Treasury Committee

Oral evidence: Re-appointment of Ben Broadbent as

Deputy Governor for Monetary Policy, Bank of

England, HC 2294

Tuesday 11 June 2019

Ordered by the House of Commons to be published on 11 June 2019.

Watch the meeting

Members present: Nicky Morgan (Chair); Rushanara Ali; Mr Steve Baker; Colin

Clark; Mr Simon Clarke; Charlie Elphicke; Alison McGovern; Wes Streeting.

Questions 1 – 69

Witness

I: Ben Broadbent, Deputy Governor for Monetary Policy, Bank of England

Written evidence from witnesses:

CV, Questionnaire

Examination of witness

Ben Broadbent

Q1 Chair: Thank you very much indeed for being here for your reappointment

hearing as Deputy Governor for the Bank of England for

Monetary Policy. I am going to go straight in. Thank you very much

indeed for filling in the questionnaire for us as well.

One of the criteria that the Committee considers on appointments

obviously is about personal independence: whether the appointee is

obviously an internal or external member. In several of your answers,

when you were asked for a view, it does start “In the MPC’s latest

projections” or “In the MPC’s most recent forecast”. Do you feel that you

are able to offer some of that independence of thought to the MPC when

they are making decisions?

Ben Broadbent: Yes, absolutely. If I disagreed with the MPC’s view, as I

described in the answer, I would have said so. The reason I describe the

answers in that fashion is that in those cases I agreed with it.

Q2 Chair: How robust is discussion with the MPC? Should we be worried

about group think at the MPC? I think there is always a belief that

potentially the financial crisis, if not caused by, was certainly made worse

by group think around boardrooms. Is there a risk of that happening in

the MPC?

Ben Broadbent: I do not think so, no. As you know, I have been both an

external member and now Deputy Governor for some years. I have been

to a lot of MPC meetings. I can tell you that they are pretty robust and

open and there is detailed discussion of many issues where each member

is able to give his or her view very freely.

Q3 Chair: Are there any examples where you have, even now, a personal

view or you have examples where you have expressed a personal view

that has perhaps been different from other MPC members or even from

the majority MPC view?

Ben Broadbent: I think there are always such things; always. In the

questionnaire—and I actually touched on this with Michael—I talked a

little about the tensions as I see them, as they are in the current

forecast, between the assumptions that we make about Brexit and those

that might be embodied in some market prices. I do not know if I feel

exactly the same way but I certainly have my own views on that.

There is sometimes I think, if I may say so, group think about group

think. I don’t see the evidence that it is there, having been on this

Committee for many years now.

Q4 Chair: Obviously, the Bank is about to have a change at the top and this

Committee will have a role obviously in a pre-commencement hearing.

What do you think the priorities for the next Governor should be?

Ben Broadbent: The Bank’s remit will not change. As Michael Saunders

just told you, it is very clear. That will always be the centrepiece for

whoever is Governor, to use our tools to maintain financial stability and

to meet the target for price stability as defined by the Government. That

is right at the core of what we do and those things will always be the

number one priority for whoever is leading the institution.

Beyond that, I would expect the next Governor to continue to make all

the efforts that the current Governor has made to—if I can use the

word—”modernise” the institution in many ways. It is those core remits,

which are given to us by Parliament, which must be right at the centre

and must be the number one priorities for the institution and for the

Governor in particular.

Q5 Chair: How important should diversity be for the next Governor? I think

as Deputy Governor you have worked to create diversity in how the Bank

works. We saw the BAME numbers last week, I think, in terms of

employees. Clearly there are challenges.

Ben Broadbent: Yes.

Q6 Chair: What are those challenges? What are the priorities?

Ben Broadbent: As you know, the priorities are to continue to improve

female and minority representation at the Bank, including in senior roles

at the Bank. I say “continue to improve” because there have been really

material improvements in the last few years. I think the number of senior

women five or six years ago was 16% or 17%. It is now 31%.

Minority representation in senior roles is the most challenging target.

That has gone up but from a very, very low number, 2%, to a number

that is still very low, which is 5%, and we clearly have more to do on that

and I think it will take some time. If you look at the latest flow numbers,

as opposed to the stock, they really are significantly different. Half our

graduate recruits last year were female, and 39% of our job offers this

year to graduates were to minority applicants. It remains to be seen how

many of those choose to accept those offers, but we have made really

material improvements.

