Treasury Committee
Oral evidence: Re-appointment of Dr Donald Kohn and Martin Taylor to the Financial Policy Committee, HC 1044
Tuesday 3 February 2015
Ordered by the House of Commons to be published on 3 February 2015.
Written evidence received from the witnesses:
Dr Donald Kohn: Responses to Treasury Committee questionnaire
Mr Martin Taylor: Responses to Treasury Committee questionnaire
Committee Report: Re-appointment of Dr Donald Kohn and Martin Taylor to the Financial Policy Committee
Members present: Andrew Tyrie (Chair), Rushanara Ali, Steve Baker, Mark Garnier, Stewart Hosie, Mike Kane, Jesse Norman, Alok Sharma, and John Thurso
Questions 1–134
Witness, Panel 1: Dr Donald Kohn, Member, Financial Policy Committee, Bank of England, gave evidence [Q1–68]
Witness, Panel 2: Martin Taylor, Member, Financial Policy Committee, Bank of England, gave evidence [Q68–134]
Q1 Chair: Thank you very much for coming to give evidence to us this afternoon, Dr Kohn, and a particular thank you for serving on this committee when you have other major responsibilities in the United States. It is valuable for the UK, as one of the two major financial centres requiring regulation, particularly, that we should have access to expertise of your kind and experience. After all, you served on the Federal Open Market Committee for a number for years and picked up a huge amount of expertise there on which you can draw in your current role. I would like to ask a few questions and I will also be asking Mr Taylor similar questions. What is it about the work of the FPC that demands consensus views at all times?
Dr Kohn: Mr Chairman, we are, particularly in the first several years of the FPC, setting a framework for the UK financial system, one that will make it much more resilient than it was. In the process of setting that framework, which was not all that well defined when the FPC was set up—what tools we would have, how we would give recommendations, how we would set the parameters for the financial system—I think it was very important that we reached consensus, that we agree on this basis—
Q2 Chair: But that is consensus about the initial rules of the game that you are going to operate on. That is not consensus about individual decisions, is it?
Dr Kohn: We are still setting out the rules to some extent by asking for tools and trying to reach consensus on how we would use those tools, what the indicators are we would be looking at and what our reaction function is. Down the road, as we start calibrating the tools, things like the countercyclical capital buffer and some of these other tools that we have asked for if Parliament gives them to us, there may well be more disagreements and people who want to dissent because they do not agree with the specific setting of the tool, but I think it is important to have consensus when you are setting out the framework.
Q3 Chair: That is the framework but, in any case, even once you have that framework in place, it is more than just consensus that is being demanded of you in a meeting, is it not? Quite severe restrictions are being placed on public examination of the issues by you except where you have put those views, in detail, on the record. Is that not correct?
Dr Kohn: That is correct in the sense that we are not supposed to go beyond the record of the meeting in explicating the things the committee took account of when it made its decision. On the other hand, I think the record has been a fairly complete record of our discussions. One of the things we should be working on is to make it as complete as possible so that, where there are different views being brought to bear to reach the consensus, those are represented and the public understands that we had this discussion and different views were represented.
Q4 Chair: But there may be points that you had not had time to make or you do not feel were best placed made at that time or that occur to you afterwards or as the result of a change of circumstances. In all four of those cases, don’t you think there should be an opportunity for you to develop those thoughts outside the FPC hearing?
Dr Kohn: In terms of the first circumstance that you mentioned, that there has not been time to develop, I have found the discussions have been very full.
Chair: What about the others?
Dr Kohn: If circumstances change, I would feel my first responsibility would be to bring my changed views to the committee. Rather than argue it in public and say, “I used to think this but now I think that”, I think I should work through the committee. If I have a different view and the committee does not accept my changed view, then presumably that would be reflected in the record of the discussion.
Q5 Chair: Did you have a discussion as a group about the code of conduct, which “specifically prohibits FPC members from expressing views that are not on the record”?
Dr Kohn: Yes.
Chair: Was there unanimity about that?
Dr Kohn: I do not recall anybody objecting.
Q6 Chair: In putting your interpretation of consensus today, you have sought to distinguish between this framework over here of initial ways of doing things and the output that will come from it once that framework is in place, which is a number of policy decisions and variations on those policies. If I do not have that right, correct me. Do you think that process is going to require a review of this code of conduct, given that pretty rigorous wording?
Dr Kohn: I think we should always strive for consensus in the committee and—
Chair: I am sure—
Dr Kohn: Quite frankly, you raised my—
Chair: That is true of the MPC, is it not?
Dr Kohn: Correct, and it is—
Chair: They all strive for it.
Dr Kohn: I think it was particularly true in the Federal Open Market Committee, which you raised my experience with. That was a committee that tried to operate by consensus. I was referencing a situation in which you would disagree with the instrument setting enough to have a different vote, to require a vote. I am just not ruling that possibility out. After striving for consensus, if you get to a point where you do not have consensus then there should be a vote and anybody who disagrees with where the other people are should have a chance to dissent.
Q7 Chair: I will just have one more go in this area. Don’t you think it is logical that there should be something that can enable the expression of a nuance, short of a vote of dissent, which does not necessarily require you to sign up lock, stock and barrel to something? Heads of state and senior ministers go out to Brussels and they agree a statement. That is the statement. It is a consensus statement. Then they come home and emphasise different parts of it and illustrate why they are emphasising those parts, which to some degree puts at least a cigarette paper, shall I put it, between them and a number of their colleagues. Why can the FPC not operate like that?
Dr Kohn: I think the members of the FPC can and should explain why the committee did what it did. This is something perhaps the FPC needs to discuss, but I do not see the reason to put a cigarette paper’s width in why I signed onto something relative to the committee. I think I should have the obligation to explain what the committee did and why it did, and I would hope my views are reflected in the record so I can reflect them in my discussion. The more complete the record is, the less constrained I am.
Q8 Chair: You told us that you came into the last meeting on the leverage ratio favouring higher leverage requirements than were supported by the majority.
Dr Kohn: Right.
Chair: But you did not vote as, in the end, you were comfortable with the consensus.
Dr Kohn: Right.
Chair: What happened?
Dr Kohn: In the process of discussing the situation, first, I realised the strength of and the reasons for the majority’s view about how the leverage ratio should relate to the risk-weighted ratio and why it was a good idea not to have that break point in terms of risk-weighted assets shifting around.
Secondly, I got assurances from the committee in the process of discussion that the leverage ratio would be taken quite seriously. It would be part of the stress test hurdle. I am not sure in 2015, but it would become part of the stress test hurdle. Violations of leverage ratio would be treated like violations of risk-weighted ratio. The meeting occurred immediately after the G20 FSB disclosure of the total loss-absorbing capital, so it looked like banks would be held to very high levels of capital overall.
In general, I became more comfortable that this leverage ratio, although lower than I had anticipated, was part of a system that would keep the banks safe.
Q9 Chair: That is a very interesting explanation. When you come before the Committee will you consider yourself bound by these consensus requirements or when you are before Parliament will you consider yourself to be able to express yourself?
Dr Kohn: I obviously feel myself free to express how I came to that consensus and I think those factors were reflected in the record, so I feel comfortable explaining that. I felt comfortable answering the question and when I answered that question I did not feel like I was constrained.
Q10 Chair: The fingers of the Treasury are all around this, are they not? Did they have a hand in writing the code of conduct, do you know?
Dr Kohn: I do not know.
Chair: Did they see it?
Dr Kohn: I do not know.
Q11 Chair: I think that is something we need to find out. Certainly, you can see clear indication from the Treasury, in the remit letters, for example; in the struggle to secure the Bank’s independence over the leverage ratio, which the Parliamentary Commission on Banking Standards recommended and the Government then prevaricated about. Both of those are indications that the Treasury were not that keen to see any breach of consensus.
Dr Kohn: Certainly, the remit letter reinforces or is consistent with the code of conduct.
Chair: Reinforces rather than just consistent; am I not right?
Dr Kohn: It reinforces it, yes.
Q12 Chair: I will not go into the detail of that reinforcement but it is pretty clear in the words.
Just one last question on this area. If you look at the history of financial stability blunders, it is fair to say that a misplaced consensus tends to be part of the reason for the scale of these crises developing. They develop for quite a while where people say, “It is a new scenario now. We are in a new paradigm”, and all this sort of stuff and then learned tracts are written on it. Then we discover that things are not so different after all and the scale of the cliff edge we arrive at and then fall off is larger than it would otherwise have been. Is there not a particular concern that, if we have a body that is expressly there to police this area that is required to operate by consensus, we might find it is less likely to be able to cope with providing advance warning and, if necessary, acting on it?
Dr Kohn: There is a risk, Mr Chairman. I agree with that. The reason the committee has external members is to make sure that groupthink does not take over the committee. At least to date so far, through the interim committee and the actual committee, I feel like my views have been heard and reflected in the financial stability report. It is not just the recommendations or the directions of the committee. The whole financial stability report and our discussions of what the risks are go through several rounds. They are very complete and open discussions and, in my experience to date, those discussions have been reflected in the FSR even if they have not led to specific recommendations. However, your point is a good one and I agree with it.
Q13 Rushanara Ali: Dr Kohn, I wanted to turn your attention to the situation in Greece. Shortly after the election our Prime Minister put out a tweet saying that the Greek election would cause economic uncertainty, and our Chancellor said the possibility of a Greek exit from the eurozone is the greatest risk to the global economy. Could you give us an assessment of how serious a potential Greek exit from the euro would be?
