24
Examination of witness
Lord King of Lothbury.
Q63 The Chair: Welcome to this session of our current inquiry. We are delighted to have Lord King of Lothbury—a former Governor of the Bank of England, as everyone will know—to help us with some of the questions that we are considering.
I will begin, Lord King, by asking you the first question. We have received evidence to suggest that the need for banks to allocate regulatory capital efficiently results in an incentive for UK banks to lend to private markets—a product of the introduction of additional capital and liquidity requirements after 2008. Do you consider that the regulation of banks, including bank capital and liquidity requirements, as well as other regulatory cost, has increased and created an unreasonable competitive disadvantage between the banking sector and private markets?
Lord King of Lothbury: There is a nuanced answer to that. There are two considerations. One is that, by and large, banks are subject to a tighter regulatory regime than non-bank financial institutions. They also have direct access to the central bank when they wish to access liquidity, and that is an advantage to banks. There are pros and cons to being a bank as opposed to being in the non-bank sector.
My second point on this is that what creates potential incentives or disincentives to channel lending through particular forms of institutions is the use of risk weights attached to particular kinds of lending. I am not a fan of risk weights. The reason why the current regulatory system is so complicated is that different kinds of lending attract different risk weights in the regulation of banks, and that can give them an incentive to move outside the formal banking sector for certain kinds of lending.
There is a reason why I am reluctant to embrace risk weights. Many people say, “It’s obvious that the capital that banks have to issue should reflect the riskiness of their particular lending activities, since the purpose of having capital regulation is to ensure that there is enough capacity to absorb losses. Surely, we should take risk into account”. My answer to that is that it presumes knowledge that we can accurately assess the riskiness of different kinds of lending. The risk weights that are put into the Basel III and other frameworks tend to reflect people’s quantitative estimates of risk based on normal times, but the purpose of having the capital to absorb losses is for when there is a crisis. At that point, risk weights are a very bad indicator of the riskiness of different elements on the balance sheet.
The best example is that, before 2008, it was assumed—and the risk weights reflected this—that mortgage lending was the safest kind of lending. That turned out to be completely false when it came to 2008. When the authorities sat round designing Basel III, they said, “There should, of course, be no risk weights attached to sovereign debt, because that is completely safe. We will always repay our debt”. That was the national authorities determining that they, themselves, were without risk. In fact, in 2023, we saw in the US, although the US did not default, concerns about long-term interest rates, as they went up, meant that the value of government bonds went down and banks found themselves with a hole in their balance sheet.
It is just too difficult to assess the riskiness of different kinds of lending. I would much rather stick with something that focused on leverage. Then the second argument for why there may be incentives to channel certain kinds of lending through the non-bank sector falls away, and you just have the argument that being a bank has extra regulation, but also extra benefits. In the non-bank sector, it is different.
After 2008, people were quite keen on the idea that certain kinds of lending, or lending in general, to corporates should go not through the banking sector but through other kinds of institutions, where people could assess the risks and, if they failed, then they failed. It is a complicated issue, and it comes back to these big questions: why do you want to protect the banking sector, and are there particular parts of the non-bank financial sector that the Government wish to protect as well?
The Chair: We have had evidence from the smaller and medium-sized banks, which have complained that they are at a disadvantage compared to the larger banks, which operate under the IRB mechanism, and getting accepted to be able to use IRB is a hugely lengthy and costly affair. You mentioned mortgages. For some of the bigger banks, the risk weighting can be as low as 20% on lending for mortgages, but as high as 150% for lending for housebuilding. It is hardly surprising, then, that we have more mortgages and, therefore, more demand in the system than we have houses being built. Do you agree with that proposition?
Lord King of Lothbury: I do not like differential risk weights, because they presume knowledge that we do not have. Who is to say whether, at the next crisis, we will discover that lending via mortgages is more or less risky than lending to housebuilders? We just do not know, and it makes no sense to try to pretend that we do. It leads to an excessively complicated regulatory framework that has, as a by-product, discrimination between different kinds of lenders. It is a mistake to do that, and I would much rather have a robust and much simpler system that focuses on leverage and by which banks in trouble can have access to the central bank liquidity facility.
Q64 Lord Smith of Kelvin: Lord King, we have received quite a bit of evidence to suggest that private credit is better placed to support productive investment such as infrastructure, because it is able to hold debt right to maturity. How well equipped are the banks to meet the demand for the type of productive investment that the UK needs to support economic growth?
Lord King of Lothbury: It is probably a mistake to think of banks on the one hand versus a uniform, non-bank private credit framework on the other. We have a variety of financial instruments, and they can be bought and sold. Banks can provide credit for long-term investments, then package up those loans and sell them off. Banks can make their own individual decision as to what they do and do not want to keep on the balance sheet.
For many long-term investments, equity is a very good framework for doing it. You can argue that we do not have a successful system for ensuring that there is enough equity finance for new projects and that we focus excessively on the secondary market trading in those instruments, but then, in order for people to be willing to provide equity finance in the first place, they need reassurance that there is a secondary market in which they can offload their commitment.
I do not see any obvious reason why the distinction between banks and non-banks is hard and fast. Some banks will be willing to finance long-term investments, but others not so. Private markets can provide committed long-term finance, but certain kinds of private finance, such as private equity, are renowned for getting in and then getting out fairly quickly. I am not sure that there is any clear answer to that distinction.
Lord Smith of Kelvin: As a former private equity person, I will take that in the spirit in which it was given.
Lord King of Lothbury: As someone said, when you go to a hotel, look at the carpet. If it has not been repaired or cleaned, you know that the hotel must be owned by a private equity firm.
Lord Smith of Kelvin: I understand why you are not here in person.
The Chair: You have just been carpeted.
Q65 Baroness Donaghy: Good morning, Lord King. We have received evidence to suggest that Governments across the western world are not well equipped to deal with another financial crisis—for example, due to the consistently high rates of debt to GDP. What are your reflections on this, and how well equipped are the UK and the Bank of England to weather a financial crisis compared with, say, the United States, where we have heard some fairly hair-raising reflections on its ability to withstand international shocks?
Lord King of Lothbury: All G7 countries ought to be very concerned about the high level of national debt relative to GDP, because it would certainly make it more difficult and more costly to engage in the sorts of interventions that we saw both in Covid and during the financial crisis, when the whole point of bringing down debt to GDP before the financial crisis was to enable it to jump up, if necessary, in the event of a crisis.
