Q29 Mr Ruffley: Would you agree that the regulation of the financial system requires much greater transparency and openness than the existing system? That is not a difficult one.

Michael Cohrs : No. I am not sure I do agree with that because, again, in coming to this job, the amount of information available is staggering. It is high quality work. If you go to the Bank of England site, if you go to the HMT site, and read the reports that have been written in this country, and in the other countries, about regulation, about what we are supposed to do about the risk, it is staggering how much information is out there. The problem is making sense of it, because we are just overloaded with information. So I think there is a fair amount of information out there about what is going on. Now, would I like to see more when we do stress tests? Yes.

Mr Ruffley: That is what I am driving at.

Michael Cohrs : Absolutely would I like to see more when we are doing stress tests, to really understand every criterion in the model. If we put the models out that we are using, and let the various quants tear them apart, that could be quite interesting.

Q30 Mr Ruffley: Is it your understanding that that kind of publication, and making the workings behind your thinking transparent and open, is done at the moment or will you be arguing for more of that should you take up this job permanently?

Michael Cohrs : Mr Ruffley, you probably know more than I do but, as I understand it, there is a privilege-well, I do know this as a former banker-there was a privilege we had when we spoke to our regulators, that things we would tell them were held in confidence. I have more experience with continental regulators, with American regulators, although I did interact with the FSA, given that I was resident in London. On the one hand, that privilege meant we could go forward and give them information but on the other hand it didn't go out to the public, and some of it probably shouldn't have gone out to the public. I think a bit more transparency there would be a good thing.

Q31 Mr Ruffley: So you will be arguing for that?

Michael Cohrs : Yes.

Q32 Mr Ruffley: Will you, as an external member, be really independent and fearless in challenging what your other colleagues might say, if you disagree with them?

Michael Cohrs : I am not sure I would be fearless, but I certainly-

Mr Ruffley: You will not be fearless?

Michael Cohrs : I am not sure because I believe that you listen; I have a lot of experience working with groups, and quite often I go into a meeting with a point of view and if there is an intelligent discussion and you listen, sometimes you change your mind. You pick the moment when you attack or when you put your points of view across. I certainly have points of view, and I have some points of view that are not in keeping with my colleagues-we have seen this in several of our meetings already-and I am fighting my corner very aggressively.

Q33 Mr Ruffley: Would you speak out publicly if it was a serious matter on which you disagreed with them? After the due meetings and everyone expressing their view in a very civilised way-as you have characterised it-if there was something you thought was wrong, would you go public?

Michael Cohrs : Probably. Although you can all tell that I have an aversion to going public because I am just not sure how effective it really is. I will promise you, if I am not happy with what we are doing I will make a lot of noise within the committee in the proper way, within the bank in the proper way, and then to you if it is appropriate.

Q34 Mr Ruffley: I am going to give you an opportunity to tell us if you are fearless. Tell me the one big major mistake the Bank of England made prior to the crisis. Just one thing you thought they screwed up on.

Michael Cohrs : Northern Rock.

Q35 Mr Ruffley: How did they do that? The bank's posture in the lead-up to Northern Rock, during Northern Rock as well, how was that wrong? This is an important question. I want to know, and I think this Committee wants to know, how fearless you are. You are going to be joining the Financial Policy Committee, and we want to know what you think the Chairman of that committee, Mervyn King, and his colleagues did wrong prior to the crisis.

Michael Cohrs : Let us be clear. When I said-

Mr Ruffley: I am inviting you to criticise your future colleagues.

Michael Cohrs : I understand, but when I said Northern Rock, the Bank of England was not responsible for regulation. However, Northern Rock should not have happened. It was an old fashioned run; the way the bank was funding itself should have been clear to the regulator and, I suspect, even the bank as an observer of the UK financial system. Alarm bells should have been ringing and it shouldn't have been allowed. This was not complicated fancy derivatives, this was just old-fashioned; how you fund a bank and do the maturity transformation.

