Treasury Committee
Oral evidence: Financial Policy Committee Appointment: Spencer Dale, HC 1236
Wednesday 30 April 2014.
Ordered by the House of Commons to be published on 30 April
Members present: Andrew Tyrie (Chair); Mark Garnier, Mr Andrew Love, Jesse Norman, Mr David Ruffley, John Thurso.
Questions 1-37
Witness: Spencer Dale, Executive Director and Chief Economist, Bank of England gave evidence.
Q1 Chair: Good afternoon, Mr Dale. It looks like the Bank of England has brought its own audience this afternoon. We are very pleased about that. We should warn you that there could be votes, which will disturb things. We will just adjourn for 10 or 15 minutes and then carry straight on. Can I begin by asking you whether you think that, logically, the FPC and the MPC should be one and the same committee?
Spencer Dale: I think it is a good question and a question that will remain relevant for some years, until we are in a position to come to a clear answer on that. If you start from abstract, I think the natural thing would be to put them as one committee. The close interactions between the Monetary Policy Committee and the FPC would suggest, “Well, why not have a single policy-making body that can take account of both objectives at the same time and set the instruments accordingly?”
The arguments going in the opposite direction are two. One we well know, which is the gains one gets in terms of accountability and transparency by having a clear alignment of instruments with objectives. That has borne very well for the MPC. When the MPC sets monetary policy, it is clear what it is trying to do. It is trying to hit an inflation target. It is not trying to balance more than one objective. One is that clear alignment of responsibilities.
The second one is rather boring, but a practical one that makes sense, which is just expertise. At the moment, we have four members on the MPC who provide considerable expertise in terms of monetary economics and we have five external members on the FPC, who provide considerable expertise in terms of financial stability. If one was trying to merge those committees either you would have a very large committee, which I think would be a problem in terms of dynamics, or you would start to lose some of that expertise, and I think it is important that we have that outside expertise.
Thus far, I think the way we have approached this issue within the Bank is to have two separate committees with the benefit of their expertise and the independence and transparency that gives, and then try to minimise these interaction and co-ordinating issues by trying to make sure the committees work as closely as possible together. I know Mark Carney has come and talked to you about the philosophy of One Bank, which is trying to make sure those committees are working as closely as possible. At the moment that is how we are trying to mitigate some of these costs of having separate committees, but I think it is a genuine question. Much of this, as we may talk about, is new in terms of macro-prudential policy and its interaction with both micro-supervision and monetary policy, so I think we should remain open-minded about that.
Q2 Chair: It is something that might subsequently be considered, even if it is not being considered now?
Spencer Dale: I think it should be. I happened to be with Mervyn King when you asked him that same question a couple of years ago and I think he said, “Let’s give it five years or so, get out of the crisis and then we can look back and make a considered view”. I think that was good advice then and remains so.
Chair: All right. We are hopefully coming out of the crisis—
Spencer Dale: Indeed.
Chair: —but we will see whether we are and that means considering it again in three years.
Q3 Jesse Norman: Mr Dale, who approached you to get this job? Were you tapped up by head-hunters as part of an independent process? How did that work?
Spencer Dale: Let me answer both the literal question and the implicit question. I discussed the possibility of this in vague terms with Charlie Bean some months ago, but it only came to concrete discussions in the context of the strategy review that I had and those discussions were both with Charlie and Mark Carney.
I am very aware that the Bank had committed to publicly advertising its executive director jobs, particularly those for the policy committee, and this one was not publicly advertised. I understand why it was not. By switching my job with Andy’s, the idea was trying to bring these two committees together. So in this case, I can understand why that was not the case but, in general, I think it is important that we continue to make sure that these posts continue to be publicly advertised and publicly contested.
Q4 Jesse Norman: Having ascended the ladder, you recommend it should be kicked away from underneath?
Spencer Dale: No, I am saying we always should be there. When I was originally appointed as chief economist, we were not publicly advertising those roles, so I can’t say I have already gone through that process; I did not. I think I was the last executive director appointed—
Q5 Jesse Norman: Are you detecting any genuine move towards One Bank? Of course, it looks like the same Sun King’s quarters it always used to be.