Dr Kohn: My expectation is that Greece, the eurozone members, the IMF and so on will work together for an agreement. We have heard some language in the last day or two that suggests a little bit of progress, a little bit of give, and I think there is enough pressure on both of them that that is not going to happen. However, your point is well taken. In a tense situation like this, people are manoeuvring, accidents happen, things happen that are not intended or people get pushed into corners. The risk of that is small but not zero.
As to how serious a failure to renegotiate the agreements would be, leading, perhaps, in the extreme, to a Greek exit, is very hard to tell. It is a risk. It depends on not just Greece but how that spills over into other countries and into the political as well as economic situation in other countries. It is a risky situation.
Q14 Rushanara Ali: What are the implications of those risks to the UK if there is a potential exit?
Dr Kohn: I think it would depend. The exposure of the UK and the UK financial system to Greece itself is probably very small. It depends on what would happen next and how this would play out.
Q15 Rushanara Ali: Just one final question. What is the role of the FPC when it faced with external risk to the UK financial system in this sort of context, given that we are a bit removed from the eurozone? What is your role in particular?
Dr Kohn: The role of the FPC is to work with the PRA to reinforce what is already there in part to make sure that UK banks and the UK financial system have reduced any risk that might be there. This is what we did in 2011 and 2012 when the previous crisis was there. We worked with the PRA and urged them to work with the banks to see how to reduce the risks they might face. Our job is to make sure, as best we can, that the UK system is stable and resilient. That is one aspect. Another aspect is what we have been doing all along, which is requiring more capital of the UK banks. That capital is there to guard against the unexpected, the unanticipated, the tail risk, and I think having more capital makes the system safer.
Q16 Mike Kane: Dr Kohn, I have some questions around priorities and challenges and risks. How close do you think we are to ending “too big to fail”?
Dr Kohn: I think we have made a lot of progress, Mr Kane, but we are not there yet. Again, a structure is being put in place; having much more capital than has been there for decades; having liquidity and liquidity requirements; the Bank restructuring its own liquidity provision; risk management systems that being put in place in banks; and, finally, part of the capital requirements is through the stress test. Instituting the stress tests in 2014 and developing them further in 2015 and beyond will help us to make sure the banking system is safe. Last would be the resolution process. The UK is developing a process for resolving these banks, getting that capital in at one level and making sure it can be moved to the areas that, if they fail, might have systemic implications for the UK economy; getting the resolution process down so that these institutions can be failed, shareholders wiped out and some of the creditors converted to equity-holders without disrupting the economy. I think the path forward has been drawn but we are not there yet.
Q17 Mike Kane: In terms of non-bank finance, banking and insurance are heavily regulated. What is the role of the FPC in encouraging non-bank finance?
Dr Kohn: The role of the FPC in encouraging more non-bank finance?
Mike Kane: How can more encouragement be given?
Dr Kohn: One of the medium-term objectives of the FPC is to encourage safe and resilient non-bank finance. It is important to get the securitisation markets going, to get the bond markets going, to give UK savers alternative places to put their savings and UK borrowers alternatives to commercial banks to finance their capital investments, but to do it in a way that is much safer than, say, it was in the US mortgage market, which was obviously quite unsafe. I think it is an extremely important objective and it is part of the FPC’s remit or part of its objectives.
Q18 Mike Kane: You argue in a piece I was reading that the FPC will need to monitor the implementation in the UK of international understandings. Did you have any particular international understandings in mind?
Dr Kohn: The resolution issue is an important one, and creating the structures and having the confidence in how other countries will treat their systemically important institutions when they fail, so that we do not get into a situation, which we had post-Lehman, of countries ring fencing their assets. I think we are moving there. The Financial Stability Board has been important in moving that agenda along. I sit on a committee in the US that looks at the resolution of systemically-important institutions for the FDIC. I think we have made tremendous progress in the last few years. You have globally active banks but people like to say after the last crisis, “They are global in life and national in death?” We have to be able to resolve these things. The home country has to be able to resolve these without endangering other countries, making sure other countries understand that their systems are not at risk, so there can be a resolution with losses where they need to be but without the system being endangered.
I think the other side, back to your “too big to fail”, is agreement on the capital level; making these guy safer and making sure that we do not have international arbitrage across borders so that problems can migrate from one jurisdiction to another.
Q19 Mike Kane: But in terms of international understandings, it takes two to tango. How will the FPC monitor those understandings in, say, resolution?
Dr Kohn: The FPC do not engage directly in the international forum but we do encourage the Bank and try to take the lead in putting forth ideas. It is the Bank and the Treasury to some extent, but particularly the Bank, the PRA and the FCA that engage in these international fora. They came to us and make sure we understand what they are doing and we try to make clear to them what we think is required. You are right; we do not engage directly, but indirectly through the Bank, the PRA and the FCA.
Q20 Mike Kane: My final question, Dr Kohn, if I may. You told us that the FPC is transitioning from concept to implementation. Do you want to outline what you think the risks are in that?
Dr Kohn: As in responding to Mr Tyrie, I think we are getting the structure in place. Our job now is to make it clear to the public and to the financial system how we are going to implement and use our potential powers of direction and powers of recommendation and what we are going to be looking for. As I said, we are moving more into an implementation stage. I think the challenge there is to try to be a little more predictable so that people can anticipate what we are going to do and hopefully behave in a way that makes it unnecessary. This is part of the indicators problem. This is new. Macroprudential policy has been around for generations in one form or another, but in this globally-integrated system it has just been revived since the financial crisis and we are feeling our way.
Q21 Stewart Hosie: Dr Kohn, is it a worry that, because the public only have a limited hazy understanding of the role of the FPC, the banks may be able to blame the FPC when credit is constrained or the cost of credit increases?
Dr Kohn: It is a concern that the public’s understanding of the FPC is not as great as it could be. Again, I think this is related in part to the newness of this so-called macroprudential policy and the newness of the committee and the fact that we are just getting started in implementing our policies. It is important for just what you said. We are going to be trying to make credit more expensive and build the resilience of the system especially at times when things are going well. People will say, “Well, what are you excited about? Profits are high. Capital is high. We are having a great time here borrowing and building homes”. Then we are going to have to say, “But we are going to make it more expensive because we are concerned about discontinuities and problems developing”, the complacency that Mr Tyrie mentioned.
Q22 Stewart Hosie: Absolutely. You were very clear in what you said to us. Public support and understanding would be essential when we act under circumstances in which threats seem small and distant but when our actions constrain credit and all the rest of it. Is it possible then to interest people in the work of the FPC and why it might do things in the future before the FPC itself becomes the story?
Dr Kohn: I think it is very important to explain that. This is a very important forum for explaining that, so preparing people for that. I believe our first experience was our housing recommendations last June. To tell the truth, and I told my colleagues this, I was pleasantly surprised at how understanding the public was. They could see that housing prices were rising and houses were becoming less affordable. We had just been through a very serious crisis, partly based on residential housing. The fact that the FPC took out some insurance to prevent a deterioration in conditions was well understood, but that does not mean that its future actions are going to be well understood. I agree with your point.
Q23 Stewart Hosie: This is quite unusual because it is a reappointment hearing, so it is not a common feature. Apart from this kind of forum, what do you think the best approach is to increasing understanding of the role of the FPC?
Dr Kohn: We need to do this in multiple different forums. I think in the academic world is helpful; in newspaper interviews and articles, op-eds and so on, to hit a broader audience; regional visits to talk to businesses and others out in the regions; and using the Bank’s system of agents to communicate back and forth. I do not think any one thing is going to do it. It is going to have to be on multiple fronts that we try this.
Q24 Stewart Hosie: Just one final question, because I am conscious of time. Obviously a large part of what you do, selling the FPC, is included in the narrative around the financial stability report. Do you think that yet does that part of the job in terms of communicating what the FPC is for and why it may have to take tough decisions at some point in the future?
Dr Kohn: There is always room for improvement and it is a longish report with a lot of detail, which I find very interesting and useful. I am not sure the public would find it very interesting and useful. There may be ways to improve the report and there may be ways to leverage the report into smaller pieces, highlighting certain things. There is an executive summary now but we do need to think about to get those messages out, I agree.
Stewart Hosie: That is helpful, thank you.
Q25 John Thurso: You said in answer to question 4, I think it was, that you were particularly interested in working with your FPC colleagues on developing the indicators that could be used.
Dr Kohn: That is correct.
John Thurso: Following on from Stewart Hosie’s question, because I think this is a good area to explore, you also said that set of indicators could be complete but we need to be better at spotting risks. We have moved from a simple set of indicators of five. In 2012, Governor King gave us two pages in the latest financial stability report. How did these indicators fulfil your aspiration for them?
Dr Kohn: I think they are a step forward. It is a complex economy in a complex financial market and no handful of indicators, including five you could count on one hand, is going to summarise all the problems that may crop up to find the areas of complacency that Mr Tyrie was referring to. Unfortunately, in some sense it is not going to be a simple set of indicators. You have to look at households and businesses as well as banks and try to find the non-banks. I think the hard indicators that we are just getting into, not only here but in other countries, are the interconnections. Part of what happened in the crisis was that banks were connected to other institutions in ways that were not obvious ahead of time and there is academic and other work and going on trying to map those interconnections. There are a number of areas we could work on, on the indicators.
Q26 John Thurso: Which would you consider to be the most important for looking for danger signs in the economy, bearing in mind, and following on from the last question, the public and the world at large need to see the signs going red just as much as those in the ivory towers?