Q36 Mr Ruffley: That is interesting. So you are likely to make that kind of point when you meet Mervyn King and talk about recent history? I am sure it will crop up in the FPC. You will have that kind of free, robust discussion with him-will you?-from what you are telling us?

Michael Cohrs : Certainly, and probably even more so because I think I have slightly different lessons from the crisis than some of my colleagues do on the committee, and I have a slightly different emphasis as to what I think we need to put in place going forward, which I think is not as well established in the regulatory world.

Q37 Mr Ruffley: Those are helpful answers. Can I move on to two final questions, one in relation to the supply of credit? One way to effect that is the capital adequacy requirements. Another way is more direct intervention, for instance requirements on loan-to-value on mortgages. What is your position on direct interventions in the supply of credit, like loan-to-value requirements? Are there other tools that you think should be used?

Michael Cohrs : Thank you. I think there are other tools. I am not even sure that capital is all that important when banks think about the credit they extend. There is a perception that bankers sit and say, "We have this much capital, let's do some loans." That is not how it works. When I took over commercial lending at Deutsche, I was very troubled by the fact that it seemed like we were always there for our clients in good times but we always disappeared in bad times. It seemed to be a characteristic of that particular business, and I vowed to fix it and I did fix it.

In 2007 we announced to our SMEs that we would be there for them, and throughout the entire crisis the size of the loan book went up. It did not go down, it went up. We did that by hedging the credit book. By hedging the credit book we weren't frightened by what was happening in the marketplace and we could stay open for business. It had nothing to do with our capital position; it had to do with ensuring that the risk we took didn't affect us in a time of crisis. So there are other things you can do and I think this concept of getting banks to be there in bad times, when clients need them, is a very important point.

Q38 Mr Ruffley: That is a very helpful answer. What are the other tools that you would like to see used? You have mentioned the hedging that you put in place in your practical experience. I have mentioned loan-to-value requirements on mortgages-let's leave capital adequacy out of this-what other tools can be used in a direct way?

Michael Cohrs : In my view, the most important tool is simple leverage because any time we get into the more complicated definitions the banks are making assessments about risk weightings, and whether they are making those risk weighting assessments correctly is an open question. To me, a very simple leverage ratio is the best way to deal with how stable a financial institution is. Leverage ratios had risen to extraordinarily high levels pre-crisis and it is quite simple-most people would say it is quite crude-but I would look at leverage ratios very carefully. Secondly, it is liquidity. The banks go down because they run out of money, not necessarily because they are insolvent, so having money in the bank is incredibly important. After those two, I think, the next thing is provisioning. We had gotten into a period when we were only able to provision against incurred losses, whereas the systems that have provisioning, which allow the banks to look forward to expected losses, do much better when times get bad.

Q39 Mr Ruffley: My final question: you will know, having read the Vickers report-you have read the Vickers report?

Michael Cohrs : Yes, I have.

Mr Ruffley: One of the options for reform is subsidiarisation. This Committee has taken evidence that that may take the form of separate balance sheets for casino banking on the one hand and High Street banking on the other-separate management structures and so on. You are familiar with the arguments. One thing this Committee is quite interested in is the propensity for banks to cheat when their back is against the wall. They may have separate balance sheets but there are ways around a subsidiarisation regime. What do you think of that?

Michael Cohrs : It is a concern.

Q40 Mr Ruffley: If we go on the basis that subsidiarisation is indeed what happens and we suppose that is the first big problem in your in-tray as an FPC member, what would you be saying about designing a system that would either reduce the opportunities for cheating or put in place regulatory rules to prevent cheating, and how would it be monitored? If you could just give us your thoughts on that.

Michael Cohrs : It is not an easy-

Mr Ruffley: No, which is why I asked it.