One of the reasons why Governments of both main parties have been keen to have a fiscal rule that shows that the ratio of debt to GDP is falling at some point—even though they have not managed to achieve it yet—is precisely that, in normal times, you need that ratio to go down slowly and steadily in order to create the room for it to go up to cope with a crisis.
Some people have drawn comfort from the fact that the recent rise in long-term interest rates has been true across the G7, and it has, but that simply means that we are all in the same mess, rather than just the UK. It is a real challenge. I remember that we used to think about fiscal challenges as something belonging to developing countries and some of the emerging markets. The IMF would have to stand by to lend to those countries if they were in difficulty. Of course, it was the G7 that had to provide the money, which the IMF could then lend.
We are now all in a much more difficult position. If there were to be another crisis, I think Governments would cope with it, but it would come at the cost of a much larger rise in the ratio of debt to GDP, and we would see interest rates go up to off-set that to make sure that lenders felt that they could get more money back, because they would be concerned about whether inflation would rise as a means of trying to reduce the burden of the debt. We are not in a comfortable position. I think we would cope with another crisis, but it would not be easy, and we were in a much stronger position back in 2007-08.
Baroness Donaghy: We have heard that the Bank of England does not have sufficient visibility over trends within private markets or the interconnections between them and the banking sector. How effective are the Bank’s monitoring functions? Are there aspects that you would like to see improved?
Lord King of Lothbury: It is always tempting to say, “You need more monitoring and more data” et cetera. This is a dangerous path to go down, because the first question you should ask is, “What is the purpose of the monitoring? Why are we collecting data? What are we trying to find out? What use would we make of it?”
To my mind, the big use of data from the banking sector about its exposures would be for the Bank of England to be able to judge the haircuts that it would impose on loans to banks if banks got themselves into trouble and it had to lend to them. We can come back to that later.
In the non-bank sector, the question is, “Why do we need to know about all this?” After all, the big lesson that we learned from the failure of central planning and the Soviet Union was that the great virtue of a market economy is that it economises on the information that anyone needs to have. That is clearly true when it comes to decisions about what products to make, how much to make et cetera.
When it comes to national policy—in this respect, financial regulation—why do we need the data? What would we use it for? That has to be the most important question to ask. I have never forgotten that, when we were discussing the arrangements after 2010, when the FSA was being divided and the PRA was coming to the Bank, the then FSA came up with a proposal for a budget for the IT division of the new PRA. I looked at it and said, “This is bigger than the entire budget of the Bank of England. Why do you need to spend so much money? What are you going to collect?”
We ought to ask why, because a lot of things will go on with private sector contracts, but we do not need to know the individual details of those. It is true that the Bank needs to have a feel for the qualitative build-up of new exposures and sources of risk that may turn out to be very large and cause problems to the system as a whole down the road, but that is not helped by insisting on compulsory provision of vast amounts of data which, because of their size, no one ever has time to look at. It just goes into some data dump and no one looks at it.
That is then a question of judgment, experience, knowledge and going out and talking to people. The markets area of the Bank had a very effective set of contacts with people in financial markets to get a feel for what might be going on. What new kinds of instruments were coming into play? What things were getting larger and making people a bit nervous because they did not really understand what they were?
These things are valuable but, once it becomes a bureaucratic exercise, there is a problem. When we started work at the Bank on the financial stability report or producing concepts of risk, every month I would get a list of 75 risks. This was not helpful. I would have preferred to have a much smaller group of people, most of whom had years of experience and remembered the previous crisis, at least, who could go out and come back, and say, “This doesn’t feel right”. They could use their judgment to say, “This is the one risk that we should worry about”, rather than trying to pretend that there are 75 risks.
It is exactly the same problem with risk registers of companies or other organisations. It becomes a bureaucratic exercise. Once you have listed them all, you think “tick” and that is it, but what you need to ask is, “What could really go badly wrong?” In 2008, what really went badly wrong was that the banking sector rapidly expanded its balance sheet, not by issuing loss-absorbing equity or other similar instruments, but by borrowing itself. Its own leverage rose to very high levels, and it had almost negligible liquid financial assets. That was the big risk. It did not matter what the exposure was.
One of the great attractions of financial regulation is that, if you compare it with, say, a pandemic and ask, “What do we learn about the next pandemic?”, some of the things that you need to do would apply whatever the nature of the pandemic, but some depend on the precise nature of the pandemic, which you will not know until it hits us. In financial regulation, we have a big advantage because ensuring that banks have issued enough loss-absorbing capacity and have access to central bank liquidity against appropriate collateral means that you do not need to know from where the next big crisis will emerge. You know that the banks should be, as far as we can judge, safe enough to absorb it. You cannot be 100% certain, and a really big crisis may overwhelm it, but you have done what you can.
Knowing what kind of lending is going to be the riskiest is not, in my view, either feasible or necessary, because you can put in a regulatory framework that is robust, irrespective of where that next shock is coming from.
The Chair: Baroness Bowles—no, Baroness Noakes. I am sorry.
Baroness Noakes: The Chair has a difficulty in telling me apart from Baroness Bowles, but it is Baroness Noakes addressing this question to you.
Lord King of Lothbury: I remember you extremely well, Baroness Noakes. We worked together at the Bank of England.
Q66 Baroness Noakes: Can I just explore this idea of using leverage rather than risk-weighted capital? If, as you say, the real problem before the financial crisis was excessive leverage, which I do not disagree with, why was it that Basel then doubled down on risk-weighted assets and not leverage as a solution? Given that the Bank of England is rather slavish about following international standards, what chance is there of a shift in thinking in the regulation of banks in this country? If there were, what impact would it have on the balance sheets of banks operating in the UK?
Lord King of Lothbury: On the first question, I fear that people drawing up regulations are tempted or feel under pressure to be so precise with their judgments about where risks lie that they feel that they can calculate risk weights. This is an intellectual mistake, and the financial crisis revealed that. Ex post, you could see that risk-weighted capital was not a good guide to which banks were safer or less safe than others. Leverage was, and that is because the risk weights did not judge accurately, in advance, where the risk would ultimately come from. That is going to be a general phenomenon.
At the end of my term, I was chairing the governors and heads of supervision committee at Basel, which drew up the liquidity regulation framework. What you could see around the table was that some countries whose banks were in a very weak state were reluctant to impose higher capital regulation. All countries around the table were deeply reluctant to say, “Certain countries’ sovereign debt is much riskier than others”, so they all got a zero risk weight. This view that you could easily judge it goes right back to the beginning in Basel. I think it was a mistake, and it is going to take a big effort to shift it because, once these things are in place, no one is really willing to say, “The emperor has no clothes”.