As you say, there are some areas—clearly, many areas—where we have

to make further improvements. I suspect that may take longer in some

cases than we have given ourselves, but the changes that we have seen

already have been pretty material, which is good.

Q7 Chair: You mention the word “modernisation”. What does modernisation

for the Bank of England—which is hundreds of years old—look like?

Ben Broadbent: That is part of it. There is now an executive committee

at the Bank, which there wasn’t when I first arrived. There are clearer

lines of accountability. There are fewer ad hoc committees. There have

been—and will continue to be made—improvements in our central

services in the way we purchase things, so that sort of thing: the

operational running of the institution, the improvements in its diversity

and its internal accountability processes.

Q8 Chair: In your questionnaire you were asked at the top whether you

intend to serve out the full term for which you have been re-appointed.

No intention to apply for the vacancy at the top?

Ben Broadbent: As you know, I am here for my re-appointment as

Deputy Governor and in time you will have an opportunity to question

whoever is chosen as the next Governor.

Chair: I shall not press you. We will wait to see who the names are on

the short list.

Q9 Colin Clark: To what extent has the recent ‘gating’ of Neil Woodford’s

funds raised financial stability questions?

Ben Broadbent: I do not think that actual event has had much effect on

systemic risk. We have not seen spillovers to other funds. We have not

seen spillovers to financial markets, so far as we can tell.

You may have read a speech the Governor gave last week at the G20,

which highlights arguably some of the issues that are clear in the

Woodford episode, namely, the risks involved in maturity transformation

in these investment funds. In other words, in having assets for the

investor’s liabilities for the funds that are more liquid that can be

withdrawn at short notice than the underlying assets in which the fund

invests.

That is something that certainly the Governor in his role as FSB chair has

been focused on for a number of years and so has the G20, so is IOSCO,

which is the community of securities regulators. In terms of the systemic

effects of the Woodford episode specifically, I do not think we have seen

any really.

Q10 Colin Clark: What would create financial stability risk around fund

gating?

Ben Broadbent: To be clear, as you know, suspensions are allowed and,

indeed, I think fundamentally if you have a fund, as I say, whose assets

are less liquid than their liabilities there will be episodes when that is

probably the right thing to do. I do not think we should see this as an

inherent problem or something we should get rid of. I don’t think that is

the case.

Indeed, I would say that the real financial stability risk in some ways

would come from funds having to liquidate assets very quickly at values

that were well below their market price. That is precisely what

suspensions are designed to prevent, so I don’t think I would say ‘gating’

is the source of the problem. In some ways, it is a reflection of this

liquidity mismatch.

Q11 Colin Clark: The Times wrote yesterday, “When the salesmen get greedy

and regulators get lazy—we are playing in a rigged casino”. Why would

The Times personify it as that? It is obviously trying to portray that there

is something unreasonable going on.

Ben Broadbent: Yes.

Q12 Colin Clark: In terms of financial stability, do retail investors understand

what fund gating is? It looks to them like you are closing the door after

the horse has run off.

Ben Broadbent: This is the fund’s decision. When you say “we” it is not

our decision and, indeed, the Bank of England does not regulate these

funds as you know. It is important that investors understand that this is a

possibility. I think that is important.

We saw a couple of episodes after the referendum when similar things

happened in commercial property funds, certainly open ended funds

clearly had this structure where you say to the investor, “You can

withdraw your money at a day’s notice, but you are investing in

something, an asset that cannot be liquidated except over long periods of

time”. There were suspensions of a couple of those funds at that time, so

as I say I think the possibility that there will be is always there and it is

important for investors to understand that.

Q13 Colin Clark: As you have just said, funds are solely regulated by the

FCA. I don’t know whether this is within your scope but does the FCA

have the teeth or resource to prevent scandals rather than investigate

them after? Does the retail investor not expect the FCA to stop financial

scandals rather than simply investigate them after?

Ben Broadbent: Responsibility—if there is any—for the underperformance of this fund is for the people running the fund. You

cannot have a system where regulators collectively could reduce all risk

to zero. I do not think that is possible and I do not think it is desirable.