Michael Cohrs : You are asking me a very difficult question. I think you are absolutely right to be concerned about it because within a bank it is virtually impossible to split the balance sheet into pieces. It is all one balance sheet, and the banks run that way, so trying to create the ring-fencing is going to be an interesting challenge. Now, I have read the report. I have listened to their very lengthy session with you, which I thought was a very good session, and I think they are hard at work thinking about how they are going to put it in place, including the regulatory oversight that will be required to do it. I do think it is possible but it is not going to be straightforward; it is going to have to have a lot of regulatory oversight to make sure that-in your words-the cheating doesn't happen.

Q41 Mr Ruffley: Do you think it is possible to design a system that can ring-fence the two operations of a universal bank?

Michael Cohrs : Yes, I do.

Mr Ruffley: Thank you.

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Q130 Mr Ruffley: It is quite modish at the moment to talk about the Government instituting a truth and reconciliation commission, to lay bare exactly what went wrong prior to the financial crisis. Do you think there should be a truth and reconciliation commission of that kind?

Alastair Clark : In a sense, I think there already has been. I don't put it in quite those terms, but there have been a range of different exercises from the FSA internationally. We have the Independent Banking Commission. We have a number of exercises, which touch on that territory. They have not been consolidated into a single exercise and I think-given where we are-it would probably be rather duplicative to embark on something of that kind now. I think in some ways perhaps it was-

Q131 Mr Ruffley: Can I just interrupt you? Is that because it would be uncomfortable for certain individuals, because what you have described, the pieces of work you have referred to, do indeed exist, but there has been no specific accountability for individual senior players, has there? Don't you think that would be an interesting commission to have to show the public that people are accountable, if they are senior policymakers, for things they have missed or mistakes they have made? I am trying to get your view of accountability.

Alastair Clark : The general principle is that if people have clearly defined responsibilities they should be accountable for discharging them. If they don't then they should be held to account for that. I think the question, or the trickier question, is how do you define those responsibilities in a sufficiently clear way, so that you can have legitimate accountability? This was one of the issues, as I mentioned, which precipitated a change in the MOU between the Treasury, the bank and the FSA.

Under the original version, the bank was described as being responsible for financial stability, which was frankly a completely unrealistic description of the role, given the absence of tools to discharge it. So I think, as I say, if one can define the responsibilities clearly and if the individual, or the institution for which they are responsible, has plausible means of discharging the responsibility, then fine. I think in many cases we were not, and possibly still are not, in that position.

Q132 Mr Ruffley: Assuming Parliament does its job well, and legislates for an architecture that has much more clearly defined responsibilities than the discredited tripartite system that you have just referred to, if policy decisions were being made with which you disagreed you would be prepared to resign on principle, would you?

Alastair Clark : Yes.

Mr Ruffley: Or would you say, "Collective responsibility of the committee, I will go with the flow even though I disagree with the majority decision"?

Alastair Clark : If it was what I considered a crucially important issue I would resign.

Q133 Mr Ruffley: Going back to the question of accountability, I understand why the Bank of England-and you have just explained-did not feel that much responsibility for the banking crisis; it was all the FSA's fault. I paraphrase that. Do you think it is odd that no one was either fired or resigned from senior positions in the FSA or the bank? Could you name an individual, either in the FSA or the bank, who has been fired or resigned as a result of their actions or inactions leading up to the financial crisis?

Alastair Clark : I don't want to name names, but I think you will be aware of what happened within the FSA. A number of people did depart. It wasn't designated, in any spectacular sense, as resignation or firing but a number of people did leave.

Q134 Mr Ruffley: Members of the public might be hard pressed to understand who took the blame for being asleep at the wheel.

Alastair Clark : They might, and you could argue-I would not pretend to know what the appropriate level of publicity is-that those who took an interest in the question could readily find out.

Q135 Mr Ruffley: Without naming names, of course, has anyone been moved on at the Bank of England as a result of their actions or inactions or defective policy advice running up to the financial crisis?

Alastair Clark : As far as I know, no, but I left the bank before the crisis.

Q136 Mr Ruffley: Don't you think that is odd?