What difference would it make to the UK banking sector? It would reduce some of the burden of compliance. There are two risks to making regulation so detailed. One is that regulation then becomes a battle between the lawyers in the regulatory authority and the lawyers in the regulated institution. At that point, the culture of the bank is affected. One thing that came out of the financial crisis was the need to ensure a change in the culture of what was going on in banks, but it is very hard for people working in banks to absorb the culture of complying with regulations when they are so complicated, with tens of thousands of pages, that you have to go to a compliance officer, who is the person who is told to read all these regulations, to deal with them. It is far too complex.
Reducing the burden of compliance on banks is a reasonable objective, but what you need is simple but robust regulation. The robustness needs to be on the degree of leverage. The simplicity is to make it clear that we are not going to impose hundreds of different risk weights on different kinds of lending, which is expensive to comply with.
It also brings home to everyone working at a bank what the risk is, which is that, if they do not issue enough loss-absorbing capacity, they will need support from an outside source, whether it is being taken over by another bank or the central bank providing support. It is possible to simplify the regulatory regime while ensuring it remains robust.
Baroness Noakes: Do banks in the UK have insufficient loss-absorbing capital? Would shifting to a leverage basis have a real-world impact?
Lord King of Lothbury: It need not. It depends on the ratio that is chosen. I would be more comfortable with a somewhat higher amount of loss-absorbing capital that banks have to provide. The beneficial quid pro quo for that, if one is needed—that is a contentious proposition; they can finance themselves in many ways, but we are asking them to ensure that enough of the financing that they obtain is in a form that can absorb losses—is a significant simplification of the regime for capital requirements.
Baroness Noakes: All things being equal, if you have more loss-absorbing capital, the cost of capital goes up, so the cost of lending to, for example, small businesses would go up.
Lord King of Lothbury: It depends on the quantitative balance between the two—how much simplification you introduce versus how much you can increase the amount of loss-absorbing finance issued by banks. The real issue about SME financing is not to do with the liability structure of the banking sector. It is a different issue altogether.
The Chair: Baroness Noakes, thank you, and my apologies again.
Q67 Lord Hill of Oareford: Lord King, can we talk just a little about financial stability risk and the potential risk of the growth of the private credit market? If we go back 10 years, after the big increase in banking regulation, I remember that the discussion at the time was that shadow banking, as it was then called, should be regulated in a similar way. The political pressure for that dissipated quite quickly, and there was no further regulation.
Here we are, 10 years later. Would it be your view that the potential risk presented by the growth of private capital still does not require further regulation, or is there a regulatory response that one ought to consider?
Lord King of Lothbury: We should start by asking the question, “What is the purpose of regulation here?” Let us leave aside consumer protection or investor protection and conduct of business. Let us stick entirely to financial regulation.
For the banking system, the answer is clear. The banks operate the payment system. They are not the only ones in the payment system, but, if the payment system were to break down—if, for example, the ATMs were to close and people rushed to take all their deposits out of a bank—the economy would grind to a halt. It is rather analogous to electricity supply. The number of people and the amount of resources involved in electricity supply is a tiny fraction of GDP but, if it failed, the entire economy would grind to a halt, so we need regulation of it.
The question is, “What is the equivalent in the non-bank financial sector?” Leaving to one side all the issues about individual consumer protection, is there a systemic risk that justifies a concern about regulation? That is harder, and we need to ask questions about what it is that the Government are concerned about.
The non-bank sector comprises a multitude of different kinds. The word “ecosystem” has been used to describe it, but it is much more. It is like different life forms across the entire planet—insurance companies, pension funds, bond funds, private equity, hedge funds, venture capital. All of these are completely different animals.
If an individual insurance company were to fail, that is not, in itself, a systemic risk, and there is protection to protect individuals who may be suffering from it. If an insurance company were to fail, and that led the entire insurance industry to find itself in a position where it could not offer insurance to people, that would be systemic.
If a pension fund failed, we have mechanisms for insuring the individuals in that fund. If the entire industry ran into trouble, would we be concerned? The irony, of course, is that defined benefit pension schemes in the private sector did fail completely and no longer exist for new entrants, but that was not seen as a systemic risk requiring financial regulation, because the problems really resulted from something other than the lack of financial regulation. I do not see why, if a hedge fund, or several hedge funds, were to fail that constitutes a systemic issue.
The big question, and probably the biggest issue in financial stability, is to find an answer to the question, “What institutions or what markets would Governments feel they had to protect in the case of their failure?” In the case of banks, it is easy: it is the payment system. In the other case, it is less obvious. When Silicon Valley Bank UK failed, the Government intervened and said, “It’s the only source of funding to high-tech, and we must preserve that for the UK”. In my view, it would have been possible to organise, in relatively short order, an auction of the assets—the loans made by Silicon Valley Bank UK—to another bank and that source of funding for high-tech would have continued. The Government did not take that view, but I do. The question of which ones we want to protect is not an easy one to answer. If you end up protecting everything, you might as well nationalise the entire financial system.
One thing we learned in the 1980s and 1990s was that the idea that, if British Leyland were to fail, the Government had a duty to step in and protect it did not make sense. Companies had to compete and, if they could not attract enough customers, they failed. Those working for those companies understood that it was better, in terms of the long-run health of the British economy, for firms that failed to be allowed to fail. They themselves might become unemployed for a while but, in a well-managed economy, they would find another job. The reason why there was so much anger after the financial crisis was that this approach to allowing failing firms to fail and see resources reallocated across the economy did not appear to apply to banks. That created a good deal of anger, understandably so.
There may be other examples in the non-bank financial sector, but it is a functional thing. What is it about pensions, insurance or other investments and markets that we feel we have to protect and save? I do not have a simple answer to that, but I am worried that, if we do not think that question through, we will end up with Governments or the authorities feeling that they have to step in and rescue any failing institution.
Lord Hill of Oareford: Can I just ask one other thing? To what extent is the shift towards private credit markets as a source of capital a consequence of the rise of regulation in the banking sector? Some of that was intentional. Have there been any unintentional consequences of the growth of regulation on banking and the complexity that you alluded to that have switched the focus from the banking sector to the private markets?
Lord King of Lothbury: The switch is not necessarily a bad thing. After all, one of the responses to the financial crisis was to suggest that the banking system ought to do fewer of the activities in which it had been engaged, in order to make it safe for depositors, and that the risky activities should go to something outside the banking sector.