Dr Kohn: First, we need to look at credit growth. If credit is growing rapidly, I think that is a sign that something is going on underneath. Is that a demand phenomenon or a supply phenomenon? Are banks being easier in granting credit in ways that might build vulnerabilities? I look at credit growth. Now, there is an indicator of credit growth to nonfinancial businesses and households relative to a trend in the UK and many other countries that fell so far in the crisis that I do not think it is going to be very useful for a while. We are required by law or at least by European regulation to start with that. I do not think that will be useful. The fact that there has hardly been any credit growth in the United Kingdom, for businesses in particular and has been very moderate growth to households, to me, tells me there is not an issue now and why I was so comfortable voting for the—
Q27 John Thurso: Not having growth says there is not a problem now, but having growth does not necessarily say there is a problem in the future. It depends on how you—
Dr Kohn: That is right. It depends on the speed and the terms of the credit. I would also look at the financial system. Our indicators are much better for banks. If we saw maturity mismatches building up, short-term borrowing to make long-term loans, or leverage building up, that is assets rising relative to capital, those would be dangerous signs. Those would be important.
Q28 John Thurso: Would it be fair to say that, when one is looking at a potential financial crisis, financial stability as opposed to the potential of a downturn in trade, which is part of the cycle of the economy, most of the indicators are going to sit within the financial system and mostly within banks and their balance sheets and those would be the red light areas?
Dr Kohn: You are right. Most of them will be within the financial system, but not entirely. I would not downplay looking at household balance sheets and business balance sheets because they are, of course, the counterparty of the banks, but also the financial stability concerns might happen if they become too extended or there is an unanticipated increase in interest rates or a weakness in income and profits and then they get squeezed, even if the banks look good. Then they withdraw and they stop spending. It is a macroeconomic phenomenon working through the financial markets because it is through the debt markets.
Q29 John Thurso: What I am asking is: do you think it is possible to develop a set of a relatively small number of somewhat simple indicators that, when they go red on the dashboard, you can say straightforwardly, “There is a problem”, or is that an aspiration too far and this is always going to be about the subjective judgment of the committee?
Dr Kohn: It depends on what you mean by “small”.
John Thurso: Less than large.
Dr Kohn: There is always going to be a matter of judgment. Even if we had something that, in history, was a good early warning sign, in the event, when we are there, that is a sign to dig down underneath and try to see what is happening and then to explain it in the financial stability report and in our recommendations to this Committee.
John Thurso: I shall follow your developing work with great interest.
Dr Kohn: Thank you, sir.
Chair: It is good to know we get so much agreement and co-operation here.
Q30 Mark Garnier: I am going to talk to you about the leverage ratio now. The FPC proposals for the leverage ratio were greeted with enthusiasm and glee by the industry. Do you think the FPC has fallen victim to regulatory capture?
Dr Kohn: No, I don’t. As I described to the Chairman, we had a vigorous discussion about what would be adequate or what would do the trick to protect the resilience of the system. I personally felt no special pressure to keep it down or to do something like that. I don’t feel that it was a result of regulatory industry capture at all. I feel like it was the right thing to do.
Q31 Mark Garnier: But you suggest you would have gone slightly further. What would your suggestions have been?
Dr Kohn: If I inspect my priors, I think I would start with a slightly higher ratio and then build from there. That is why I came in to the discussion.
Q32 Mark Garnier: You would say 4% rather than 3%?
Dr Kohn: That is how I came into the discussion, something more like that. When I had answered the Chairman’s question a couple of years ago, when he quizzed the then Financial Policy Committee members what our leverage ratio was, I think I said four. He is nodding yes. I did come in but then when I heard the reasoning behind the 3% plus, when I got those other assurances, I felt like that was enough.
Q33 Mark Garnier: This is the risk-weighted element of that? Is that what you are referring to?
Dr Kohn: Referring to keeping it 35% of the risk-weighted, but also being proactive on changing the risk-weighted one when we saw problems developing, so that would bring the leverage ratio up.
Q34 Mark Garnier: What is your understanding of how this is going to affect the banking sector? Is it going to help them? Is it going to restrict certain parts of the banking sector? How do you see it playing out when it—
Dr Kohn: How the leverage ratio affects the—
Mark Garnier: Exactly, when it starts to bite. Yes.
Dr Kohn: I think it is complementary to the risk-weighted assets. It prevents too much leverage from building up when you do not have as much confidence as you wish you had in the risk-weighted assets. It does have a particular effect on mortgage lenders because mortgages have very low risk-weights. I think they tend to be caught by the leverage ratio sooner than other lenders.
Mark Garnier: The building societies.
Dr Kohn: Building societies, right. It also has a particular effect on broker dealers and investment banks because they tend to have large balance sheets relative to their capital, RPs reversed in and out and things like that. We were aware of that and we had public comments to that effect and that played into our discussion. We took account of the public comments.
Q35 Mark Garnier: I have one more question, if I may, which is more your personal opinion and a slightly hypothetical, almost philosophical, question about the leverage ratio. At the moment the Monetary Policy Committee is targeted with controlling money supply through inflation targeting. Do you think leverage targeting on banks would be a better control of money supply and possibly a more effective tool to be used by the MPC than inflation targeting?
Dr Kohn: No. First of all, the leverage ratio is not going to be binding most of the time, so it is not a tool that can be used. It is more about resilience. I think the Monetary Policy Committee has the right tools: interest rates and the size of the Bank’s balance sheet. That is not to say that what we do in the Financial Policy Committee and what happens in the Monetary Policy Committee do not have effects on each other that we need to take account of. They certainly do. We look very carefully if they are keeping interest rates low for long and that may be having an effect on search for yield and financial stability issues. We discuss whether the search for yield and liquidity illusion and things like that are having financial stability effects and we talk about that in the financial stability report as well.
Of course, what we do might affect the channels of monetary policy effect. We have had joint meetings with the Monetary Policy Committee, for example, on housing; not really a meeting but briefings—to discuss the housing situation. I anticipate more of those in the future. I think it is important that each committee knows what the other is doing and why it is doing it, but I also think it is important to have separate committees.
Mark Garnier: That is very helpful. Thank you very much indeed.
Q36 Chair: Dropping down from 4% to 3% on the leverage ratio is not a little thing, is it? It is not a tweak. This is huge. We are talking about an increase in multiples from 25 to 33. This is quite large. You have said that you were persuaded on the grounds that RWAs could do more of the heavy lifting, in a nutshell. Why do you think that is the case, bearing in mind the history of incorrect estimation of RWAs?
Dr Kohn: The other thing that has changed in the probably three years since I answered your question with 4% is that the RWA framework has been worked through and we have the SIFI surcharge, the extra capital for G-SIBS, the countercyclical capital buffer and changes in what is being counted as capital.
Q37 Chair: Those changes have moved in both directions, have they not?
Dr Kohn: In different jurisdictions, right.
Q38 Chair: Yes. So is that an improvement? You have just listed it as one.
Dr Kohn: Not entirely.
Q39 Chair: Is that net on the upside or net on the downside or do you want to come back?
Dr Kohn: I think there has been more clarification about what qualifies for tier one capital. I do not remember exactly where we were when I answered that question a few years ago.
Q40 Chair: Would you mind very much coming back to us in writing on that third point because that is quite a big one.
Dr Kohn: Okay. The other point, though, is the total loss-absorbing capital. As I said, the FPC met just following the FSB G20 meeting that set this 20% or more for total loss-absorbing capital. I think the whole framework has developed in a more rigorous way than I probably had imagined it was going to develop when I said 4%. That is my story anyhow.
Chair: It is that last phrase that—
Dr Kohn: No, I should not have said that.
Chair: You certainly should not have said that.
Dr Kohn: I retract that.
Chair: Too late now.
Q41 Steve Baker: Dr Kohn, do you think it is fair to say that the financial establishment was shocked by the scale of losses during the crisis?
Dr Kohn: The financial establishment was shocked?
Steve Baker: Yes, the regulatory establishment, the banks themselves; were they shocked by the scale of losses?
Dr Kohn: Yes.
Q42 Steve Baker: We have had exchanges on this Committee where we have talked about the inadequacies of risk models and we have had some very interesting testimony. If memory serves me correctly, and it is memory, I think it was Sir John Cunliffe who connected the inadequacy of the risk models to the need for leverage ratios.
Dr Kohn: Right.
Q43 Steve Baker: I am particularly interested in the offsetting of exposures using credit default swaps and other synthetics. What is their role in this whole panoply of problems?
Dr Kohn: You are getting me into a technical area that I am not familiar enough to answer without making mistakes.
Q44 Steve Baker: That in itself is very helpful, thank you, but I will just make the point. I rang up one of my dissident banker friends who is an expert in this area and he told me that this whole area of leverage ratio, because of this phenomenon of credit default swaps offsetting risks, was a veneer of regulation where nothing effective was happening. Therefore, it concerns me that you have given me that answer on credit default swaps.
Dr Kohn: In terms of the leverage ratio, the accepted offsets are quite limited and it is a much grosser measure. But, you are right, I cannot answer the technical details.
Chair: Why don’t you come back to us when you have had a chance to discuss this with—
Dr Kohn: Okay.
Q45 Steve Baker: On that line, I am also very interested if, when you come back to us, you might tell us something about the correlation of risks in this regard as well. I think that was another area where financial stability was materially affected because risks correlated in a way that people did not expect, but I will move on. Does the current account deficit matter for financial stability?
Dr Kohn: It is one of our indicators and it is one that has been flashing yellow for a while because it is a very large number in the UK. We had a box in the last financial stability report when we discussed this. It is something to pay attention to. It implies that the UK is a net importer of capital. It is a net borrower. It implies that the borrowing levels are building up, potentially, relative to GDP, depending on the size of current account deficit. When we looked at it, and we did look at it, we found that, at least of late, it had not been so much an issue. The flows of income from assets and liabilities were closer aligned than you would think if you just added up the current account deficit because of what the UK owns outside, but I think it is a danger sign. It belongs with the indicators and it is something we ought to keep looking at.