Spencer Dale: Yes, I do see a genuine move towards One Bank. Let us take housing. It is a live issue at the moment and it is a live issue for the Monetary Policy Committee, for the FPC and for the PRA Board. What I think One Bank means in practice is, when we sit down, we have a shared understanding of what we think is going on in the housing market; that we do not operate in silos with different briefing given to the three policy committees; and that we have a shared understanding of what different peoples’ views of the housing market are and also a shared understanding of how each of the policy committees is likely to respond to the issues going on in the housing market and how we think our respective responsibilities play out there. In that way, and it refers to the Chairman’s question, that can start to overcome some of these co-ordination issues and I think, yes, it is working.
Q6 Jesse Norman: But nothing has changed, has it, Mr Dale? The ancient Bank of England technique of reverse engineering the Governor’s views and then seeing if you can reach them by other means: nothing has changed to alter the incentives of people to do that, has it? How do you get some real independent-mindedness on these committees?
Spencer Dale: My recollection is that the Governor voted in the minority on the MPC for the last four or five months before he left. I also know that, in my six-year period while I was on there I voted against the Governor on numerous occasions and the Governor was in a minority on numerous occasions. This is important when we think about the increased powers and responsibilities of the Bank and the risk of the over-mighty citizen and so on. Much of the powers that the Bank has reside in its policy committees, and within those policy committees we have independent people making independent judgments and I think it is important that that continues for the long-term legitimacy of the Bank. I do not agree with the premise of your question.
Q7 Jesse Norman: But the MPC, to the extent it has that, according to the account you have just given, has it because of the mechanism between transparency and voting, which requires people to be put on their mettle. We are not carrying that over into the FPC, are we? So how is that going to work?
Spencer Dale: That is quite fair. We have been told in the remit where possible to try to reach consensus, and only where not possible do we have votes. My experience of sitting in on some of the pre-meetings of the FPC, I can understand why it makes sense at the moment to do it in that consensus way. The nature of the people coming to the table on the FPC is that they all have slightly different perspectives and slightly different information sets. It is not the same as the Monetary Policy Committee where you have nine experts who all pretty much have the same understanding of the economy and the same understanding of the data. I think, in the current environment, a lot of the time the FPC is trying to share information, learn from each other and then trying to reach a consensus in that way. I think the nature of the dynamic of that committee at the moment is different from that of the MPC.
Q8 Jesse Norman: The FPC is finding its way but, of course, it is going to be the June meeting that starts to be interesting because it is at that point that the question of whether and how far the punchbowl ought to be removed starts to bite, particularly in relation to housing. Is that not right?
Spencer Dale: I think the June meeting will look very carefully at the housing market and my own personal view is that, whatever decision is made in June on housing is quite significant. I do not think this is a one-shot game. I do not think it is: you do now and this is a one and one only game. It is part of a repeated process, but the reason why I think it is particular significant—we have already started along this process—is, just as with the MPC, people have to start understanding the FPC’s reaction function, how it responds to issues like this. The FPC already started doing that in November by explaining what was in its cupboard in terms of the tools available for dealing with the housing market. I think we will provide an update on that in June, and we will provide an update on our analysis of the housing market and whether we need to do any actions at this stage or, if not, what we will be looking for when we are making those decisions further on.
Q9 Chair: The FPC, as you pointed out, reaches its decisions by consensus, but that should not necessarily have a bearing on the capacity and willingness of its members to express different views publicly. Do you still hold that view?
Spencer Dale: In the Chancellor’s remit letter, he makes it clear that if you reach consensus the idea is that members should go out and try to explain that consensus view. My own personal view—
Q10 Chair: That is what always happens in the Cabinet.
Spencer Dale: Indeed.
Chair: Haven’t you noticed how they all come out of the Cabinet and all say the same thing?
Spencer Dale: As I was saying earlier, one of the real benefits of having a committee is making clear that different perspectives are taken into account when reaching those decisions. Even if you reach a decision by consensus, for individuals to go out and explain their perspective on an issue and why they think that is the right one is important. As I said in my evidence, I think it is just as important for the members of the FPC to go out and explain their views on key issues.