The obvious example, which has nothing to do with credit, is that banks got heavily involved in trading activities of complex financial instruments before the financial crisis. There was a feeling that a lot of that trading activity should be outside the conventional banking sector, hence the proposal for ring-fencing. The Vickers commission did a really excellent job in proposing some modest tightening of capital and liquidity regulation, and some modest ring-fencing, rather than going whole hog for, on the one hand, much tougher capital regulation and nothing on ring-fencing, or, on the other, complete ring-fencing, back to Glass-Steagall, but nothing on capital regulation. It was a very balanced approach and we need to stick to that.
It was the trading activity that caused the concerns in the financial crisis but, as I said before, equity markets are also an important source of finance. That is always outside the banking sector, so we ought to allow institutions that can provide different sources of finance to grow up and develop.
Where people have become concerned—and there is something to this point—is that, in a financial centre such as London, there is a tremendous temptation to focus entirely on trading activity in secondary markets rather than the provision of finance to new or existing businesses as such.
I vividly remember someone coming to me during the financial crisis from a large, non-UK-based bank in London and saying, “It is utterly frustrating. I have this really good idea for setting up a £500 million fund inside our bank to fund medium-sized businesses. I took it to my boss and he said, ‘Forget it. We make £500 million in an afternoon’s trading’”.
The focus on trading as a source of profits, rather than basic banking activities, was a problem and still is a dominant issue in financial markets. It is something that I do not find particularly attractive. The whole point of these markets is partly risk-sharing, which secondary markets certainly provide and they underpin primary markets, but, ultimately, we want these activities to support businesses of all kinds, not just manufacturing, but non-manufacturing, as well as households, and to provide insurance and savings opportunities, through pension funds or other kinds of saving. This is what financial markets are really designed to do. The focus on trading for its own sake as a source of potential wealth is somewhat less attractive. Culturally, it is important to ensure that there are enough people focused on the first of these objectives rather than just on the trading activity.
Q68 Lord Kestenbaum: Good morning, Lord King. May I ask you to develop that very theme? It caught my eye when you responded to Baroness Noakes and said, “SME lending is a different issue”. I would be very grateful if you would develop that a little bit for our committee.
We have taken evidence from those on various sides of the SME lending question—the giving and the receiving—and there are, it is fair to say, some mixed messages. For some, it is purely a commercial conundrum for lenders that they just cannot make that side of lending profitable enough. For others, it is the bank’s regulatory regime, liquidity arrangements and capital adequacy that are constraining them.
They might say, “Were it not for these constraints, we would have the risk appetite to lend”. Others would say that there are simply not enough commercially viable small and medium-sized businesses to lend to. The good ones get the money, and the reason that the others do not get it is that they are just not investable. You began to say something about SME lending and capital adequacy for it to Lord Hill and to Baroness Noakes. Could you say a little more about it, please?
Lord King of Lothbury: There is a fundamental problem. Suppose that I have a really good idea for a venture, which I am completely confident will be financially very successful. Let us suppose that the Lord Chairman has the money. I need him to finance me. He would like to finance me, but he does not know whether my idea is any good and there is no way that he can easily find out.
If he starts to believe that my idea is a good one, he will want an equity stake in my business but, since I am completely confident that my idea is a good one, the last thing that I want to do is to give the Lord Chairman an equity stake. I want to borrow from him. If he is concerned that my business is not going to be that successful, he will say, “I will lend to you, but only on the basis of having collateral in terms of a personal guarantee and a claim on your home”. That is where we end up and there is no easy resolution to this. It is asymmetry of information in a fundamental sense.
We have to remember that, for every person such as me who is convinced that they have a very good idea, there are probably many others who are equally convinced that they have a very good idea but whose idea is, in fact, no good at all and will lose money.
How you finance these things is a deep challenge to any economy—private, market or centrally planned. There is no simple answer to this. The clearing banks were a good source of financing, because they would have an intensive branch network, whereby you would get to know your bank manager, who would know all about your past records of either repaying small loans or how much you had earned and your employment record. He would know a lot about you. A local branch manager in the community would actually know the individuals. They were better placed than anybody else to say, “This person is trustworthy. They work hard. They do not skive off. They are serious. It is worth backing them”. That has gone now with the contraction of a branch network—for reasons of cost, understandably—and the use of credit scoring. Credit scoring is of no use whatever if I have a bright idea for a business, which I have never had before, and it is a jolly good idea. No credit scoring or rating can ever assess whether that idea is worth funding.
There is no easy answer to this, which is precisely why, for decade after decade, going way back to the Macmillan Committee, the financing of business has always been a problem. Many businesses say, “We have very good ideas that we cannot get funding for”, and the potential suppliers of finance point out that many of the businesses that they have funded have gone bust. It is very difficult to form judgments. That is why they ask for claims and security. Some people are willing to put their own home up, but that is a daunting thing to have to do.
There is no simple answer to it. It is about creating opportunities for people to come together and to meet—a marketplace in ideas where potential borrowers and lenders can come together. It is no accident that Silicon Valley and venture capital are based around a relatively small community in a geographical area. People go there and get to know the venture capital people. The venture capital people get to know not just the companies, but the individuals in Silicon Valley who may then form their own company a few years later.
If that is true of high-tech, where we are talking about hundreds of billions of pounds of investment being needed, it is going to be even more true of trying to find a way in which small businesses can start up and obtain relatively small sums of money to enable them to get going. It is the marketplace where borrowers and lenders come together that matters, rather than the regulatory framework or anything else.
The Chair: Just on that point, I certainly remember, when I started in business, it was because a bank manager took the view that they could form a good judgment of me. By the way, I would be very happy to lend you any money on the back of your judgment based on your performance, not just as governor, but in this House.
Lord King of Lothbury: I have no good ideas at present for a business, but I will bear it in mind.
The Chair: Unfortunately, I do not have any money, so there we are. Of course, you are right that we no longer have a branch network. You mentioned credit scoring. Even if a banker wishes to support something, it is, “Computer says no”. To what extent does the regulatory system require that kind of apparatus with credit scoring and mitigate against bankers who know their clients taking a view and taking a risk?
Lord King of Lothbury: This goes back to the issue of risk weights. If you have risk weights that say, “If you apply credit scoring, you get a lower risk weight than if you do not”, you are building in an incentive that may have no justification at all. That is why I would just dispense with risk weights as such and stick to simple leverage.