It is one of the things I think about with regard to the US. We had what for us was a very large current account deficit, 6% of GDP, in the years leading up to the crisis. That corresponded to a build-up of household debt, so it wasn’t corresponding to businesses who were investing in capital equipment that might yield returns that could be used to service the debt that was building up and perhaps it is something we should have paid more attention to.
Q46 Steve Baker: With that in mind, I understand that our current account deficit has typically been large at the end of boom periods, whereas at the moment it is large at the beginning of a recovery. Does this difference concern you?
Dr Kohn: It does. I think it has a lot to do with what is going on in the rest of the world. We have a situation in which the UK’s economy is performing well, but some of its major trading partners are not. I think that is contributing to the issue here. It is not a typical boom period but, yes, I agree, it is something we need to pay attention to.
Q47 Steve Baker: Finally from me, I understand our net position is helped by the returns on overseas investments that we have been enjoying. Do you think that leaves us more exposed to a sudden stop and a sudden worsening of our net position?
Dr Kohn: Yes. I am not sure “more exposed”, but you are always exposed to a sudden stop. I think our exposure is to deterioration in financial and economic conditions abroad. This is a very globally-integrated economy and financial market and it is almost the net position is not as important as the gross position and we are very exposed to bad things happening abroad. That is going to be one of the things we are going to be trying to at least test the banking system on in the 2015 stress test.
Q48 Jesse Norman: Can I just a question picking up on something? Can you remind the Committee again why it is so important that the FPC have unanimity and no what you might call obiter dicta that might bear on decisions the committee have reached?
Dr Kohn: It is important to reach consensus when you are constructing a framework for the financial system to work within because uncertainty about how that framework might change would be a major source of uncertainty for the businesses operating in the UK financial system and for their customers. I think this is an attempt to reduce uncertainty.
Q49 Jesse Norman: Is that particularly important for the FPC because the FPC deals in so many areas that are politically sensitive?
Dr Kohn: No. I think it is particularly important because the FPC is doing—this is a new framework, this macroprudential framework. It so affects the financial system. I do not think it has to do with the political sensitivity.
Q50 Jesse Norman: You do not think there might be a public worry about the politics of changing the structure of mortgages or things like that? You don’t think there might be political issues?
Dr Kohn: They may be worried, but it is not affecting our decisions.
Q51 Jesse Norman: Do you think that generally the Bank should be taking positions that have clear political implications or criticising politicians?
Dr Kohn: I think an independent central bank should be giving views on things that are important to fulfilling its objectives and its mission. Sometimes that involves criticising things that are happening in the political system, but it should speak out when it thinks that those things might have an adverse effect on its ability to do what Parliament tells it to do.
Q52 Jesse Norman: That is very interesting and helpful, thank you, because obviously one of the things that is in front of us at the moment is the Governor’s recent speech in Dublin in which he made a series of very interesting tacit criticisms of eurozone countries and, in particular, Germany, as you are acknowledging. One of the things he said, of course, was that the eurozone needed a plan that “should include what every other successful currency union has at its heart: mechanisms to share fiscal sovereignty”.
Dr Kohn: Fiscal risk is what I think he said.
Jesse Norman: He says fiscal sovereignty but he talks about risk as well. You are right. The first question is: did you have any knowledge about this speech before it was made?
Dr Kohn: No, not that I remember. No.
Q53 Jesse Norman: It was not circulated among senior members of the Bank?
Dr Kohn: It might have been circulated among senior members of the Bank but—
Jesse Norman: Or on the FPC or other people.
Dr Kohn: I do not believe so. Sometimes people send speeches for comment and I don’t always have a chance to do that, but I don’t believe so.
Q54 Jesse Norman: You are obviously very well positioned because of your relationship with the Fed as well as with the Bank. How usual is it for central bank governors to criticise foreign Governments?
Dr Kohn: I would say it is not frequent, but it is not unheard of where they feel that what the foreign Governments are doing has an effect on their own policies. For example, I think of the chairman of the Federal Reserve answering some of the criticisms that foreign politicians were making of the Fed in terms of its monetary policy and the need for flexible exchange rates and things like that.
Q55 Jesse Norman: When they do that, isn’t that a sign that private mechanisms of communicating concern have not been working? You go public with something because you cannot make the challenge work through the normal mechanisms of central bank discussion or the FSB decisions?
Dr Kohn: To some extent I think his comments were meant for a wider audience than just a central bank audience because he must have felt that it was very important, given the UK’s exposure to the euro area, that they get it right for UK welfare.
Q56 Jesse Norman: With a new Greek Government, very widely supported, and a stark disagreement between the Bundesbank and Mr Draghi, as you are acknowledging, this is a particularly sensitive time to be making a speech like that.
Dr Kohn: Yes.
Q57 Jesse Norman: First of all, do you agree with the conclusion of the speech? Do you think it is important for the eurozone to have another mechanism to share fiscal sovereignty?
Dr Kohn: I do, Mr Norman. As I think the Governor said at the beginning, it is an incomplete monetary union and better fiscal union is one thing that would help cement the monetary union.
Q58 Jesse Norman: It is interesting. The Governor is very clear about the fiscal side. It is surprising for a central bank governor, obviously with his preoccupation on the monetary side, to be thinking so publicly about the fiscal side. First of all, he draws an unflattering comparison between the eurozone and the UK, as you may recall, in terms of growth and things like that and then he points out that the eurozone has a fiscal deficit less than half, in relative terms, than that of the UK. Then he draws the conclusion, “It is difficult to avoid the conclusion that, if the euro were a country”, he means were “if the eurozone were a country”, “fiscal policy would be substantially more supportive”.
Dr Kohn: I read this speech as having a number of layers and a number of points and one of them was the one you just said, the overall fiscal policy of the eurozone was holding back growth and making it more difficult, and the other one was the risk sharing within that overall fiscal zone. One of the things that the Governor emphasised was the importance of nominal income growth and the horrid difficulties of making the adjustments on the periphery when nominal income for the area is so weak and the adverse effects that is having on the debt servicing and the debt to income ratio. I think both monetary and fiscal policy need to be more expansionary in euro area and the monetary steps have been taken in order to improve the situation substantially.
Q59 Jesse Norman: Just to be clear, expansion of the fiscal policy in this context means the Governor is tacitly recommending higher public spending or lower taxation in those countries?
Dr Kohn: Well, in the euro area as a whole. He was not making a recommendation for a particular country.
Q60 Jesse Norman: It might be much more expansionary in northern countries in order to suck exports out of southern countries and remove some of the straightjacket they are under at the moment, for example?
Dr Kohn: For the euro area as a whole there needs to be expansion and those countries that have the space to do that obviously they would be the ones it would be most appropriate for.
Q61 Jesse Norman: That is helpful, thank you. Because you share his views about the importance of risk sharing and pooling of sovereignty, could we take it you also think that about the situation in Scotland where we have a risk sharing and pooling arrangement?
Dr Kohn: The Governor pointed to the United Kingdom as a good example of a currency area that had the risk sharing and which it was successful at.
Q62 Jesse Norman: It follows from that, if the currency area were to break up or if the union were to become dissolved, that risk sharing would also be harmed.
Dr Kohn: That is a question for you folks, but I assume that—
Jesse Norman: That is the Governor’s implicit assumption. He does not like the idea of dissolution of unions because he thinks it undermines risk sharing.
Dr Kohn: He would have to speak for himself, but I think he would be concerned if the monetary union broke up. That would have implications for the fiscal union.
Jesse Norman: Or other breakages that would affect pooling of risk.
Dr Kohn: I am not sure exactly what you are referring to with respect to Scotland.
Q63 Jesse Norman: If Scotland were independent, for example, then the pooling of risk arrangements that exist now would have had to have been changed and they could not have been strengthened and would almost certainly have worsened. That is the point he is making, is it not?
Dr Kohn: I think that is probably what would have happened if that had happened.
Jesse Norman: Yes. That is very helpful. Thank you very much indeed.
Q64 Alok Sharma: Dr Kohn, just returning to Greece, in response to Ms Ali you made the point, and please correct me if I am wrong, that there is limited risk to the UK of Greece exiting the eurozone. Is that right?
Dr Kohn: Per se, in a very limited sense, but I also expressed that it was the knock-on effects from that to other countries and to financial markets and how that was anticipated that would expose the UK.
Q65 Alok Sharma: There are differing views right now as to what the impact on the rest of the eurozone would be of a Greek exit. Would you like to try to quantify the risk of contagion in the eurozone and particularly on the bond markets?
Dr Kohn: No, I do not feel like I have the expertise to do that. I think there is a risk of contagion but I can’t quantify it.
Q66 Alok Sharma: Okay, you cannot quantify it, but can you tell us in the level of magnitude? On a scale of one to ten where ten is major risk, the whole system is going to collapse, and one is very limited risk? Where is it?
Dr Kohn: That is if Greece exited then what?
Alok Sharma: Yes.
Dr Kohn: More than one, but how much more I do not know.
Q67 Alok Sharma: Going back to this point that Mr Norman was talking about with the Governor talking about the sharing of fiscal sovereignty, could it be argued that, if Greece was to exit and the views of those who think there is limited risk of contagion holds true, the scenario is a lot better for going forward with this issue of sharing fiscal sovereignty across the eurozone?
Dr Kohn: Possibly, because you have just taken one member out with a particular fiscal problem, but they are not the only member with fiscal problems. So how much better it would make it I am not sure.
Q68 Chair: Thank you very much for coming to give evidence to us this morning. It has taken slightly longer than expected but colleagues are very interested in what you have had to say and we are going to pursue it further now with your colleague.
Dr Kohn: Thank you for the opportunity.