Q11 Chair: You do not agree with the Chancellor’s remit letter there, do you?
Spencer Dale: I agree with the Chancellor’s remit that one should not go out and try to emphasise differences where there are no differences, but I do agree with your point that individual members of both committees should go out to explain their perspectives on issues and why we have reached the decisions we have reached.
Q12 Chair: We can square the circle between those two?
Spencer Dale: Yes.
Chair: Okay. Well, we will keep examining that space.
Q13 Mr Love: Can I come back to the housing market, which you mentioned as a very live issue? After what you have just said, what would you define as the responsibilities of the FPC over house prices?
Spencer Dale: The responsibility of the FPC is to ensure the resilience of the financial system and ensure financial stability. The question for us is whether developments in the housing market, even in terms of transactions in the housing market or levels of house prices, are causing threats to the stability of the financial system. We know we should be nervous about what is going on in the housing market. The housing market, we know from experience, has the ability to turn from relatively comfortable warmth, in terms of supporting the economy, to overheating relatively quickly. We know that, for UK banks, housing assets are the most important part of their balance sheet. This is an important part of the banking system. We also know that recessions associated with booms and busts in property markets tend to be bigger and more pronounced than other types of recession. This is something we need to be conscious of and looking at, and that is why the FPC is doing so.
Q14 Mr Love: Can you put a little more flesh on the bones of what you need to see happening in the housing market for you to then consider intervening?
Spencer Dale: I think so far what we have been seeing in the housing market has been a good thing for our economy. A healthy housing market is good for the UK economy and what we have seen so far is a development in the housing market that has helped to support the recovery we have enjoyed over the last year or so. This is good for construction in terms of encouraging house-builders to build the homes we need to buy. It is good for mobility in terms of people being able to move to different parts of the country because the housing market is functioning. It is good for consumer confidence.
Thus far, I do not see evidence of a housing market that is massively overheating. Loan approvals are up by about a third from their trough, but they are still about a third off their peak. Importantly, net secured lending, the amount of actual increases in debt that is being driven on the housing market, is still at very low levels. Their growth rates are still at very low levels and, although we are seeing house prices increasing, the extent to which that is happening in London is far greater than that in the rest of the country. I do not think there are signs of overheating at this stage but, as I said, we do need to be on our mettle on this for the reasons I gave: the housing market can change quickly and, if it does, it can have significant implications both for the UK economy and for UK banks.
The issue for me particularly at the moment is, with what we are seeing in London, in terms of London house prices, is this just something very specific to London, or is this an indicator of what could start to spread out to the rest of the country? We have seen in the past a sort of rippling out in terms of house prices where house price growth in some regions, often particularly in London and the south-east, ripples out. I think there is also some evidence to suggest that what is going on in London is common across many other regions of the economy. It is just more pronounced here and this is this issue that you may be aware of.
If you think of, crudely, there being two types of houses: cheap houses and expensive houses. What we are observing is prices of expensive houses growing far more rapidly than those of cheap houses. That is true across the country as a whole. It is most pronounced in London because the ratio of expensive houses to cheap houses in London is far greater than in the rest of the country. That may tell you that what is going on in London is not, in some sense, unique to London. It reflects something that is going on across the whole of the country. If we were then to see these effects start to affect cheaper houses as well, that would have more worrying implications. I think it is those types of issues we are looking at.
Mr Love: Can I just say that for first-time buyers I do not think there is any such thing as cheap housing in London.
Spencer Dale: Indeed. I was using a crude—
Q15 Mr Love: These things are all relative. You will understand that the ability of the FPC to intervene in London is constrained by the fact that there is a lot of cash buying of property and, therefore, the tools that are available to you will not measure up to the need, but I wanted to ask you a much more general question. Can you see the FPC ever acting on a regional basis? Is there a scenario where you could see them intervening just in London or just in London and the south-east? We got a rather equivocal answer from the Governor on this matter. I wondered what your view was.