One of the problems here is that the banking system has become very concentrated. There are good reasons for that over time. It makes the system as a whole probably more robust. The reason why we did not have major systemic problems, either in the 1930s or after the Second World War, was that we had a highly oligopolised banking sector, ditto Canada during the financial crisis.
One thing that was learned during the financial crisis was that it would be helpful to make it easier for new entrants into the banking sector. Of course, one of the problems when you do that is that the regulators will ask themselves, “What could go badly wrong for me as a regulator? The answer is admitting a new bank that fails shortly thereafter. I really will get blamed then. If it is a big enough bank, the Government would insist that it is bailed out. It will not be my decision”. I worry that, inevitably with a regulatory framework, regulators will spend a lot of time thinking about protecting themselves rather than protecting the country against a genuinely systemic risk.
Q69 Lord Grabiner: Good morning, Lord King. If I may, I must say that what you have been telling us has a refreshing clarity. I wish all of our witnesses were as clear as you have been to us so far. That is my sense, but I suspect that that is the view of the committee generally.
I want to ask you about a couple of things. Your reference to British Leyland as being, in effect, ring-fenced was an interesting one. I remember exactly the same argument—and it was probably true—in 2008 that there was a choice between AIG and Lehman Brothers. Lehman Brothers fell and AIG survived. That was just another example of the point that you were making.
Lord King of Lothbury: It is interesting that a number of mini financial crises have occurred where industrial companies, or companies not directly involved in financial activities, got heavily involved in transactions in financial markets, which created problems. That is certainly true.
The difference between AIG and Lehman Brothers is that the Federal Reserve would have desperately wanted to protect both of them. Lehman Brothers was allowed to fail because it could not provide the collateral against which the Federal Reserve could comfortably lend. The authority of the Federal Reserve was to lend to a body such as Lehman Brothers, which was not then a bank, against adequate collateral.
Of course, over a weekend, it is just impossible to assess the value of the collateral, which is why, subsequently, I have come to the view that the right way of focusing financial regulation on banks is to say to them that they have to pre-position collateral with the central bank. The central bank will determine the haircuts that it will lend against on different types of collateral. The total amount of money that the central bank is, therefore, willing to lend to a bank against its entire balance sheet is the upper limit of the amount of money that the bank can obtain by issuing deposits or other short-term finance, up to, say, a maturity of three months.
If that were to happen, there would be no bank runs, because everyone would know that the central bank had guaranteed that deposits and very short-term finance would always be covered by money from the central bank.
Lord Grabiner: You have addressed, in some of the points that you have been making, the principal point that I wanted to ask you about. It is a big-picture question, really. I—and probably we—would be interested in knowing your views. Are there features of the regulatory structure that you think are inhibiting economic growth?
Lord King of Lothbury: It is the sheer complexity of regulation. If you add it to investor protection, you end up with rulebooks and regulations that run into literally tens of thousands of pages. This means that it is impossible for anyone working on the front in financial markets to really understand financial regulation. What they do is say, “I have no idea whether this passes muster. I will take it to my compliance officer, who will say, ‘Yes, you can do it’, or, ‘You cannot do it’”. You have to build a culture that says, “Is this in the interests of my client?” In your own profession, Lord Grabiner, you have very strict rules about doing things in the interests of the client.
After the financial crisis, I remember someone coming to me and saying that they were very nervous about what they had experienced beforehand. They were in a fund management company. They said, “All these kids come in in the morning, carrying their bottles of water and cups of coffee, and rush to their machines. They are all thinking about how much they can make before lunchtime. What none of them is thinking about is, ‘Is this in the interests of the clients, the pension recipients or the insurance holders who are behind this?’”
Drastically simplifying a lot of the regulation but being robust on certain key things—in particular, leverage and access to central bank liquidity—would have a big impact on how banks operated. It would also reduce a lot of the compliance costs, which are—probably even more so in the United States—a heavy burden on banks and, as a result, a very strong impediment to any new entry into the banking system, because only a large bank can afford to bear the burden of this overhead compliance cost.
Lord Grabiner: I have just a very small point in conclusion. I was very surprised that you did not bite off the Lord Chairman’s arm when he offered you a loan, because he was not asking for a piece of the action. I was surprised that you did not move to that with alacrity.
Lord King of Lothbury: I do not like having my own leverage.
Lord Grabiner: Thank you for your answers.
The Chair: We might remove this from the transcript.
Q70 Lord Lilley: Lord King, I echo Lord Grabiner’s remarks about the clarity of your evidence. It is almost as if you have been thinking deeply about these issues for a long time, which is not always the case with some of our witnesses.
Following the great financial crisis, the rate of growth of lending and of the economy in the United States returned to roughly their previous levels. This side of the Atlantic, in the UK and, I believe, in the eurozone, that was not the case, and both the economy and lending have grown more slowly.
The question that poses itself, therefore, is whether the slower growth of the economy this side of the Atlantic is due to the slower growth of lending, or whether the slower growth of lending is due to the slower growth of the economy, in which case, what is causing that?
The argument that it is has something, at least, to do with the slower growth of lending this side of the Atlantic is that, in the States, they have 800 banks that are unaffected by the Basel agreement, and they were able to resume lending as before, whereas most of our banks have been constrained by the Basel agreement in terms of having to increase their reserve ratio and, therefore, are restrained in the amount that they can lend.
Could you tell me which side of the argument you think it is? Is it the lower growth of the economy holding back lending, the lower growth of lending holding back the economy, or a bit of each?
Lord King of Lothbury: If you take the period from the financial crisis until now, I would say that it is primarily slow growth of the economy that has generated slower growth of lending. In the immediate aftermath of the financial crisis, there was one thing that was most unfortunate. During 2008, it was very clear that the banks were undercapitalised. The only way to restore confidence in the banking system was to provide confidence to those people who were going to lend short-term to banks that they could absorb any losses down the road. That meant that they needed to increase the amount of equity that they issued.
The FSA, at the time, was very keen to say, “We are going to raise the ratio of equity to the size of the bank”; in other words, the capital ratio was the thing that really mattered. The problem with that was that banks that did not want to issue more equity could meet that ratio by reducing the size of their lending. If they cut back on lending, they could see their ratio of equity to the size of the bank creep up without having to issue new equity.
We at the Bank of England insisted on the opposite and, indeed, we did make sure that at least one major bank was forced to issue more equity. The approach of trying to constrain banks by saying, “We need tougher regulation on capital, but we’ll designate this in the short run in terms of the ratio, as opposed to the long run”, was a mistake, and that compressed lending in the year or two after the financial crisis.