Examination of Witness
Witness: Martin Taylor, Member, Financial Policy Committee, Bank of England, gave evidence.
Q69 Chair: Thank you very much for coming to give evidence to us this morning, Mr Taylor. You are as familiar to most of us as Dr Kohn is. Why don’t I begin by asking the same set of questions that I asked Dr Kohn except, rather than going through them one by one, why don’t you—and I noticed you were taking careful notes, or at least I assume that is what you were doing—why don’t you tell us what you were writing?
Martin Taylor: I was writing answers to the sort of questions I thought you were going to ask me. Let me say, first of all, that I very largely agree with what Don Kohn said but perhaps give you some more observations of my own. He, of course, was a member of the interim FPC and I think it was then that the code of conduct was established. When I joined the statutory FPC in April 2013, the code of conduct was a given, “Here is the code of conduct. Please read and follow”. We have debated the code of conduct since when there have been emendations to it. We have simply been asked if we were content with the emendations, but I do not feel that I am an author of the code of conduct. It is like the acquis communautaire when you join the European Union.
Q70 Chair: Just to follow that very interesting remark, clearly most countries when they join the acquis communautaire are pretty vigorously opposed to bits of it and bitterly regretting that they were not there at the start in order to prevent particular bits emerging. Are you giving us that same sense here? Is there any bit of this code of conduct that, had you been there, you might have spoken up about?
Martin Taylor: It is a very austere document, Mr Chairman. You are familiar with it yourself, I think.
Chair: I have it in front of me, particularly the section marked “Communications” on page 2.
Martin Taylor: That was certainly one of the things that sprang to my mind.
Q71 Chair: It concerns you.
Martin Taylor: Well, it was one of the differences between us and the Monetary Policy Committee, for the reasons that you have given. First of all, compared with us, they have a very much more restricted field of operation. They are doing an enormously important job but they decide interest rates and they decide the Bank’s balance sheet and they vote every month on these matters, soon to be eight times a year if you agree. It is well established over the life of the MPC that members who dissent from the majority view are expected to explain to the public why. So it is a different way from the way we operate. There are very many other important differences between us and the MPC. They are concerned with the most like path—
Q72 Chair: I was asking a question there—
Martin Taylor: I am sorry. Did I not answer it?
Chair: —which was not: what is the difference between you and the MPC? I am sorry to interrupt, but my question was: was there any part of this acquis communautaire that concerned you and that you might have wanted written differently?
Martin Taylor: It did not concern me and I did not object to it. I just noticed the communication point because it seemed so different from the habit on the MPC and the difference comes down to consensus against voting, as you have discussed.
Let me give you an example, if I may, of when I think consensus has worked very well as a technique on the committee. If you look at the housing intervention, in order to make the interventions that we made last June we started worrying about this area about nine months before and the first question we had to answer was whether this was an area with financial stability implications, something that we should get involved in. The second was whether the timing was right for intervention. The third was which of the very many potential instruments in our toolbox we should deploy. There are something like a dozen ways in which we could have come at this. The fourth, having decided which tool to use, was the calibration of the tool.
Now, you could not get to that sort of determination by voting at every stage and I think it went very well. I do believe the present rules allow nuance, which is a question you asked Don Kohn. I made a speech in November on the leverage ratio where I went out of my way to stress some nuanced areas relative to where the committee as a whole was, but they have been referred to in the record. One was around and there were different views round the table. One was around the use of alternative tier one, CoCos and the new leverage ratio, and the other I did say that if we had gone for a simpler one-size-fits-all leverage ratio we would have had a much higher number. In a sense, as Don Kohn said, 3% was acceptable as a minimum provided one believed, and I do believe, that the FPC would be vigilant about the time variant component and moving it up as circumstances demand.
Q73 Chair: You do think that the 3% with the countercyclical capital buffer and the SIFI and all the rest is equivalent to the 4%, but you in fact wanted 4.06% as I recall when you were a member of the Vickers Commission.
Martin Taylor: 4.05% or 4.06% was the number for the ring fenced bank, supposing that 3% was taken as the Basel base, and we were proposing—
Chair: I should not have teased you with—
Martin Taylor: Not, not at all. I am in awe of your memory. We are not opposed to voting and when we come on calibrating numerical things like the CCB it is quite likely that some people will not want to raise it. Some will want to raise it by more than others and we should say so.
Q74 Chair: My question was a simpler one. Do you think that the Vickers approach that you required has been met in full by the decisions now taken by the FPC on leverage?
Martin Taylor: We have not yet calibrated the mark-up for ring fenced banks. We will do that this year, but Vickers did not see time variance of leverage. The proof will be whether we and our successors do this and do it intelligently, but at the moment all of these indicators are at their minimum.
Q75 Chair: Do you have the remit letter in front of you?
Martin Taylor: No, I don’t. I have the paragraph concerning consensus on accountability.
Chair: Could you turn to the last few sentences of that. That is section (v), is it not?
Martin Taylor: I just have the paragraph, I am afraid, Mr Chairman. Perhaps you could read it to me.
Chair: “Recognising the requirements in the Act to achieve consensus wherever possible, communication by individual members regarding Financial Policy Committee decisions needs to be coordinated and consistent where decisions are reached by consensus. Where consensus cannot be reached and a vote is taken, as required by the Act, the balance of arguments should be reflected in the record of the meeting. In such circumstances, members should be free to explain their differences and will be publicly accountable accordingly”.
Martin Taylor: Yes.
Q76 Chair: Are you entirely happy with that?
Martin Taylor: It has an implication that, absent such circumstances, members should not be free to explain their differences, but I think there is an intermediate level that in fact we are operating on. I have operated on it and Don Kohn in his answers to you in the questionnaire was operating on it. That is where consensus was reached but the record reflected the richness of the debate, so it was visible to the reader of the record that not all members set out with the same view.
Q77 Chair: You are going to watch like a hawk the record before it is published?
Martin Taylor: We are responsible for drafting it. The whole committee drafts it.
Q78 Chair: I think you had better watch like a hawk that it accurately reflects any difference or nuance of view. We can rely on you to do that, can we?
Martin Taylor: This whole debate and conversation that we are having among ourselves—and it is very helpful that you have made it more prominent—has brought home to me the importance of the record and that it should be a less arid and more nuanced document than it might be.
Q79 Chair: Do you think the consensus approach enhances the committee’s accountability to Parliament or not?
Martin Taylor: Has it enhance the accountability? It arguably makes the accountability even more important.
Q80 Chair: Do you think it makes our life easier or more difficult?
Martin Taylor: I should be very unhappy if I thought we were making your life more difficult.
Chair: People get unhappy all the time, Mr Taylor, but I am only talking about the consensus decision and the way it is interpreted in the code of conduct.
Martin Taylor: I am worried about that.
Chair: Does it make it more difficult or not?
Martin Taylor: It has not made it more difficult so far.
Q81 Chair: May I just explain why I have asked this question? I asked this question because in another of the remit letters the Chancellor has written, “This approach will further enhance the committee’s accountability to Parliament”. That struck me as requiring a bit of explanation.
Martin Taylor: I did not pick up that sentence, I am afraid. I would be interested to have it construed for me.
Q82 Chair: I have read the whole sentence except for four more words “and the wider public”. I think that is even more implausible. It strikes me it does not enhance accountability at all. Accountability is best served with as full and public explanation as possible in most cases and probably here, too.
Martin Taylor: All the external—
Chair: Whereas in this case—I am sorry to interrupt—we are restricting, broadly speaking, to the minutes, are we not?
Martin Taylor: Yes.
Chair: Except for a few nuances in your speeches.
Martin Taylor: I hope you do not feel we are being obstructive. I do not think we are.
Chair: Not yet.
Martin Taylor: No. When it comes to it, if we are, you should certainly—
Chair: After all, we are still building a framework.
Martin Taylor: We are building a framework, as my colleague said.
Q83 Rushanara Ali: I wondered if you wanted to give your reflections on the situation in Greece and on some of my questions earlier and whether you agree with Dr Kohn’s assessment or not.
Martin Taylor: How dangerous. I should start by saying all efforts will be made to avoid a breakdown. It is not always clear whether, like efforts that have been made in the past, these efforts solve the underlying problems or simply put a sticking plaster on where we have arrived at. If there were to be an accident and Greece were to withdraw, it would depend enormously on the response and the way that the ECB in particular handled the rest of the peripheral countries.
Q84 Rushanara Ali: How would you describe the underlying problems?
Martin Taylor: I do not know whether Jesse Norman is going to ask me again about the Governor’s Dublin speech. As you watch this play out, we have great moments where people say, “We have to have QE or the eurozone will be in difficulty”. We get QE and then we have to get a solution to the Greek debt or the eurozone will be in difficulty. Let us hope we get a solution to the Greek debt, but I do think the fundamental structural issue of the absence of risk sharing makes a genuine monetary union very difficult. If you do not have a genuine monetary union what you effectively have is a bunch of national currencies fixed at par and that is a vulnerable configuration. I have no wisdom to sort this out.
Q85 Rushanara Ali: Do you share Dr Kohn’s view about the risk levels not being too significant for the UK?
Martin Taylor: It depends on the response. There are very many levels of risk. If you simply say, “Is the British economy or the British banking system heavily exposed to Greece”, the answer is no. Obviously its exposure to other peripheral countries is higher, though much lower than it was when the crisis was last at this kind of level.
Q86 Rushanara Ali: Yes. Which ones in particular would you say?
Martin Taylor: The larger the country on the whole the larger the exposure, but there is also, of course, exposure through the banking systems of the stronger countries in the eurozone which themselves are exposed to the south. I think if there were to be, God forbid, a withdrawal followed by contagion, it would need the most vigorous intervention by the central bank to keep the European banking system on the right side of panic, if I could put it that way.