There is risk in these funds. There is risk in risky assets. Investors get

paid higher returns—sorry, at least an expectation for these higher

returns.

As I understand the particulars of this case, there were some questions

about whether it could or should have been able to list some of its

securities to meet the regulatory requirements, under which no more

than 10% of its assets could be held in unlisted securities, but there were

no rules broken so far as I understand it.

Q14 Colin Clark: Specifically on that point, again, The Times referred to

illiquid assets being listed on the Guernsey Stock Market to get around

EU regulation, and the FCA did not step in or the FCA did not point this

out. Is that its responsibility? Is it the FCA’s responsibility to identify it is

illiquid?

Ben Broadbent: I am not going to answer questions about the individual

regulators. One, it is the FCA’s responsibility but, again, as I understand

it, that was within the rules, so there may be a question about whether

investors are sufficiently aware of those rules but, as I understand it, I do

not think—

Q15 Colin Clark: You see what I am getting at that at some point this

Committee will take evidence from the FCA, and retail investors expect

the FCA to be providing a function to protect them as opposed to simply

investigate after there has been a scandal.

Ben Broadbent: No, I understand, but we should be clear that what

individual investors seeking a higher return than in their bank account

cannot be protected against is underperformance of that fund. That is the

ultimate thing against which it would be nice to have protection, but you

cannot. One should be clear that the regulator could never be and should

never be seeking to reduce all risk to zero. That cannot and should not

happen. As to whether the particulars in this case were met or there

should have been more information or the FCA should have—that I will

not comment on.

Q16 Wes Streeting: First, I want to turn to an issue we have visited on more

than one occasion about the relationship between the different policy

Committees. In your written questionnaire, you say, “I think the

interactions between [monetary and prudential] policies are often

overstated, particularly in small open economies like the UK”, and you

point to a speech in which you argued for a “separation of powers”. Given

this, what do you see as the costs and benefits of having the Governor

and three of the Deputy Governors across all three policy Committees? Is

there a risk that monetary and prudential policies are insufficiently

separated?

Ben Broadbent: One is trying to strike a balance. There is a very clear

advantage, I think, in having all these committees have the same

understanding, or the best possible understanding, of how the economy

is doing, where the risks are coming from. To that end, it helps to have

people who are members of all of them.

I do think on the other hand—as I said in the speech—that it is important

not to meld them all together into one grand committee, where I think

what you would end up with there is that people would naturally tend to

focus on satisfying the most visible objective. In the case of the MPC and

the FPC, that would be inflation, to the neglect of financial stability

issues. There is a balance to be struck; I think it is reasonable at the

moment.

Q17 Wes Streeting: In practical terms, can you think of a circumstance

where it would be appropriate to abstain from a vote or recuse yourself

from discussions because of your role as Deputy Governor for Monetary

Policy having conflict, for example, with the optimal decisions for the FPC

or PRC?

Ben Broadbent: If I can separate the two, the intrinsic connections and

interactions between monetary and macroprudential policies I think are

generally overstated. During the financial crisis when UK-owned banks

lost untold fortunes—some measures say £200 billion, in that order—the

vast majority of those losses did not come from assets in this country.

About three-quarters of them were on overseas assets. Of the rest of the

domestic assets, most were in things like commercial property that were

not the most sensitive to domestic interest rates. My view is that the

idea, for example, that you could have materially reduced the risk or the

scale of the financial crisis, the scale of the effects of the crisis seen in

this country, by rising domestic interest rates ahead of it, would not have

done much.

Maybe it would have made more difference if the Federal Reserve had

had higher interest rates and it certainly would have made more

difference if the banks had had more capital, but that is history now, as

we know. My point is I would not expect to find myself in a position

where somehow I would have the incentive to do one thing on the FPC

but it conflicts with what I am doing on the MPC. Each committee has its

objectives and I think it can largely meet each with its own tools.

Q18 Wes Streeting: Finally on this topic before I move on to a slightly

separate issue, in your questionnaire you say that there is scope for the

FPC, when dealing with macro-financial stability, coming into conflict with

the PRA and PRC, when dealing with the prudential regulation of

individual firms. Can you cite any specific occasions where this has

happened to date?