Of course, once that lending had contracted, that led to slower growth. There is no doubt that the world economy after the financial crisis was growing more slowly. Every country said to itself, “If only the rest of the world was growing at its normal rate, we would be fine”, so they could afford to have fiscal consolidation, hoping that external demand would provide an adequate support to the economy. That was true of everybody, so it turned out that the world economy did grow more slowly.
You could see why, in the short run, central banks wanted to keep interest rates at such a low level for such a long time, but it had the problem that it created what were called zombie companies. There is no doubt that, if you look at the numbers, a good source of productivity growth in a normal year comprises people moving from failing companies with low productivity to more successful companies with higher productivity.
That batting average effect increases total productivity in the economy. With very low interest rates, fewer companies failed, which led to less allocation of resources from low-productivity to high-productivity firms, dragging down the average rate of productivity growth in the economy. There were other things going on as well, but that was one important source.
In more recent years, the US had an enormous fiscal expansion under President Biden, but that just led to higher inflation. In 2019, in most countries in the G7, there was a feeling that aggregate demand was broadly in line with aggregate supply. When the pandemic hit, whatever the merits of it, we decided to shut down parts of the economy. That reduced aggregate supply. Governments and central banks decided, “We are going to boost demand by trying to expand aggregate demand”. That was an odd thing to do. It would have been better just to wait. That excess then certainly increased activity and investment, to some extent, but also led to much higher inflation.
No doubt, in years to come, people will look back and analyse the causes of slow growth, but, in the UK, what is very clear is that, if you draw a straight line through the path of GDP per head from 1900 onwards, it was growing at 2% a year right the way through to the financial crisis, with slight deviations when there was a boom or a bust, or an upward trend in the cycle and a recession. After the financial crisis, GDP growth has fallen well below where that trend would have been.
I do not think that the good ideas that would have been implemented have disappeared, and there must be a real opportunity for a period of reasonably fast growth once we can get back to a situation in which economic policy appears to be set on a genuinely stable footing and banks feel that they are comfortable lending.
The real reason for slow lending over the 15 years since the end of the financial crisis has been weak demand and slow growth in the economy, rather than some deep reluctance of the banking system.
Lord Lilley: Why would low interest rates and the zombie company phenomenon not be as prevalent in the States as here?
Lord King of Lothbury: It has not been as prevalent because, with the creation of new businesses in particular areas of the economy, there is, in a sense, a different network for providing finance to that. The US has depended very heavily on growth in the tech sectors, which has probably skewed the performance of the US economy relative to our own, but even the US has seen a slowdown in productivity growth on average.
Q71 Lord Eatwell: Good morning. The committee has agonised in its discussions on financial regulation about the issue of lending for primary investment as opposed to secondary markets. We have already this morning heard some of your views on this. One thing that was very striking was that, when we had before the committee a number of small fintech companies that needed funding of around £50 million for the second stage of their growth, all of them had got their funding from the United States, and none of them from the UK.
Although there is a difficulty in putting together lenders and borrowers, as you quite accurately pointed out, some other countries seem to do it better. Can we learn from their better performance in that particular activity?
Lord King of Lothbury: It is a very good point. I doubt that the sources of finance that they got from the United States were primarily from the large banks in the United States. They were from other sources—people who probably specialise in lending to fintech companies. Of course, developing a network of potential lenders is much easier if you are in an environment where the market as a whole for those companies is much larger. This is a very good example of where, if it starts in the US—and many of the borrowers go to the US because they can get funding there, and many of the potential lenders set up in the US because that is where the potential borrowers are—you get an agglomeration effect that is very hard to undo.
How we create a network of potential lenders here is less clear to me. As soon as you start to restrict it to, say, fintech or just tech, you get bogged down in tremendous problems about the definition of what constitutes tech, et cetera, so a more general scheme would make sense. I would expect that, if you had a scheme in which the incentives to lenders and borrowers were general, it would focus in the end very much on tech and fintech, or biotech and so on.
We have managed to ensure that a lot of savings in the UK go through institutions—pension funds and insurance companies. We do not have a great tradition of individuals or groups of people coming together to provide financing to venture capital companies, which then specialise in lending to particular kinds of high-tech firms.
I do not have any simple answer to this. It is partly a cultural thing and partly a question of size, but there is no doubt that it would be beneficial to the UK to try to create an environment in which there were people who saw themselves as specialists in providing finance to such companies.
Lord Eatwell: I would now like to ask something completely different, in the sense that financial crises are very expensive to the economy. There are significant losses of GDP. One characteristic that financial crises tend to have in common, going right back to the tulip mania and right up to 2007-08, is that they are often associated with entirely new financial products. The tulip mania was trading on the margin; 2007-08 was credit derivatives. What do you see now as the likely area out of that clear blue sky where the new product that is around at the moment is going to be the product that undermines the stability of the financial system?
Lord King of Lothbury: The honest answer has to be that I cannot see anything coming out of a clear blue sky. An obvious area of concern, though, would be the focus on cryptocurrencies and instruments of that kind. The risk here is that, as the markets expand, there is great pressure to regulate them. People then draw false comfort from the fact that they are being regulated and feel that they can go further into those markets as they expand a lot.
Tulip mania became serious once people realised that the bulbs had no value. Once people realise that cryptocurrencies have no value, there could be a serious problem, which is why the right answer would be not to regulate them, but to make it absolutely clear to people that, if you want to invest in a cryptocurrency, it is like going down to your local bookie and putting money on the 2.30 at Newmarket. You are welcome to do that, but do not expect anyone to bail you out. The hope is then that we do not end up in a position where so many people have bet on the 2.30 at Newmarket that the Government have to step in and bail them out because of political pressure.
It is quite difficult to pinpoint where problems may come from. After all, before the 2008 financial crisis, it was certainly true that there was this massive expansion in transacting all kinds of complicated financial instruments that many of the people funding them did not really understand, but there was a good argument that said, “By spreading the source of funding out, and spreading the risk away from the concentrated banking system, the system as a whole might be more stable”.
What that overlooked was that in quite a short period—no more than four or five years—before 2008 the banking system itself expanded its own leverage very rapidly and became very fragile. It is that that we have to look out for. Are there parts of the economy that we really care about, which suddenly become unstable because they have expanded leverage?