Spencer Dale: In principle, we could design the instruments that are available to the FPC to do so in one particular region. I think the issue here and I think the bar, which is why I hesitate to think it is very likely, is: can I think of house prices in just one region posing a systemic threat to financial stability? I can understand why house prices growing in a particular region may have all sorts of unfavourable consequences in pricing out ordinary people from being able to live in that region in terms of distortions, but the question with this would be: is this posing systemic risk to the financial system? I think that is the bar the FPC would have to think about if it was just concentrating on one particular region.
Q16 Mr Love: Sorry if this is an unfair question. There has been a lot of talk after the credit crunch about bubbles and sensing bubbles. How easy is it to recognise a housing price bubble, in the sense that we understand it, where it would be necessary for the FPC to take action?
Spencer Dale: I do not think it necessarily has to be a bubble for the FPC to take action. For the FPC to take action it can think that the level of house prices and the rate at which house prices are increasing and the implications that has for debt and the risk it may pose to the financial system further out are such that it wishes to intervene. I think trying to identify any type of bubble-like behaviour, by which I mean prices are rising and people are entering the market just because they think prices are going to continue to rise, is quite difficult, but my experience of the financial crisis is that one can’t then sit back on the sidelines and wait until one is certain that the market is out of control because if you do that you will be too late.
In monetary policy, we make judgments over a whole range of things that are highly uncertain because that is the name of the game you are in and that is my experience here. If we know for certain that we have a bubble-like market, we are too late in operating. I think the nature of this thing is you do the best you can in terms of analysis and, if you think it poses threats to financial stability, you have to act.
Mr Love: This Committee might be looking to the MPC and the FPC to have courage in the future, but no doubt we will come back to that.
Q17 Chair: You are not suggesting that the London house price market movements can be explained wholly in terms of a widening of differentials, are you?
Spencer Dale: What I was saying is the following. If one completely ignores London house prices and looks at the relationship between house price inflation and the level of house prices in other parts of the country—so it is just based on this fact that more expensive houses are growing more quickly—and then says, “Given that relationship based on house prices in the rest of the country”, so completely ignoring London, “given the composition of houses in London between cheap and expensive, by how much would I expect London house prices to be growing?”, a vast majority of that can be explained by this other relationship. The story there would be that what is special about London is not so much London per se but the fact that it has a high concentration of high-value properties.
Q18 Chair: You have clearly written this down on a bit of paper. I think we would like to take a look.
Spencer Dale: Some of it has already been reported in the FSR, but we can update you on that point.
Chair: I think that would be helpful.
Spencer Dale: Just to pursue for one second the reason why I think this is potentially interesting. It turns out, not very surprisingly, that the average loan-to-value ratios of mortgages taken out on expensive houses tend to be lower than that for those on cheaper houses where first-time buyers are going. In that sense, some of those credit constraints that we have seen over the last few years have bitten less hard for that upper end of the market relative to the lower end. The issue here is, as credit conditions ease, could this then start to feed through into house prices more generally? This is why I think this is a potentially interesting question.
Q19 Mark Garnier: Mr Dale, can I turn to the other side of the balance sheet for households and talk about their household debt? Are you worried at all about rising household debt?
Spencer Dale: Yes. I think the level of household debt remains a worry. As you know, household debt has come down as a proportion of income since the financial crisis but, at 140% of income, it remains high. It remains high historically and it remains high relative to other countries. We also know that, within that, that some pockets of our society are particularly inundated with debt. This is an issue, and an issue in terms of the implications of when interest rates start to rise, as inevitably they will at some point.
I have two or three responses to what one should do about that. One is in terms of what the MPC has said thus far in its forward guidance. It has said, “We are going to raise interest rates gradually and we are only going to raise interest rates at a point when the economy is stronger”. In that sense, the ability for families and households to withstand that rise in interest rates will be that much better at that point. In terms of monitoring or calibrating the risk to financial stability, there are two issues. One is, in terms of adding to that problem, that is the whole reason why the FPC has emphasised the importance of underwriting standards and making sure that people take out mortgages that they can afford in terms of the affordability test.
