger Carr: At the time we had Paul Fisher, Paul Tucker, who was the Deputy Governor responsible-

Q39 Mr Ruffley: The other two can chip in to help you with the names. I just want to understand who at the Bank was responsible for doing the work on the financial responsibility objective.

Sir Roger Carr: Yes. Andy Haldane was also involved, so these were the people that we had interaction with, from the CourtÕs perspective.

Q40 Mr Ruffley: Would you say their work was adequate in doing work on financial stability and making sure bear traps were clearly flagged up before 2007?

Sir Roger Carr: I understand bear traps, and the reality is that these people, from our judgment, are very competent and able people who have put a lot of energy and most of their life career into exactly this area of central banking. So they were people of-

Q41 Mr Ruffley: The financial stability objective that the executives were doing work on-you think they discharged that work adequately?

Sir Roger Carr: I think they did discharge it adequately. As we discovered later, the system and all the difficulties of the financial stability area were not things that were fully understood by all parties, but that is not to say that at the time they were not discharging their obligations correctly, and working hard to do it.

Q42 Mr Ruffley: Yes. You see, I have a problem with that answer, compared with the answer you gave some moments ago to Mr Fallon and Mr Tyrie. You said-I wrote it down-that the Bank "could have shouted louder. Whether people would have listened is questionable." That is what you said.

Sir Roger Carr: Yes, that is what I said.

Q43 Mr Ruffley: On what basis? What evidence do you have for it being questionable that people would have listened, had the Bank done its job of shouting louder? You are implying there was a fault. You said, "We could have shouted louder."

Sir Roger Carr: I think in hindsight one could have always shouted louder. On one very notable occasion, I was at the Mansion House where the Governor made a speech that was clearly really forewarning of the difficulties that may result from the way the financial markets were operating. He made a speech which referred to the risk of the champagne cork and, when the bottle was opened, of it being rather flat. He said that people should be careful; there was no new financial paradigm here, and it needed to be monitored. He made that point very clearly-everybody heard it-but it was at a time when the world generally was enjoying this artificial benefit of lots of cheap credit and were developing their businesses accordingly. People did not want to hear the bad news. The bad news was being given, and I think being given with authority. Now, it is a judgment whether if he had shouted more often people would have started to listen, but naturally I think, looking back, people only really listened when it was too late.

Q44 Mr Ruffley: You are painting a picture here of the poor old Bank crying in the wilderness. They were powerless in the face of these events in 2007 and onwards. Is that what you are suggesting?

Sir Roger Carr: I am not trying to paint a picture; I am just giving you the facts as I remember them.

Q45 Mr Ruffley: You are painting a picture. You are saying, "They could have shouted louder; whether people would have listened is questionable." I put it to you that there is more that the Bank could have done. That is its job-highly ranking, highly respected professionals in the financial world of this country. You think they did a "reasonable job"-another phrase you used. I have a problem here, because it was a massive screw-up that has affected the lives of our fellow citizens in sometimes quite horrific ways.

Sir Roger Carr: Yes. I do not think that emanated from the Bank of England.

Q46 Mr Ruffley: You do not think you could have done a better job?

Sir Roger Carr: I think everybody can always do a better job in hindsight, but I think the commitment, the vigour and the determination with which the job was being done at the time was very high indeed.

Q47 Mr Ruffley: You talk about being in a "learning situation"-I quote from one of your earlier answers. Do you not think it would be a good idea to get more people on the Court who knew about central banking? That is for Sir David and for you. You can go first, but I would like Sir DavidÕs view. Knowing about central banking-donÕt you think there should be more people on the Court who are good at that?

Sir Roger Carr: I think we need a balance of skills and knowledge on the board. You certainly need a good degree of knowledge about central banking; that is what the executive are primarily for. You then need to add to that through non-executive skills of a mix, some of which are central banking and some of which are not. It is dangerous to have only one skill set in any boardroom.

Q48 Mr Ruffley: I think most people listening to this would not particularly want someone talking about being in a learning situation. Let us move on to the future.

Sir David Lees: You invited me to-

Mr Ruffley: Yes, on that point about banking, and then I will go on to the future, to the.

Sir David Lees: Really what you are talking about is the mix of the Court, I think. Whether it is central banking experience or financial services experience or both, and bearing in mind also that we are looking today at the future, we are probably talking about the insurance industry, so I think you really need a blend of skills, but not exclusively financial services or central banking related. I do think that you need on the Court of the Bank of England two or three people-it would always be a minority-who have experience of governance, of running large and complex organisations.

Q49 Mr Ruffley: Okay, IÕve got the picture. Sir David, could you just list for me the key changes under the new arrangements to the way the Court will operate now that it will have responsibility for oversight of the Financial Policy Committee and other committees?

Sir David Lees: Yes. I think I can. If I start with the Financial Policy Committee, that is a committee of Court. It has a responsibility in the smaller print of contributing to the BankÕs financial stability objective, so there will be a close link between the Financial Policy Committee and the Court. I envisage, and this is looking into the future, the relationships between the FPC and Court to be not dissimilar in certain respects to the MPC. That requires me to say a little bit I think about the MPC, because the responsibilities of Court in relation to the MPC are essentially to make sure that they have the tools of the trade available to them to carry out their responsibilities. How do we do that? We do that in two or three different ways. We attend meetings, called pre-MPC meetings, where they are reviewing the economic developments of the last month. We have external members of the MPC at Court when we are discussing the latest economic situation. I personally interview every single member of the MPC in the first quarter of the year to ensure that they are getting the support that they require and to make sure that there are no governance issues about which they have concerns.

Now I see a similar sort of operation developing also for the FPC, where the Court would invite members of the FPC to attend Court to discuss financial stability matters. We would of course, because it would be our responsibility, initiate the financial stability strategy, of course taking into account the contribution that was being made by the FPC. I would certainly envisage face-to-face interviews with members of the FPC. I hope this gives you a slight picture of how I think it might work as we go forward.

Q50 Mr Ruffley: All that would be minuted, would it?

Sir David Lees: Certainly. Everything that is said in Court, subject to the generality point that Roger made, is minuted. I think the arrangements for the FPC, as I recall them, are that the Governor and the Chancellor meet twice a year to review financial stability, and I think there is a published record of their conversations. I also understand that the FPC will be fully minuted.