Ben Broadbent: No, not really. I was thinking more conceptually of what

might happen, in particular, in a downturn. One of the fundamental

purposes of macroprudential policy is to ensure that in such

circumstances banks do not try to maintain their capital ratios by cutting

back aggressively on their lending. That is why we ask them to hold more

capital. It is why we want other loss-absorbing liabilities. When such a

time arrives, it will be important to allow some of these buffers to shrink.

It was more making sure that at those times the individual regulators

who might be inclined to maintain capital and the macroprudential people

who want to release it, that that conversation is clear and the objectives

are well understood. Thus far, having been on both Committees for a

while, I have not come across—of course, they work together every year

in formulating and analysing the stress tests.

Q19 Wes Streeting: Turning to the issue of Brexit and business investment

now, were you surprised that the most recent data published by the ONS

showed business investment in the UK rose by 0.5% in the first quarter

of the year, whereas it had declined in all quarters of 2018? What do you

think is going on? Noting in your annual report to us you indicated that

the upturn in business investment could have been due to,

“Precautionary spending on stocks ahead of the presumed Brexit date on

March 29”, why do you think stockpiling would show up as business

investment?

Ben Broadbent: I would say it is related to that. Firms buy stuff that is

durable. Some of it is called stocks and some of it is called fixed capital

and that is what is recorded as investment when you spend on that stuff.

It is possible that there was more spending, say, on warehousing. That is

very clearly fixed capital; that is investment. In that case it would have

arisen from the same fundamental source, a desire to prepare ahead of

29 March. In that particular case it would have been fixed capital. Having

said all that, we should recognise that these numbers, particularly from

one quarter to the next, are pretty volatile and subject to revision, so I

would not want to over analyse or interpret the first estimate of a move

in a particular quarter.

Q20 Wes Streeting: Fair enough. In a recent speech, you argued that firms

postponed irreversible business investment as the possibility of a no deal

approached in the spring. Do you have an estimate of how much business

investment may have been forgone?

Ben Broadbent: No, but Michael described to you how our figures look

in comparison with other advanced economies. He has a speech today or

tomorrow and he has a very nice little graph that demonstrates very

clearly and very starkly what has happened in that respect. We follow the

rest of the G7 and business investment is pretty tightly correlated across

advanced economies. We follow it up and down and then we get to Brexit

and everyone else does that and we do that. That gap is 12% or 13% or

14%. It is very, very big. That sort of order of magnitude, certainly well

north of 10%, is the effect of this drag.

Q21 Wes Streeting: You have given us something to look forward to when

the alert pings into our inbox tomorrow with the speech.

Finally, you acknowledged in your speech that firms that see an upside

from Brexit may also be delaying investment amid uncertainty. I think it

would be a consensual point—whatever the wider political divisions are—

that the uncertainty is not helpful. Does this mean that a resolution of

uncertainty in the form of an October Brexit, in whatever form, could

boost investment? Do you think that the extension of Article 50 to

October was long enough to have had any meaningful impact on

investment?

Ben Broadbent: No, not really. No, you are making very long-term

decisions. Six months is neither here nor there. My understanding of this,

as I have tried to explain it in that speech, is that when we talk about

uncertainty we are really using that as a euphemism for downside

outcomes. It is very clear in the direct conversations with businesses and

surveys and what business organisations have said, that in this particular

case that is a no deal outcome for Brexit. Choosing that deliberately may

reduce uncertainty. It will not increase investment, at least for those

firms that have any connection with trade with the EU, whether directly

or indirectly. That is pretty clear.

Q22 Wes Streeting: One thing I want to pick up, before handing on the

baton, is: how would the economy be affected by entering a post-Brexit

transition period in October, versus the impact of any further extensions

of Article 50?

Ben Broadbent: There are two things that one would expect to take

time. One is the negotiation of the future trading relationship. As you

know, there is not one at the moment. There are some words but nothing

agreed. Beyond that, normally when you strike any trade deal there is a

long implementation period—many years, usually—to allow the economy

to adapt in the way that it needs to. I think that would be desirable in

respect of the economy, certainly.