Q87 Rushanara Ali: Just one more question. Is it inevitably that a country like Greece has ended up in this situation given the level of unemployment and so on, that the reaction to the austerity plans and so on has led to that? Also, do you have any views on how the eurozone should be taking into account some of the social effects of the previous crises and the responses?
Martin Taylor: If your question is a version of am I surprised that Greece has elected a new Government, no. It is hard to be surprised by that after what people have been through there. Unfortunately, this is one of those tragic situations where everybody is convinced of the rightness of their position.
Q88 Rushanara Ali: Sorry?
Martin Taylor: Everyone is convinced of the rightness of their position, both the debtors and the creditors, and it will need great statesmanship to bring this ship safely into harbour.
Q89 Rushanara Ali: Do you feel confident that a deal could be made?
Martin Taylor: I don’t think a deal would solve the problems of the eurozone. I think it would solve this week’s problem.
Rushanara Ali: This week’s?
Martin Taylor: Yes. I am sure somewhere there is a way of accepting that money that will not be repaid will not be repaid.
Q90 Rushanara Ali: You would share the view of our Chancellor when he described it as, “A Greek exit from the eurozone is the greatest risk to the global economy”, then? It seems very different to what I heard from Dr Kohn and yourself.
Martin Taylor: I would not quite put it the way the Chancellor put it. I think a Greek exit from the eurozone with uncoordinated follow up could indeed have pretty much uncontrollable results. What can we do at the FPC? We have raised the banks’ capital. We have encouraged them to reduce their exposures in this area. The Bank has put in place new liquidity arrangements, which means that, were there to be a crisis, it would be easier for our banks to fund themselves.
Q91 Rushanara Ali: Why do you think he takes a much dramatic position? Are there any underlying reasons for that or is it just a reaction?
Martin Taylor: I read the context as being he was receiving a Greek visitor and he wanted to say, “Let’s solve this problem. If we do not solve this problem the consequences will be dire. Let’s solve it”. I don’t know what happened in the private meeting.
Q92 Jesse Norman: Sir Martin, can I ask you a question just to pick up on the line I started with Dr Kohn, which is whether or not you have a view on the Carney speech advisability, criticism of the foreign politicians trespassing into fiscal areas? You have a view on most everything, Sir Martin, so I would be surprised if you did not have a view on this.
Martin Taylor: I did not see the speech before it was given. He was speaking, of course, in a eurozone capital and he had probably been asked to talk about the eurozone. Central bankers do not usually criticise other central bankers.
Jesse Norman: Politesse extends that far at least.
Martin Taylor: Politesse certainly extends that far. Sometimes it is hard for a central banker to criticise his own Government publicly, but a friendly central banker from another country could do the job on your behalf. That is how I read it.
Q93 Jesse Norman: That is a very polite way of saying there is a kind of confraternity of central bankers in which they mutually criticise each other’s political leaders.
Martin Taylor: It is not a bad idea, is it?
Jesse Norman: By the way, thank you for laying open the workings of the monetary system commercially. I was not aware of that.
Martin Taylor: One of the important things the speech said was that central bankers cannot fix the problem. Going back to what I was saying to Rushanara earlier, the idea was around that the ECB, by unleashing a €1 trillion QE, could somehow fix the eurozone problem. All it was trying to do was to get its inflation target back on, which is maybe a necessary condition but not sufficient.
Q94 Jesse Norman: That is very helpful and interesting. One way of thinking about the speech is that not only was the ECB discharging its democratic, or not depending on how you see it, mandate in seeking to launch QE at least in some form, but also there is an underlying overlap of interest, because it is buying sovereign Governments time to decide at what level they want to think about further fiscal pooling or risk-sharing.
Martin Taylor: If I were in the ECB, I would feel I had been buying time for Governments for very many years.
Q95 Jesse Norman: Indeed. In a way this is an indicator that the central bankers are running out of patience with the inability of Governments to act on this issue.
Martin Taylor: Yes. I am very anxious that my comments should be taken as personal comments rather than those of a Bank of England official, because they are absolutely not and I have no authority to discuss this. However, one of the tragedies of the European situation seems to me to be that there are two absolutes in the German mind that are in deep conflict. One of them is the need to be pro-European at all times and the other is the need for monetary and financial rigour at all times. When these come into conflict, the easiest way to resolve it is to claim that monetary and financial rigour is pro-European. It seems to me that the debate in Germany, which maybe has not been happening as much as it should, is beginning to happen and this conflict needs to be laid bare. It is opening up and one just hopes that Germany will come to a coherent solution. I am sure they will.
Q96 Jesse Norman: That is a fantastically interesting answer. Thank you for that. Unlike the Governor, we regard you as fully capable of speaking in your own person at all times, I would say. Just for the avoidance of doubt, what is your view on the argument about whether or not the creditor nations should come to some kind of reduction of Greek debt?
Martin Taylor: The debt has already been restructured. It looks to me unsustainable. I have not made a special study of Greek debt. If the creditor nations do believe they are going to get their money back, we are in an even worse situation than I think we are. Sometimes it is not expedient to acknowledge that you are not going to get your money back because you lose all hold over the debtor and there is, of course, the huge issue of contagion, because the Greeks are not the only highly-indebted nation struggling with high unemployment and low growth. That is why, whatever happens, Greece is not the end of this.
Q97 Jesse Norman: Just very quickly then, you sound as though you are cautiously, subject to suitable levels of popular obfuscation, in favour of reducing in a way that allows Greece to start to grow, which seems to be where a lot of expert opinion is. If they cannot pay it they are not going to pay it and, therefore, why not reorganise the fiscal straitjacket?
Martin Taylor: Yes, reorganise the fiscal straitjacket. Here I am back to my reading of the Carney speech. I think Europe needs to go further than that because simply reorganising things fixes the problem this time around, but does not address the underlying cause.
Q98 Jesse Norman: There has to be underlying structural change?
Martin Taylor: I think so.
Q99 Jesse Norman: That is very helpful, thank you. There are so many questions I would love to ask, but the one I just want to pick up is on the work that you did as part of the Vickers Commission, which memorably identified the implicit subsidy to the banking system as being anywhere up to £50 billion a year, as I recall. How far you think that has fallen and whether you think the FPC or the Bank should commission a further piece of work to estimate where the implicit subsidy presently lies.
Martin Taylor: There is a chart that the Bank has used in some publications since measuring the implicit subsidy, but it measures it by a highly conventional way, which is taking the difference in credit ratings of the banks with and without implied Government support and then calculating the value of that to their debt servicing cost. The problem with it is that it is a highly procyclical measure. For example, if you take it back to 2006, it showed that the implicit subsidy was zero. It was then enormous after the crisis. When the house had burnt down, people would have paid anything to insure it, and it has come down—
Q100 Jesse Norman: Yes. It is like Casablanca, “I had no idea of the implicit subsidy. I am shocked, shocked, shocked”.
Martin Taylor: Yes. It has come down again. Part of the reason it has come down again, no doubt, is because of the “too big to fail” work and part of the reason is that the banks are better capitalised, but part of the reason also is the general feeling that economic conditions are less menacing, I am sure.
Q101 Chair: Isn’t the main reason Germany is taking the position it is that it wants, as you have implied in one of your answers, but this the further structural and supply side reform in Greece, that at the moment it removes the tourniquet on the debt side its shock is going to get is much less? That conundrum you have said is very straightforward where there is two policy objectives in conflict. It is very clear why they are maintaining it.
Martin Taylor: I was going beyond the Greek situation and looking at the whole eurozone, but I agree with you. If you are going to allow restructuring, you want to get some bang for your buck beforehand.
Q102 Chair: If they are going to for maximum restructuring, the next question must be: can the Greek economy recover at current exchange rates, even after the restructure, the maximum reasonable amount you could possibly to get?
Martin Taylor: Let us see when we see the numbers.
Chair: That is the question. What is the answer?
Martin Taylor: I think I am going far beyond my precise competence, Mr Chair.
Chair: You are taking the Fifth. That is fine.
Q103 Alok Sharma: Could I just return to this point on contagion? When I asked Dr Kohn whether he would quantify the risk of contagion to the rest of the eurozone of a Greek exit, I think he was reluctant to try to quantify that. However, from what you have said earlier, you deem the risk to be significantly higher than perhaps that implied by Dr Kohn. Would you agree with that?
Martin Taylor: I think the size of the risk depends on the way the rest of the eurozone and particularly the ECB handle it. It depends on what happens and how the exit is handled and the more violent and uncontrolled—
Q104 Alok Sharma: Let us go forward. Let us say there is what would be described as a managed exit. What is a managed exit and, therefore, what is the risk of contagion?
Martin Taylor: The problem with any exit, apart from the technical difficulty of handling it and the legal issue about which currency liabilities are denominated in after it, is the question of redenomination risk, which was very present in 2012, declined and has come back again as people are frightened of an exit, will rise very sharply. Something has to be done to make the financial markets believe that this is the last such exit and that Greece is a special case. I suppose the question is whether that can credibly be achieved.
Q105 Alok Sharma: Just going back to the Chairman’s point about whether any of this stuff is going to work, we are talking about debt swaps and all the rest of it. Do you think we are just having this sort of constant situation with Greece where every few months we come back and there is another restructuring? What do you think is required in terms of a restructuring that will mean that Greece does not keep coming back?