Just one final point. In terms of how big a threat does the stock of debt that we have seen so far pose to the banking system, I think that is one of the key issues of the stress tests that we are carrying out this year, the scenario of which we announced yesterday, to help us better understand that. A key feature of the UK variant of that stress test is to stress-test households in terms of what would happen in a world where interest rates rose sharply and you saw quite a large fall in house prices.
Q20 Mark Garnier: Could I separate that answer because there are several bits within that, all of which are very important. Taking that last bit, are you happy that the Bank of England has enough granularity on the data? Clearly, you can look at the wider picture and say, “These are the big numbers. It is 140%. It has come down from 170%. There is £1.2 trillion of mortgage debt and so on.” However, clearly, as interest rates rise, it is going to affect different households in different ways. You are going to have different effects regionally because, of course, in some parts of the country household prices are not going up as much as others. Therefore, you have a balance sheet issue. In other areas you just have a very high absolute level of debt. Are you satisfied that the data you have takes apart that picture in such a way that you can do a proper analysis to how it is going to affect certain areas and, therefore, give you a far—the average may be neutral but some parts are going to break very badly.
Spencer Dale: No, I do not think the data are good enough for us to do that at the level you talked about. We conduct some of our own surveys, but they are surveys and they have confidence intervals and sampling issues associated with them. In general, the quality of granular cross-sectional data on the debt and assets and liabilities of households is not as good as we would ideally like to conduct the type of analysis you just talked about.
Q21 Mark Garnier: An awful lot of the predictions and, indeed, forward guidance may be vaguely helpful to some people but the reality of it is it could be giving people a lot of sleepless nights. Could I also just stick to the wider picture? You said that you have what you referred to as being a very high level of debt; you are worried about it. Is there a level at which you would not be worried anymore in terms of the income to debt ratio?
Spencer Dale: I do not think of there being some sort of special number if it goes beyond that level or below that level and, in part, for the reasons you have just described, the issue here is as much to do with what is in the tails as it is to do with any single number. By looking at the representative number you may well get misled because what matters is the nature of that distribution and the vulnerability of the people and the tails of that distribution.
Q22 Mark Garnier: In that case, does the direction of travel of debt cause you concern, the fact that it is growing as opposed to coming down?
Spencer Dale: When thinking about the risks posed by debt, I think it makes sense to deflate it by the resources available. Household debt to income ratios have fallen from somewhere like 160% to 140%, so the direction of travel is helpful in that respect.
Q23 Mark Garnier: But that is expected to reverse.
Spencer Dale: A key driver here relates to the questions Mr Love has just asked me about house prices. The key driver of household debt, in terms of the increase in household debt in the 10 years or so prior to the financial crisis, was increases in house prices. What one observed was essentially households—young families—borrowing ever-increasing amounts of money to get on the housing ladder and that then going to essentially the older generation who were selling those houses. We saw quite a substantial redistribution of wealth from the young to the old.
The point here is these increases in house prices we have already observed will eventually start to lead to an increase in these debt to income ratios in the future, but intuitively, if one thinks about it, you realise that can take many years for the full implications to come through. The point here is, if we are all sitting in houses that have now increased in value, the impact of that on debt will come about only when all of us have sold our houses to new people entering the housing market. The impact of the house prices we have seen over the last year on household debt to income ratios will not be fully seen for as long as 20 or 30 years, until that housing stock has been gone through.
Just as a thought experiment, if one looks at the increase in house prices one has observed already and suppose house price inflation slowed very sharply today, so from now on and forever more it grew in line with income, just under plausible assumptions the increase in house prices we have already seen will be enough to take that household debt to income ratio back up to that 160% number, but it may take as long as 20 or 30 years for that to come through.
Q24 Mark Garnier: Do you ever worry about the fact that people mainly look at their main house as a balance sheet issue not a cash flow issue? By that I mean, given the fact that you have to live somewhere, it is not about what the house is worth, because that is pretty irrelevant. It is about what it is costing you on a week-by-week and month-by-month and year-by-year basis. Even if you have no mortgage at all, you still have your carrying costs. You still have the cost of that money. Do you think people look at this as a general point in the wrong way: it is not balance sheet; it is cash flow until you die?