Alastair Clark : I come back to the point about the definition of responsibility. It would certainly be odd if there were people who had defined responsibilities that they did not discharge.

Q137 Mr Ruffley: You have helpfully said that the new architecture must more clearly define and better define individual responsibilities.

Alastair Clark : Yes.

Mr Ruffley: Given that, what flaws do you see in the proposed FPC? It is in outline. We haven't legislated the detail of course, but is there anything you think might be defective in the proposals that are currently in play or is it 100% perfect?

Alastair Clark : I think it is highly unlikely to be 100% perfect.

Q138 Mr Ruffley: If it is not 100% perfect where do you think the deficiencies might lie?

Alastair Clark : Two things occur to me straight off. One is that-I don't know whether it is a deficiency, but I think it is a consideration-the Financial Policy Committee is dealing with an industry that is almost uniquely internationally linked, uniquely to the extent of the linkages. I think we need to be careful about the expectations of what can be delivered by a national entity with a leverage-principally, but not exclusively-over national institutions and national practitioners, and how far that is equal to the task of delivering financial stability in the round, given the international dimension. I think that is one thing, which is a question at least.

The second thing is, as has been mentioned this morning, that we are going to be spending quite a bit of time over the next six months at least on the question of what instruments are available to do what I have been saying, to translate the analysis into some action. There are quite a number of questions on that. One is that we talk in a broad sense about financial stability, but what does that mean in operational terms? As you may recall, 18 months or so ago the bank put out a paper discussing possible alternative provisions of what operationally might be involved in macro-prudential policy. Should it be concerned with curbing excessive growth of credit? Should it be concerned with curbing excessive growth of debt, or should it be concerned with ensuring that the banking sector, particularly, was resilient in the face of shocks?

All of those overlap to a degree but they are distinct, and I think one of the questions is going to be which? Or, conceivably, are we seeking to pursue all of those objectives and which instruments best address each one? For example, if one was talking about resilience, I think capital would be relevant. If one sought to increase capital requirements, it would be a direct way of trying to address the resilience. However, I think personally I have some question about how effective capital requirements would be, certainly in the short term, as a way of curbing credit growth. If the target was credit growth you may need to look to other things, like loan-to-value ratios or something of that kind.

I think that is the second area: the international dimension and getting clear what the instruments potentially available can deliver.

Q139 Mr Ruffley: That is an extremely helpful and interesting answer, Mr Clark, if I may say. In the light of that, and in the light of the fact that Parliament screwed up in putting in place in the first Labour Government the tripartite structure-legislatively, we did not describe it tightly enough-and in the light of your last answer, what input will vulnerable technicians and your colleagues be making when it comes to the drafting of the legislation? In short, are you in discussions with Treasury Ministers about the legislation, which needs to be just right, for all the reasons you have set down, when this place comes to legislate?

Alastair Clark : Absolutely. In relation to the FPC, the formal process is that the FPC is charged over the next six or nine months with looking at these various possible instruments for implementing macro-prudential policy. It is required to make proposals to the Treasury for the instruments that it thinks would be valuable, or at least worth exploring further, and it is for the Treasury to make orders under the Financial Services Act, or whatever it is going to be called, to give the FPC the powers to activate those instruments.

The FPC will have a role in the analysis of the instruments and in making recommendations to the Treasury Ministers on what those instruments should be, and no doubt there will be some discussion between the Treasury and the FPC about whether we have the same view about the efficacy or not. As a result of that, enshrined in powers will be some description of the instruments that are to be available to the FPC.

Q140 Mr Ruffley: I hope you will speak out, because when the tripartite structure was put in place I don't recall too much comment from the bank saying, "These split responsibilities will never work". I hope this time, because we only have one final chance to get this right, that you will be speaking out if there are things when it goes through Parliament, or amendments being made or not being made, which you think make the FPC less effective than it should be.

Alastair Clark : I would certainly hope that will be the case.

Read the full transcript here: http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtreasy/1125/11060702.htm