Martin Taylor: As I understand it, one of the difficulties is that the Greek debt servicing costs have already been reduced very greatly by the last restructuring. I suppose, if you push out all principal repayments for a very long time, you get Greece off the treadmill of how they are going to meet the €5 billion in July and how are they going to meet €4 billion. That is spooking the markets right now. They are supposed to be running a primary surplus. The new Government claims it can collect taxes more efficiently than its predecessors. Those would both be helpful.
Q106 Alok Sharma: Finally, long term, do you think it would just be better if the Greeks left sooner rather later so the rest of the eurozone can pick itself up and keep carrying on?
Martin Taylor: I would revert to my previous answer about what I think is needed to reform the eurozone and make it function as a proper monetary union. If it cannot do that it will not be just be Greece who will be better off out of it, but if it can then Greece would be better off staying.
Q107 John Thurso: The only Greek I remember is, “O, Rhododáktylos Ēṓs” which I think translates as, “Oh, rosy fingered-dawn”. May we wish for that and then return to what the FPC does. Can I come back to the question of indicators? You heard the discussion I had with Donald Kohn. Can I just ask whether you have anything particular on that that you would like to add before I put some questions?
Martin Taylor: Only that I am suspicious of mechanical means. The ones that seem to me to be the most useful are if you go back in time—let us go to a period that we keep revisiting, when we know things were going badly wrong, 2005/06, before the crisis exploded but everyone was feeling great—and look at the indicators then that were beginning to flash red, and they are, as Dr Kohn said, mostly credit indicators. I think if we saw that happening again we would clearly be on the case. We do look at the balance of payments numbers and we do look carefully at things in the balance sheet, but we are dealing with tail risks.
The MPC spends its time thinking about a central path for the economy, what is most likely to happen and how to steer it. We spend our time dealing with things that we hope are not going to happen, that are right at the edge, and it is a different kind of thinking. One of the things we should be looking at are things you would expect to be happening that are not or things that you think the market will be worried about but sort of was not. I think it was the Governor in fact in an internal meeting who drew attention a few months ago to the fact, when we were all worried about the geopolitical crisis coming, “Why isn’t the price of oil going up? There is something funny happening in the oil market.” He was right. It was just before it dived and that was a good example of an FPC indicator; the dog that did not bark, if you like.
Q108 John Thurso: The reason I ask is that, when we were holding hearings right at the beginning when the FPC was being mooted and we were talking to people who were going on to the shadow body at the start, one of the things that we discussed was how do you know when there is a problem coming and what indicators could you look at. I remember a metaphor. It was like flying a plane; you only need about three or four instruments to know whether you are up, down, going right, left or whatever, and then there is an array of other dials that warn you about things. At the time, the thinking was you should concentrate on the ones that are direction of travel and height rather than the warning ones, but what I understand from listening to both of you is it is far more subtle than that and the direction of travel is the MPC, and it is all the myriad warning lights that you are more concentrating on. Is that broadly the analogy?
Martin Taylor: I think that is a good analogy for what is going on. I think that is very fair and, of course, we are constantly asking ourselves, “If these disagreeable things were to recur, how badly affected would we be? First, can we do anything to stop them or make them less likely, and secondly, can we make sure that if we cannot affect them, as we cannot affect Greece, that at least we have made the system resilient enough to survive a shock?”
Q109 John Thurso: You used a very interesting phrase in one of your answers, “Sorting out what is significant from what is really interesting”. Do you feel the FPC is able, through the developing indicators, to begin to sort out what is significant from what is just interesting?
Martin Taylor: We try. It is very difficult to think in a way that allows you to see things that other people are not noticing; things that you kick yourself for missing afterwards. I have no reason to believe that central banks have any particular advantage in doing this, except that we are put in a small room and asked to do it and we try.
Q110 John Thurso: The problem is not simply for you internally, but it comes back to the problem we were discussing earlier, which is the external perception. It is back to our old “taking away the punchbowl” analogy. In 2006 we all thought that it was going to go on forever. There were odd people going out there and saying, “There is a lot of debt around” and so on, but everybody said, “Oh, do not worry. They have restructured it such that it is going to be all right in the future”. In 2007 we had Northern Rock; 2008 we had all the rest, and very sudden, very quick. In 2006, if you had said to the public, “If we do not cane you on mortgages, pull back credit and slam on the brakes, we are going to be in a really bad place” nobody would have believed it and no politician would have had the courage to enact it. The absence of big red warning lights that are clearly understood could mean that the job that the FPC and the bank have been set becomes remarkably difficult. Developing indicators is not simply about internally what you would look at, but externally we can understand what you are looking at. How do we deal with that?
Martin Taylor: I completely take your point that, if the FPC has these powers and therefore these responsibilities, it is essential that it should be able to explain why it is using them in the way it is. I think we have come a certain distance in the last year or two. I think the housing intervention was a critical one. It was important to make the intervention, but what the public noticed, if it noticed anything at all, was not some technical movement on loan to income rates on mortgages. It was the fact that the Deputy Governor and then the Governor were making speeches about this and were saying there was a risk and they were going to do something about it. I think people were more affected by the mood music and the feeling that the Bank of England was intervening than taking a very detailed interest in what the intervention was. That does not worry me.
Q111 John Thurso: There is a direct read-across from whatever the indicators are saying and your decisions, to your powers, and particularly your powers of direction, because if your powers are never used they quickly become what is known as the nuclear option. They become like the powers of direction of Secretaries of State over the Crown Estate, but the fact is they are never used, they are a threat; whereas I think Parliament intended you had powers that you would use and, of course, you cannot manufacture a situation where you need to use your powers. Is there not a danger, if they are never used, that the norm becomes that they are never used?
Martin Taylor: The powers of direction we have had so far have been quite limited and there has not been a reason to use them. The powers of direction that seem to be on the way, particularly loan to value and debt to income, and on the leverage ratio too, are powers where we would be inclined to use direction rather than recommendation if only for reasons of speed. If we have powers of direction, we can get things moving much faster; whereas sometimes if we make a recommendation to a body, it has to go through six or nine months of consultation before acting. I think there is a reason for the powers of direction here, which is not that we believe the body we would make a recommendation to would not be inclined to act, but that it would be able to act much faster. Maybe these are not nuclear options.
Q112 John Thurso: My worry is that, because the power is such a powerful one, you would think long and hard before using it and, the longer and harder you think, the less often or the less likelihood of use there is and, the longer it goes without a use, the more likely it is that it never gets used.
Martin Taylor: I follow that but take the example of the housing intervention, which was done by recommendation as it was all we had. We deliberately placed the calibration outside where the market was, so nobody had to give up a mortgage that was in the pipeline because of the Bank of England’s action. It was a warning to the banks saying, “We do not mind where you are now, but if you carry on like this for another three or four months you will get to a place we are very uncomfortable with”. So it was asking them to change course gradually.
Q113 John Thurso: If we are all to worry intelligently, what should we be worrying about?
Martin Taylor: The financial stability report is full of things to keep you awake at night.
Q114 Mark Garnier: Can I go back to the leverage ratio? In fact, some of the questions I was going to ask you have covered earlier, which was very helpful, but I will do a few of the same ones I did for Dr Kohn. Regulatory capture: given the fact that banks are so delighted, and indeed the share price of Barclays went up 8% of the back of your recommendations, how do you feel about the accusation of regulatory capture of the FPC by the banks?
Martin Taylor: I think the reason the Bank’s share prices reacted so positively was that there were stories in the market that we were going to do something of unbelievable austerity, which, by the way, we had not planted and there was no reason to believe that. I think that people were in a position of regulatory anxiety, where they said, “If the FPC were to put the ratio here, it would cause a bank like Barclays or the big building societies to have to make a sudden and rather rapid change in their business models”, and so there was certainly relief when that was not the case.
Q115 Mark Garnier: The market had factored in a leverage ratio of 4% or 5% or 6% and it came in at 3%.
Martin Taylor: I think it factored in a 4% probably, but, if you read the paper carefully, you will see that if we put the buffers on, it is 4.7%.
Q116 Mark Garnier: It is interesting they had factored that in, because in a funny sort of way, if the market is factoring in a certain level, the market is taking a view on what possibly it thinks should be the right level and you came in significantly below that market anticipation. As we discussed earlier, 4.06% or whatever was your Vickers level. The PCBS was 4%. Obviously we have the risk-weighted, so 35% as well on top of that, which is something that was not talked about in the past. Nonetheless, if the market believed that 4% was a reasonable level, why were they wrong? Why was the FPC right?
Martin Taylor: The Vickers was 4% for the ringfenced banks, and that was based on the assumption that the minimum Basel level would be 3%.
Q117 Mark Garnier: But the PCBS was 4% overall.
Martin Taylor: The PCBS was 4%, I agree, but the PCBS also was assuming a single point ratio, a single number.
Mark Garnier: That is true.
Martin Taylor: I would agree with you that if we had had a single point regime, it would probably have been 4%.
Q118 Mark Garnier: The difference was the 35% risk-weighting element and not the single point?
Martin Taylor: Yes.
Mark Garnier: That is helpful.
Martin Taylor: What is also very important, Mr Garnier, is that the insistence that the buffers should be fed with pure equity capital. We want more equity in the banks when we put the buffers on, so the question that had concerned me about using CoCos in the numerator of the leverage ratio.
Q119 Mark Garnier: CoCos cannot be used?
Martin Taylor: CoCos can make up to 25% of the base 3%, so they can be 75 basis points.
Mark Garnier: The rest has to be—
Martin Taylor: The rest has to be pure equity.
Mark Garnier: Okay, that is very helpful.
Martin Taylor: That is probably slightly more severe than the market was expecting.
Q120 Mark Garnier: That is interesting. The market is perhaps not as intelligent as it thought it was when the share price of Barclays went up 8%?
Martin Taylor: I think it is very difficult for the market sometimes to respond in five seconds to a very technical 100-page paper.