Spencer Dale: I do not like to presume that I know how people think, but I agree with your analysis. For any individual, there may well be net wealth in their house, if they know at some point they are likely to move down and move to smaller houses. I think we have seen quite a trend in recent data. One of the features we are seeing is people moving downmarket and releasing some of their equity. For them, if you are long housing services and increasing the relative price of housing services, it does mean you are better off, but for every one person who is better off, somebody is worse off because somebody has to buy that house.
Q25 Mr Ruffley: On house prices, you said in relation to a question from Mr Love that the FPC could design tools to address problems that you perceived in the London housing market. Could you say a bit more about that? What could you do to specifically target a particular region? Just give me a hypothetical example.
Spencer Dale: Just to be clear, I do not think it is very likely, for the reasons I gave, that we would wish to do that because of the challenge whether they would be sufficient to raise financial stability issues, but if one were concerned, in principle—one of the tools over which the FPC has powers of direction is sectoral capital requirements. In this case it would be lending to the residential housing market and, in principle, one could say, “Look, we are really worried about the London housing market. If you, oh bank, are lending to houses based in London”, and the nice thing about this is you know exactly where the house is based because it is a gated property and it has a postcode associated with it, one, in principle, could say, “I demand that you back that with higher capital requirement for lending on property in London than in the rest of the country”. In principle, one could do that if you wished to do so.
Q26 Mr Ruffley: It is relatively straightforward, isn’t it?
Spencer Dale: Yes. As a conceptual matter, yes. I believe, although I would stand corrected, if one looks at other parts of the world, there are some examples where these types of regional tools have been used.
Q27 Mr Ruffley: We have talked about house price inflation as it may cause financial instability. Could you just have another go at defining what might be a plausible instance of house price inflation causing financial instability in the system in the next five years? How would that instability be manifest given big house price increases? Let us assume that as a given. Let us not complicate it with “it might fall back”. Let us just assume house price inflation as it is now continues fairly solidly over the next five years. How would you define financial instability in the context of rising house prices?
Spencer Dale: What would be the risk in that case?
Mr Ruffley: Yes. How would the instability manifest itself or the risk to stability?
Spencer Dale: The risk to stability in a world of rapid house price growth, that would lead to rapid growth in net mortgage lending and so household debt will rise sharply. Mortgage lending is already the single most significant sterling asset on a UK bank’s balance sheet. That will just become an ever-increasingly-large part of that balance sheet. Now, if we knew for certain that house prices would never fall back, one may be less worried, but even in that world you would you have a household sector that was very vulnerable to any types of shocks in one form or other because its balance sheet was very inflated with very high levels of debt. In that sense, any type of shock, be it to interest rates, be it to house prices, be it to the economy as a whole, that debt then becomes an amplification mechanism in terms of the economy. House prices will then be affected by the subsequent slowdown and then that feeds back in terms of the value of the assets held on the bank’s balance sheet.
It is a combination, to my mind. One is that mortgage debt is a very important part of the bank’s balance sheet, combined with the fact that increasing household debt means that the household sector is more vulnerable to shocks. Therefore that debt can act as an amplification mechanism and leave our economy more generally vulnerable to shocks, whatever form they may take.
Q28 Mr Ruffley: Understood. You have identified the bank balance sheet issue. You have been looking at that and you would also be looking at household mortgage indebtedness. Could you just put a couple of numbers on the ratios you have been looking at in each of those cases that would start the alarm bells ringing in your mind, put some sort of numerical value on that?
Spencer Dale: In terms of the household debt-to-income ratios, it is the same answer to Mr Garnier’s question. I hesitate to give a single number because I think it is to do with distributions as well, but if one saw household debt-to-income ratios starting to pick up and it looked like they would continue to pick up—remember this point I was making earlier about house prices—the implications that has for household debt will take many years to come through. I think if you saw it starting to pick up rapidly towards the rates it was picking up before and it looked like it was going to go on beyond that you should be worried.
Q29 Mr Ruffley: At the peak it was 170%. Is that right?
Spencer Dale: That was the peak in the late 1990s, I think, but, yes, it peaked just before the financial crisis. Then it was around 160%, but it was even higher, I think, at some point before that.