Q23 Alison McGovern: I want to ask you some questions about the

communications of economics and particularly that in your questionnaire

response you say that, “Public understanding of monetary policy

decisions is critical”. In many of your responses so far, underpinning that

has been the assumption that it is important that the public understand

what is going on our economy, particularly around Brexit and other

matters.

I would like to ask you about an interview that you gave to The

Telegraph, when you were describing the situation that we are in in

relation to productivity. You described the period that we are in as

“menopausal”. We have, “Passed our productive peak, awaiting the

invention of new technology”. Reflecting on your use of the term

“menopausal”, do you think it was appropriate and helpful in people

understanding the state of our economy that you were describing?

Ben Broadbent: No, not at all. It was awful and it was an awful thing to

realise that I had caused people the offence that I did. For what it is

worth, I did not actually say that. We were talking about productivity in

the 19th century. Not now but in the 19th century. There was a period in

British economic history—right in the middle of the industrial revolution—

when there was a very protracted slump, which still puzzles economic

historians. The point I was trying to make was that it is difficult to

diagnose what is going on right now with a great deal of precision, and as

an example look at what happened 150 years ago. After a century and a

half of thought and cogitation we have not figured that one out and I do

not think we should be confident about figuring this one out. That was

the point I was trying to make.

For some reason, economic historians have described that episode with

the word “climacteric”. Goodness knows why. I was trying to define that

word, so I did not say the current economy is like that. I know it was

reported in that way but that is not what I said. Having said that, to have

used the word in connection with any economic poor performance,

possibly to have used the word at all, was very insensitive and that is

why I felt that I had to apologise immediately, which I did. I can only do

that again. The answer to your question is definitely not.

Q24 Alison McGovern: The apology is welcome, but given the environment

in which you work, the Bank of England, one that is utterly dominated

both historically and today by men, and you have mentioned that you do

not think that group think is a problem, reflecting on that incident do you

think that, perhaps unwittingly, you have demonstrated that the Bank of

England does still have cultural issues in relation to women?

Ben Broadbent: Possibly, but this was me. I do not think you should

draw lessons about the Bank of England from this. It was my

responsibility. I said what I said. It should not reflect on the institution.

Q25 Alison McGovern: How does the Bank monitor the public understanding

of its work?

Ben Broadbent: We have a survey we do regularly, the Inflation

Attitude Survey, which asks people about the things that are most

important to us—most important to the MPC, certainly—and we have

occasions surveys of public awareness. There are others not done by us

as well. We look at these things very regularly to try to understand how

we can improve our communication and reach more people.

Q26 Alison McGovern: Do you think the public understands what it is you

do?

Ben Broadbent: Some of them. I do not think everybody does. Let’s be

clear that the importance that I refer to in the answer was not for its own

sake. The reason is that we are better able to control inflation when

people understand and trust the target that we are aiming for. That is the

core point.

It is to that end that we want to ensure people are aware not of every

aspect of what we do but, broadly speaking, first, that we have a 2%

inflation target and that we will do what is necessary to meet that;

secondly, not at all points of time, what that might imply, given

everything else, at least qualitatively for the path of interest rates. That

is it. Getting those messages across is important, all the other detail less

so.

Q27 Alison McGovern: I would have to say I would bet that members of this

Committee have probably knocked on more doors and spoken to more

members of the public that you have, Mr Broadbent.

Ben Broadbent: Quite possibly.

Q28 Alison McGovern: Unfortunately, they do not have a high level of trust

in us or you, so I think we have long way to—

Ben Broadbent: If I may say so, the level of trust in our surveys is quite

good, so I do not think that is fair and I do not think that is true. If you

look at the surveys on trust in the Bank of England, they are quite good.

I accept the point that many people are not sufficiently aware, I would

say, of the target, what it is for, why it matters, why it is there, but trust,

I would dissent from that.

Q29 Alison McGovern: You point also to community forums and citizens’

panels as examples of growing public outreach. Could you say what you

mean by “citizens’ panels” and what you think you have learnt from

them?

Ben Broadbent: They are a means of talking to people. People are free

to come to these meetings, wherever they are. I have done a couple.

There are very broad topics that we invite people to have opinions on.