I remember giving a speech before the crisis saying, “Excessive leverage has always been the common theme in past financial crises. Why do we think that we are cleverer than the financiers of the past?” People did not like that, but it turned out that we were not cleverer than the financiers of the past. We need to remember that now.
You are quite right. These things have happened regularly in the past and can happen again. A common theme is that, if we could find a way to prevent runs on banks, we would have plugged at least one of the big holes that have opened up in the past. There is a way to do that by making banks pre-position collateral to impose an upper limit on the amount of short-term finance that they can engage in.
Q72 Lord Hollick: Good morning, Lord King. I want to come back to SME lending or borrowing, and the lack of supply. We heard last week from the chair of the Federation of Small Businesses that there was a gap of some £65 billion not available to small businesses. Although 50% of lending to small businesses had been, in effect, transferred from the traditional banking market to the private banking market, that extra demand was not yet available. What measures should the Government or the regulator be considering in order to meet that gap?
Lord King of Lothbury: The problem with estimates of a gap of that kind is that, I presume, it is an estimate of what SMEs would like to borrow compared with what they are able to borrow. Some of that additional borrowing—that so-called gap—may well be regarded as a good idea and a good loan in the eyes of the borrower, but less so after the event or in the eyes of the lender.
If it were the case that there was a gap that was profitable to fill, the question I would ask is: “Why, in a highly competitive financial centre such as London, is someone not stepping in to fill that gap?” You would think that people would set up organisations to do it. We have so many new opportunities now—private equity, hedge funds, banks. There are all sorts of opportunities to create a vehicle for doing it. I can see why, if small banks feel themselves penalised by the overhead costs of compliance with an excessively detailed regulatory framework, that makes it more difficult for someone to come in and lend.
One of the banks that impressed me a great deal during the crisis was Handelsbanken. Handelsbanken comes in from Sweden and deliberately creates a geographically wide branch network, because it feels that there is money to be made in lending to SMEs, provided you have a manager in the branch in that local community who can form their own judgment and is given delegated authority to make judgments as to whether to lend. That model has to be carefully managed, but it has been very successful. It is one that others might copy; nothing has stopped them from copying it.
There is no simple or easy answer to how you can fill a gap for SMEs, other than trying to remove obvious impediments to new entrants into the market for lending.
Lord Hollick: The FSB was saying that the majority of that £60 billion was not for exciting new ideas from the Chairman or others, but was for businesses that were already well established and doing quite well, and could do better if they could get the access to the funding. The Handelsbanken example is a very important one, but it is difficult to see what the Government and regulators can do to encourage that approach to be taken in the UK.
Lord King of Lothbury: I agree. There is this fundamental problem. Even if the gap is for existing SMEs that seem to be doing well but want to expand, the question is: “Is that expansion a good idea?” In some cases, it will be; in others, it will not. It does not make sense for the Government to try to mandate, or to subsidise, higher lending. If there are obstacles to new entrants, we should try to remove them, but there is always going to be an issue about how a relatively small operation can demonstrate convincingly to someone representing a large pool of capital that they would like to borrow more.
The fundamental issue is that, if you are a pension fund or represent a large pool of capital, you just do not have the time or resources to talk to thousands and thousands of people. You need a smaller institution on the lending side, but they could be created as divisions or units of existing bigger ones.
Lord Hollick: We have heard in this inquiry, and in the previous one, which was on the competition and growth objective, that, since 2008, there has been a significant change in the appetite for risk from borrowers and particularly from lenders, but also from regulators.
A certain frustration that we have had is getting any of the participants in this debate to say precisely what should happen on risk and the risk culture. Everybody complains about the more risk‑averse culture. Many companies complain about being victims of it. Understandably, the regulators say, “Yes, we agree that there is a problem here, but it is not really our job to specify”—with the clarity that you have done today in our deliberations—“how we should recalibrate it”. The Government have said, if I can summarise it, “These are independent regulators. It is not our job to do it”.
We have ended up with a general view that there should be a change in the culture, but nobody is prepared to say, “This is what we should do”. How do you break this situation? In your view, what should the Government or regulators do to make changes to the culture of risk aversion since 2008 that we are still suffering from?
Lord King of Lothbury: There is no simple answer, and I cannot pretend to offer one, but what I would say is that it does not make sense for the regulators to try to tell institutions what kinds of lending are more or less risky. That is what risk weights do. The problem with risk weights is that they have encouraged banks to arrange their affairs and manipulate their balance sheets to meet the requirements of the risk weights set down by the regulators. In the end, I suspect, they are bound to regard SMEs as a group to be high-risk, but that is not helpful.
I would do away with the risk weights and say to banks, “You have to set your own risk weights and judgments about risk. You cannot rely on the regulators to give you a financial incentive to follow the regulators’ view about risk weights. We are going to impose on you a leverage ratio. We have a scheme by which you have to pre-position collateral so that you have access to us at times of a liquidity crisis, but then you have to manage your own risk. If you can see profitable opportunities in lending to particular SMEs, we are not going to stop you doing it by telling you that there is a high risk weight”.
The problem for SMEs is that the only solution to it is to have an environment in which people do not regard all SMEs as belonging to a category called SME, which is risky. You have to have potential lenders willing to say, “This particular proposal is a good one. This one is not”. That way, you will get more lending to the SMEs that deserve it.
Branding them all with a high-risk label and a high risk weight is not going to help create an environment in which people can say, “There is a profitable opportunity here. Some of these SMEs must be worth lending to. Let’s create a division or part of our organisation equipped with people who can form judgments on which we are prepared to rely as to which SMEs we will fund and which we won’t”. That is a profitable opportunity, and you do not want to handicap that by saying, “Any loans that you make will, therefore, attract a high risk weight”.
Lord Hollick: What role do the Treasury and the Government have in prompting that new thinking?
Lord King of Lothbury: It is more to do with Parliament, your committee and others, saying, “We need to change the legislation”. The regulators will say, “We are part of the Basel III network. We can’t change. We all have to abide by the same risk weights”, but the result has been an incredibly complex regulatory system, which does not serve the purpose for which it was originally set up.
There is something to be said for going our own way. The Basel III network is not a legal international framework. It is a set of advisory suggestions, which then requires each country to legislate for itself, hence the US deviating from Basel III and even more so, earlier, from Basel II. Now that we are no longer in the EU, we have the freedom not to abide by EU legislation on how to implement Basel III, so we do have the freedom to move in this direction if we have the self-confidence to do so.
The Chair: The secondary objective does say “subject to maintaining international standards and rules”, does it not?