Q121 Mark Garnier: Yes, fair enough, a very technical document. Just on a completely different subject. When Lord Grabiner gave evidence to this Committee, one of the questions that I specifically asked him about was the amount of information that is flowing to the Bank of England in terms of what is going on in the foreign exchange market. There was this discussion about Mr Mallett and whether he was passing information that he should have done up the chain or whether he was not and whether there is now a certain, and I use the term hesitantly, reputational risk with members of the foreign exchange market passing information to the Bank of England in terms of giving it intelligence about what is going on.
I used the example in particular of the attack on the ERM in the 1990s. That is absolutely a time when the Bank of England needs a great deal of intelligence about what is going on in terms of how to respond to it and I suggested to Lord Grabiner that one of the secondary casualties of this debacle could be that the Financial Policy Committee is deprived of information that could be used in a financial crisis potentially. He said, “I can see that it might well be, yes”. How do you feel about what has happened with this foreign exchange incident and your access to intelligent information?
Martin Taylor: We sit a very long way away from all this, of course, though we are consumers of the bank’s market intelligence.
Mark Garnier: Yes, absolutely.
Martin Taylor: As I understand it, although there have been some moves to stop chatrooms being used in various ways—I have never been in a chatroom, so I do not know what goes on there—I do not believe that was a particularly important part of the bank’s information gathering. There are an awful lot of people to whom the bank speaks in the markets and that continues. Certainly we have not noticed any difference.
Q122 Mark Garnier: You are comfortable at this level that you would see early enough any potential kind of move on sterling, move on—
Martin Taylor: The Monetary Policy Committee is very sensitive to that because they are constantly watching the interest rate curve and the exchange rate. I am quite sure they would be very sensitive to any shortfall in information and we would pick that up quickly.
Chair: Of course, the Grabiner hearing began calmly but deteriorated somewhat when we did not feel we were getting answers to questions. In this hearing, we feel so far, at least certainly I do and I think a good number of colleagues, we are getting answers to questions and that is why perhaps it has gone on slightly longer than had been planned.
Q123 Steve Baker: I have listened very carefully to your fascinating evidence. You were talking earlier about a number of foreseeable sequences of events and the phenomenon of dealing with the current crisis. Is that, as I interpreted it, to be indicative of a general short-termism of approach everywhere?
Martin Taylor: I do not think so. In times of danger, horizons do tend to come in. We are a committee who are charged, after all, with looking at the long term as well. The “to big to fail” programme, I remember when the Vickers Commission recommended that the banks should comply by January 2019. This was in September 2011. There were sort of hoots of derision, “This is a date that is never going to arrive”. We are halfway there and the banks are saying, “Can we have more time?” We try to do both. You can’t help but worry about short-term things because of the availability of them. They are all over the place. They fill the space, but we need to look beyond as well. I think we do.
Q124 Steve Baker: The reason I am drawing you down this path is that, when the European QE programme was announced, I found this writing from an economist. It is just one sentence so I will read it, “I cannot help regarding the increasing concentration on short-run effects ... not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilisation”, which was Hayek. He has a fantastic rant at the end of the pure theory of capital. You were talking about tail risks as well and explaining that you deal with tail risks. To what extent do you consider the sorts of notions that Hayek was exploring, that the real effects of money creation are deep and long-lasting and in fact slow to manifest themselves in the way that they reallocate capital? Now, I watch you smiling.
Part of the reason I ask is that, once again, QE has been announced. Capital markets have risen. Those who have benefited from capital markets rising have run around saying the world has been saved and, in the meantime, high levels of unemployment persist among ordinary people. I am rather concerned that Hayek might have been right. You have made a perfectly reasonable case, but I hear you explaining that we do seem to have grabbed those highly-available short-term problems. Are you satisfied that we take adequate account of these long-term real effects on the structure of the economy?
Martin Taylor: No, I am not. Talking of courage, if I may, Mr Baker, I thought of you the other day—
Steve Baker: Hurray.
Chair: We all do.
Martin Taylor: —as one does, because when we gave evidence here on the Wednesday about the FSR, you asked about the potential conflict between monetary policy and macroprudential policy and how it could be resolved. The next morning, the Swiss National Bank took the cap off and it seemed to me that that was a very good example of what you have been saying.
Steve Baker: Thank you very much.
Martin Taylor: Yes.
Q125 Steve Baker: I do not want to have too much déjà vu and I want to move swiftly. Is there anything you want to add in relation to the risks posed by credit default swaps and other synthetics in relation to leverage ratios or indeed on the current account deficit?
Martin Taylor: I think when credit default swaps are held to hedge a portfolio, i.e. when credit swaps refer to the risk that is in the portfolio, I have no problem with them. The danger of credit default swaps is, as George Soros has pointed out, they allow people to buy a long position to express a short risk or, put another way, they allow you to buy fire insurance on someone else’s house and then potentially burn it down.
Q126 Steve Baker: One of the things that has concerned me is that colleagues explained to me the accounting around these instruments allow people to upfront profits on unrealised cash flows and, therefore, to exaggerate capital. Is that a phenomenon that has been considered when looking at these tail risks?
Martin Taylor: One of the things that most concerned me at the beginning of this century was the way that very long tail derivatives, swaps that could be 20 or 30 or 40 years, where there would be cash flows over a very long period of time, could be marked to market, and profits taken into the bank’s books on day one and probably half of it paid out to the staff and then the derivative is a kind of zombie lying in a drawer. I think that is a matter of deep concern and I have discussed that before this Committee and the PCBS in the past.
Q127 Steve Baker: Thank you. I feel sure that on that basis we might return to this subject later. Because you are both held in such high regard, it is almost possible to forget this is a reappointment hearing. Could I just ask you want you bring uniquely to the committee that would otherwise not be found there?
Martin Taylor: I cannot answer that question. What I would say is that the four externals bring very different things to the committee. We do not resemble each other and that seems to me to be the best thing you could have, rather than four all expressing the same thing.
Q128 Chair: Do you think it might be a good idea to have five? You almost said yes there. I could not help but read your—
Martin Taylor: No, I think—
Chair: I think your face was moving into the yes position.
Martin Taylor: What does the yes position look like? I must avoid it at all costs. I think the problem is the committee is already quite big. When I was a company chairman—
Chair: You could take one of the—
Martin Taylor: One of the Deputy Governors off.
Chair: After all, we do have a Deputy Governor of Inflation, haven’t we?
Martin Taylor: Yes. I would say that five would be helpful if I thought there was a voting issue where the externals were a kind of block who needed to be protected, as institutional investors think non-executive directors need to be in the majority on a board. I do not feel that way about the FPC. I do not think it works like that.
Chair: At least not at the moment.
Martin Taylor: Not at the moment.
Q129 Chair: No. I have one last question. If you go and talk to the banks, and you have just mentioned the banks are now pleading for more time to implement the ring fence requirements, they will say, “The compliance cost of all this is so huge”, and they are talking about much more than the balance sheet effect, and they are talking about the admin costs and all that; that they would much rather just take a hit with higher capital and higher RWAs. You are quite well-placed, and it is particularly relevant with respect to the question you were just asked, having been at the top of a major bank, to say whether you think there is anything in the criticisms and concerns that are now being expressed by the banking community.
Martin Taylor: It was obvious a few years ago that the banking industry needed reform and it was obvious that the banking industry was incapable of reforming itself and it, therefore, had to be reformed by outside pressure. The things that outsiders do are never perhaps what you would have chosen to do yourself. I think we have to go back to the fundamental reason for ring fencing and it had to do with two things. It had to do with making the banks more easily resolvable and resolution is still something that we and the Bank of England thinks about a great deal.
Q130 Chair: We are not yet there, are we?
Martin Taylor: Not yet. The second thing is making sure that the implicit subsidy that Jesse Norman referred to is cut, because the investment bank cannot benefit from the flows of the retail bank. I think these are as important as they ever were.
Q131 Chair: Was that a slightly elliptical way of saying the banks are wrong?
Martin Taylor: I have no doubt that this is costly for the banks. They will stress the administration and compliance costs, but it is also costly because it makes it more difficult to do some things that were bad habits that have grown up in the business model, like comingling or trading assets on the retail balance sheet.
Q132 Chair: Was that a yes or a no? I am sorry to be so tough at the finish.
Martin Taylor: If the banks were wrong? I understand why the banks are lobbying, but I think the lobbying should be resisted.
Q133 Chair: Yes. I am not asking you whether they are right to have a go at lobbying. I am asking you whether their judgment is correct, that it would be better that we get a higher level of protection on the two points you have just raised, which, as you say, is a key point.
Martin Taylor: I think it is essential we get this protection.
Chair: That we would get that protection?
Martin Taylor: We would get the protection, yes.
Q134 Chair: We would get that protection more effectively though higher capital, particularly through RDAs, than by going through all these compliance hoops with ring fencing? That is the question that I asked.
Martin Taylor: I am just trying to think how much extra capital, if I were a kind of financial dictator, I would require the banks to carry rather than have them subsidiarise their retail banks. It would be an awful lot of capital I would make them carry; an awful lot, probably more than they expect.
Chair: The banks probably are wrong?
Martin Taylor: Probably.
Chair: Probably. We got as far “probably”. Thank you very much indeed for coming to give evidence to us; it is now this afternoon by a whisker. It has been an extremely interesting and somewhat longer hearing that we expected and that was because of the replies and because a good number of them were very substantive and which will be of interest to a lot of people well beyond this room. Thank you very much for coming to give evidence.
Oral evidence: Re-appointment of Dr Donald Kohn and Martin Taylor to the Financial Policy Committee, HC 1044 20