There is usually a host who asks questions and then we go and sit at

tables and talk to people. They might ask us about anything. It is mainly

for us to listen to what people’s concerns are about the economy,

broadly, but also to try to help people understand what we do and what

we can do, what a central bank can do.

Q30 Alison McGovern: Do you think that at those citizens’ panels people are

able to understand the work of the MPC, what it does, or are you mainly

there to mutually hear the topics that people raise when prompted?

Ben Broadbent: Both, really; both. I think people are able to

understand, yes. Certainly, people who are old enough—as I certainly

am—to have lived through the 1970s and 1980s will understand the costs

of having very high and variable inflation, very clearly. It is not difficult to

convince those people of the virtue of having low and stable inflation.

Q31 Alison McGovern: Are they bothered about other issues now?

Ben Broadbent: Yes, often. They will ask about whether the financial

system is safe and what are we doing with that. They are very interested

in changes in the forms of money we use and how we transact, a whole

host of issues, yes.

Q32 Alison McGovern: To come on to the FPC’s work, your colleagues on the

FPC also have an interest in this. They may or may not feel that their

work in making sure that the financial system is safe is important to the

public. Post-2008 do you think that the public—you say that the public

trusts you. What is your evidence?

Ben Broadbent: There are surveys. I can give you the numbers because

I know they are reasonably good. I will get those to you.

The answer I wrote about the FPC is not so much about trust but it is

about awareness of some of the decisions that the FPC takes and why.

Back in 2014 the FPC made various changes to reintroduce more

stringent rules for being able to get a mortgage, and I think those have

had some effect. With good reason those measures were instituted. It is

important to understand that they exist and why those measures were

taken. What I would be concerned about is if the FPC took decisions that

did affect somebody and they were unaware of the context of those

decisions and why they were taken, so I think it does matter to that

extent.

Q33 Alison McGovern: My final question is: reporting of your work on either

of the Committees. It is fashionable to be critical of the MSM, mainstream

media, even if it is perhaps, in our position, unwise. What do you think of

the way that your decisions are currently reported?

Ben Broadbent: Maybe it is a more febrile environment for news

coverage in general, but it is up to us to get our message across in as

clear and a consistent way as we can.

Q34 Mr Simon Clarke: Mr Broadbent, looking at the world economy at the

moment, one of the most pervasive themes is that of trade wars, actual

or potential. What is your assessment about the current state of the

world economy and where it is likely to develop in the near term?

Ben Broadbent: Clearly, globally, growth is weaker than it was, certainly

in 2017 and early last year. Part of that reflects the profile of US fiscal

policy and to that extent was reasonably predictable. There was a big

boost in 2017-18 and that is now starting to fade. I think there has been

an effect of trade tensions, particularly those between the world’s two

biggest economies—the US and China—and it has contributed to more

fragility in business confidence, and reduction in actual trade flows and

some weakness in business investment, including in Europe over the last

year.

Q35 Mr Simon Clarke: How concerned should we be about that, looking at it

from the perspective of the British economy? I appreciate it is one that,

as you say, is somewhat out of our hands.             

Ben Broadbent: That is true but it is also true that we are a very open

economy, we always have been, and we will always be susceptible.

Always, no matter, I have to say, whether we are without or within the

EU. We will be very susceptible to economic fluctuations elsewhere,

disproportionately in our nearest and largest trading partners.

Q36 Mr Simon Clarke: Is this something that central banks discuss in terms

of your international collaboration?

Ben Broadbent: Yes. People always at these meetings discuss the health

and the near-term outlook for the global economy. As far as we are

concerned in the UK, as you said, we have to take it as a given and it is a

backdrop against which we form our projections for economic growth

here—an important part of that backdrop—and through that an influence

on policy. Directly, the MPC just has to accept that that is the case.

Q37 Mr Simon Clarke: Indeed. We were talking about surveys earlier. To

what extent of those surveys show firms reappraising their supply chains

in light of some of these tensions, if at all?

Ben Broadbent: There is some tentative evidence—more from Brexit I

have to say—that there may be some effect on these chains as the Brexit

date approaches and given the ongoing uncertainty about the outcome.

That has been cited by a couple of producers of surveys.

Q38 Mr Simon Clarke: Are you able to identify what sector they are in?