Lord King of Lothbury: The regulators have so many “subject to” conditions imposed on them that it would be good to get rid of almost all of them.
The Chair: I fully understand the point that you made about risk weightings. One of the things that will determine your capital requirements by the regulators is concentration risk. If you are a small bank of the kind that you describe, whose business is mainly UK-based, the regulators take the view that, because you are UK-based and your lending is UK-based, that is a concentration risk. Therefore, there will be a higher capital requirement than if you are a bank that is lending on an international basis. Do you think that that makes sense?
Lord King of Lothbury: I do not, because what you are doing is taking away from banks the responsibility for judging the risks themselves. You would think that a bank would worry about concentration risk. It ought to worry about concentration risk, no matter what its size.
The Chair: I am sorry to interrupt, but the view is that the concentration risk arises because you are lending in the UK, not because you are too heavily involved in properties or other assets.
Lord King of Lothbury: I would stick to a simple framework based on leverage and access to central bank liquidity. If the central bank feels that you have a concentration risk on your loan portfolio, it may require a higher haircut on that bunch of assets and so require you to fund more of your lending through longer-term debt than deposits or very short-term financing. That is the way that it should come about, but those are judgments that matter only in the event of a serious crisis or failure of the bank.
At one level, it makes sense to say, “Surely, one kind of lending is more risky than another, so it should attract a higher risk weight”, but those are judgments that we want banks to make for themselves. A successful bank will make good judgments on those things, better than an arbitrary regulatory requirement imposed on it from the outside. Bad banks will make poor judgments and bigger losses, and the market will see that.
Simplifying the framework a lot would make it easier for new entrants to come in. Reducing the burden of compliance is of benefit to the banking system, and there is no reason to impose something that is unnecessarily complicated.
Q73 Lord Sharkey: I would like to go back, if I could, to the question of funding for SMEs, but, before I do that, I would like to check whether you include stablecoin in the comments that you made about cryptocurrencies.
Lord King of Lothbury: Stablecoins are a different issue altogether, potentially more problematic. The best way to think about stablecoins is that they are like Scottish banknotes. We allow Scottish banks to issue Scottish banknotes, and Northern Irish banks to issue Northern Irish banknotes, so that they can advertise themselves.
In order to avoid loss of control over both seigniorage and note issue, and the money supply, we at the Bank of England insisted that every Scottish banknote that was issued had to be backed one for one, at all moments of the day and night, with a Bank of England note. We printed special notes to do that. That is what should happen to stablecoins.
The technical advantages of stablecoins may be something that people can exploit, and we should certainly be open to technological advance, but no central bank can afford to lose control over the issue of the money supply, so it needs proper regulation. That does not mean allowing stablecoins to be backed by government treasury notes or some other short-term asset. You will get into the same problem that we had with money market funds in the financial crisis, when they purported to be worth one for one, but turned out not to be when the value of those notes went down. The only backing has to be a deposit at, or a note issued by, the central bank. Technical things are attractive. Do not mess around with the issue of the currency.
Lord Sharkey: Are there any obvious advantages to the UK economy of adopting some form of stablecoin?
Lord King of Lothbury: I cannot think of any significant ones. If you had it regulated in the way that I suggested, there would be no particular financial attraction in issuing them. We have the benefit in the UK of living in a country with a pretty sophisticated commercial banking system that allows us to use technology to make transactions. The US is much less advanced in this area. It is quite amazing that a country that sees itself as the home of high-tech still has a pretty low-tech banking system. We are ahead of it.
The area that people are most concerned about is cross-border banking transactions, which are very expensive to make and subject to a lot of regulatory hindrance. That is why, if you drive through south London, you will see small shops advertising, “Payments paid overseas. Come in”.
One of the biggest obstacles to smoother cross-border transactions is not our own commercial banking system being behind the times, but that the Government have imposed, for ostensibly good reasons, serious restrictions—“know thy customer” and cross-border payment limits and monitoring—in order to prevent terrorist financing.
The biggest impact of those restrictions, I suspect, has been far less on terrorist financing, which is best dealt with through intelligence where there is a great deal of access to information, and more in terms of restrictions on ordinary depositors and people who want to make payments. That area would benefit from another careful looking at. I know that all of us suffer from the problem of being a politically exposed person and the difficulty that that adds in terms of making payments or even, sometimes, having access to a bank account.
We should certainly allow new technology. We should allow new entrants to enter the payment system. These things will improve, but there is no magic answer here through stablecoins, because the attraction of them to the issuers is clearly that they appear to be issuing money and can invest in government securities to back it. That is not safe and not something that central banks around the world will feel comfortable with.
Lord Sharkey: Can I go back briefly to the question of funding for SMEs? We have heard from other witnesses that direct SME lending is challenging, at the very least, for banks. SME lending is high-risk, and the profitability of a given loan, of course, decreases exponentially as the amount lent reduces.
We have also heard evidence, though, that the established and sophisticated private credit firms increasingly prioritise providing finance to large corporates over providing finance to SMEs, and that this may represent the start of a gradual reduction in the willingness of private credit markets to provide SME finance as they currently do. Is there anything in that?
Lord King of Lothbury: I am not close enough to how the markets are operating today to comment on it. If it is true, it reflects the basic point that I made. The challenge in funding SMEs is that you really do need to know a lot about a small enterprise. It is a costly thing to do. There may be a lot of money to be made out of funding good SMEs, but you can lose a lot of money by lending to bad SMEs.
How can you create a cost-effective framework to distinguish between the two? There is no easy answer to that. As I said before, Governments, over many decades, have agonised over this and set up committees and inquiries to sort out the problems of financing small business. It is inherently a problem of lack of information.
If we can identify impediments, we should try to deal with them. It is a good thing that there are new sources of lending for SMEs, rather than just going to a small number of high street banks, with a risk of—if not actual collusion—focusing on very large amounts of money and credit scoring in aggregate, rather than monitoring individual enterprises. I can see that, as some private credit institutions grow and become bigger, the incentive for them is to make bigger loans, and they will want, therefore, larger borrowers, not just SMEs.
The Chair: On that note, Lord King, I think we should conclude this session and thank you for your answers, which were of great clarity and of huge help to the committee with our inquiry. If you have any further thoughts that you want to pass on to the committee, we would very much welcome receiving them. You have given us a tour de force this morning and we are extremely grateful, so thank you very much.
Lord King of Lothbury: It has been my pleasure. Thank you.