Q30 Mr Ruffley: Yes. You are saying that when it starts approaching that, you would then get your eyes on this and say, “You know what, this could be a problem”.
Spencer Dale: I think I would be looking at three dimensions. One is its level; secondly, its pace of change and where it is likely to go to; and third is that distribution. What does that tail look like in terms of the vulnerabilities?
Q31 Mr Ruffley: Yes. What about the bank balance sheet point?
Spencer Dale: On the bank balance sheet, again I am not sure there is a magic number. I think this is where exercises like the stress test we will do provide the ideal type of quantitative environment for us to test the vulnerabilities. How vulnerable are banks to a sharp slowdown, to a rise in interest rates, and to a sharp fall in house prices? That provides you with a quantitative framework for working out how worried one should be.
Q32 Chair: Do you think that IT systems pose a serious risk to financial stability?
Spencer Dale: In terms of cyber risk, yes. Andy, who is sitting behind me, is more expert in this. One of the first things that brought it to the Bank’s attention is that Andy, who speaks better on this than I am doing, was speaking to the banks’ credit risk officers and they came in and they were very concerned and alarmed about it, which is why it was on the FPC’s agenda and was raised in the meeting in June last year. As you know, since then the Treasury is leading a programme to better understand the threats posed by cyber-attacks and the vulnerability of the financial system in terms of trying to develop benchmarks of vulnerability and also a testing framework. Yes, I think this is a real issue.
Q33 Chair: What about just poor-quality IT systems? They do seem to crash quite a bit these days.
Spencer Dale: I think poor-quality IT systems have a significant bearing in the relationship between banks and their customers, in terms of the nature of that trust. Whether poor-quality IT systems in themselves pose a threat to financial stability I guess I would be less convinced about, but I am more than happy to be corrected.
Q34 Chair: One last point about the FPC. How much do you think your legitimacy depends on the public getting to hear about you, that you exist and what you are doing, or does it not matter so much?
Spencer Dale: No, I think it is critical.
Q35 Chair: They do not know about you at the moment, do they?
Spencer Dale: No.
Q36 Chair: In fact I have a figure here. 11% have heard of the FPC, of whom one-third wrongly think that you are basically doing the work that the PRA do. It is probably the same 11% that work in the financial services industry.
Spencer Dale: I accept that; although I think, unprompted, only something like 30% knows the Bank of England’s interest rate. It is quite a hard hurdle in all of these. I was conscious that both the Chancellor and the Governor have recently said that public understanding and awareness of the FPC needs to improve. To my mind, I think absolutely.
In terms of the long-running legitimacy of what we are doing, I think people have to understand what role the FPC is playing, how that relates to the Monetary Policy Committee and how that relates to supervision and that is important for two reasons. One is that part of what we are trying to do here is ensure that people have trust and confidence in the banking system and can go out and run their businesses, not worrying whether the bank is going to pick up their phone in times of need but be confident they are going to do so. Our communicating that is important. That is one of the benefits of what we will be doing.
Secondly, in terms of the housing market, at different points in time I have no doubt whatsoever we will have to make decisions that will have adverse consequences, at least in the short run, for different pockets of society. They may well be the right decisions to make and we should make them, but at that point I think the legitimacy for making those is people having a clear idea of: what is the FPC, what is it trying to achieve and why is that important? I think, in terms of the long-run legitimacy for us to do our role, people do have to understand. Now, the FPC has only been in its statutory form for a year, so this is early days, but I would hope, over the next three years of my term there, we would be able to improve that.
Q37 Chair: The public are going to get to hear about Spencer Dale.
Spencer Dale: If their hearing about Spencer Dale helps, yes. I think it is more important that the public has a better understanding of the FPC.
Chair: It has been very helpful. Thank you very much for coming to give evidence.
Spencer Dale: Thank you very much.
Chair: It is not the first time we have heard evidence from you and it certainly, I think, will not be the last.
Spencer Dale: Great, thank you very much.
Oral evidence: Financial Policy Committee Appointment: Spencer Dale, HC 1236 13