Ben Broadbent: If you refer to the people who produce the surveys,

they are talking about autos, usually. That said, there are other effects

on that industry. We know there has been big interruption in production

internally at the latter end of last year, dealing with the new emission

standards. As you said there are the wider global tensions on trade, so it

is difficult to untangle all these effects. We knew ahead of the Brexit

process in which of the industries there are these very integrated supply

chains and autos clearly is one of the prime examples.

Q39 Mr Steve Baker: In a recent paper from the Adam Smith Institute, titled

“What a Capital Idea! How to make Britain’s banks more competitive,

innovative, and safer”, John Cochrane and Kevin Dowd argue that,

“Prudential regulation fails because it is captured by the banks it seeks to

regulate and because it presupposes ‘forward-looking’ abilities on the part

of regulators that do not exist”. Are they right that, therefore, the FPC

and the PRC are doomed to failure?

Ben Broadbent: No, not at all. The fact that we have capital standards is

precisely because we cannot foretell the future. It is an admission of that

point. You need capital to deal with unforeseen events. You need liquidity

buffers to deal with unforeseen events. It is precisely the admission of

that fact that leads to these safeguards.

The banks now in the UK have 10 times the capital they did in 2007[1] and

we have simulated a number of times through the stress tests very, very

severe macroeconomic stresses, at least as severe as those in the

financial crisis. Perhaps it is surprising but during that crisis the British

banks lost, say, 3% or 4% of risk-weighted assets and they now have on

average 17% of risk-weighted assets in tier one capital that they pass

those stresses.

Q40 Mr Steve Baker: I should say I am grateful to the Bank that the

institutions engage with Professor Dowd’s criticism of those stress tests,

but that is rather out of scope for today.

One of the recommendations in the paper is that, “The best system is one

of high minimum capital standards and strictly unlimited personal liability

on the part of senior bankers, and such a system should not be subject to

prudential regulation”. What do you think would be the impact of such a

system and could such a system be maintained in parallel with the one

we currently have?

Ben Broadbent: I would argue we have the core aspects of that. We

have a senior manager regime, which has materially increased the

liability of individual senior bankers and others, and we have, as I

described earlier, large—certainly far, far higher—levels of minimum

capital. So far I think the experience of the SMR has been good. It is very

hard to say what the effects are.

I cannot tell you that the fact that we have not had another financial

crisis in the last 10 years is because of these things but it is unarguable

that the levels of capital are much higher. I think it is unarguable, given

the stress tests that we have had, that it would be sufficiently high to

deal with the kind of macroeconomic stress we had in 2008-09.

Mr Steve Baker: Thank you very much. I will look forward to reviewing

your evidence with Professor Dowd.

Q41 Chair: Before I hand over to Rushanara, I think we are going to touch

quickly on the Mark Zelmer review of the Co-op failure, following on from

Steve’s question. In his final paragraph he said, “If the UK experiences a

protracted benign environment in future, there is a risk that prudential

oversight could fade into the background at the Bank of England and

receive commensurately less executive attention and resources in an

institution where the culture is heavily skewed in favour of

macroeconomics”. Is that a danger that you recognise? How does the

Bank ensure that does not happen?

Ben Broadbent: No. I am Deputy Governor for Monetary Policy but I

spend more of my time on macro and microprudential issues.

Chair: Prudential issues rather than the macro economy?

Ben Broadbent: Yes. Not necessary the micro. I am talking about micro

and macroprudential together. The number of economists in MA, the bit

that serves the MPC, I think is about 80 or 90. There are over 1,000

people in the PRA. Most of the resources of the Bank, most of the

analytical core resource at the Bank—rightly, because it is a resource intensive

business—are focused on prudential regulation. The three

committees have equal statutory footing and certainly the regulatory side

has appropriately more resources. I do not think there is any appreciable

risk of that, frankly.

Q42 Rushanara Ali: I had a supplementary to the point you made about the

fact that the Bank of England is 10 times better capitalised since the

financial crisis.

Ben Broadbent: The UK banks.

Rushanara Ali: Sorry, UK banks, and the stress testing and so on. Is

there a risk that some politicians might seek comfort from that and,

therefore, take more risky decisions with the future of the country—

particularly in relation to Brexit—than they might otherwise have done if

we were not as well prepared as we now are, in your view?

Ben Broadbent: It is our job to do the best we can to make sure that

the financial system is robust. It would be a perverse thing, I think, to

make the system less robust in order to have some effect of political

decisions.

Rushanara Ali: No, I agree, because politicians might be responsible;

absolutely.

Ben Broadbent: We are confident—having gone through everything we

can—that, as Michael described it, the financial system would not amplify

the stress of actual Brexit in whatever form it took. Equally, as Michael

also described very well to you, that is one part of the economy. It is not

sufficient. Even what other parts of the economy have done is not

sufficient to prevent the likely negative effect of such an outcome.

Q43 Rushanara Ali: Yes, and they need to heed that. Thank you. At the last

“Inflation Report” press conference the Governor emphasised that—

according to your forecast—meeting the MPC’s inflation remit would

require more interest rate increases than the market currently expects,

but there was little response from the market. Why do you think that

was, and in general how well do the markets understand the MPC’s

communications?

Ben Broadbent: I think the markets understand them very well, but that

does not mean they have to agree with everything in the forecast. The

markets will take their own view.

Q44 Rushanara Ali: What sort of quandary does that put the MPC in if you

are trying to get a message across?

Ben Broadbent: As Michael said, I am not particularly exercised that the

future path of interest rates and markets should be exactly the one within

our forecast option and it meets our objectives. That does not concern

me very greatly. The primary purpose of the “Inflation Report” is to

explain today’s decision, what we have just done and why. It is not to fix

some part of future interest rates.

Q45 Rushanara Ali: If there is a regular response from the market to this

kind of message, does it generate concern or would it generate concern?

Ben Broadbent: No, I do not think so. It is very rare. I can think of one

particular time—and it was not even when I was on the MPC, it was in my

previous job—when I perceived the Committee as saying very

deliberately—actually, there has been one in my time. A month before we

raised interest rates in 2017 we were pretty blunt. On that occasion, you

are right; I do not think the market had taken everything on board.

Normally, I at least am not trying to say this should be the expected rate

in two years’ time in fixed-income markets. That is not what I am trying

to do. The purpose of the report is to explain today’s decision in the

context of the forecast. Beyond that, it is to give some idea to people of

how we might react in future to particular events.

There was a conference—I am not sure if it is still going on—last week in

the US about the Federal Reserve, which the Federal Reserve itself

organised, a very big conference and big overview of its objectives and

its tools and how it communicates.

I was interested to see the remarks of J Powell who said at some point—

we are talking about the Federal Reserve’s so-called dots where the

FOMC makes forecasts of various things, including the future policy rate.

He said that sometimes that distracts people from the more important

thing, which is giving people some information about how policy might

react to particular economic events.

Q46 Rushanara Ali: You would not advocate such an approach here?

Ben Broadbent: I think there are pros and cons. In the submission I

gave you I wanted to emphasise the cons because I think they are not

sufficiently recognised. Certainly, what would worry me is that people

would see these as some sort of promise or even about future interest

rates, when they could not be that and could not even legitimately in my

view be described as intentions, even though that is often the way the

Federal Reserve’s dots are described. They are forecasts and they are

subject to news about the economy like anything else.

Q47 Rushanara Ali: Moving on, two of your MPC colleagues, Silvana

Tenreyro and Gertjan Vlieghe, have broken ranks and said that the

likelihood is that an easing of monetary policy is more likely than a

tightening in the case of a no deal Brexit. Do you think it is possible or

wise to say one way or the other?

Ben Broadbent: I certainly do not feel confident about saying which

direction it would go in. Immediately after the referendum—and that is a

different thing, obviously, the effects of the referendum were

disturbances to people’s expectations that might arise from Brexit rather

than the actual event—we saw a big drop in business confidence; very

big, immediately afterwards. That is why the Committee reduced interest

rates in the wake of that in August 2016.

We also saw a big depreciation in the exchange rate that fed through to

higher inflation. Because at the same time through the course of 2017

unemployment fell faster than we were expecting, even though economic

growth was not much faster than was forecast at the end of the previous

year. We then raised interest rates.

In that sense, that event and its various aspects—the hit to business

confidence on the one hand but the drop in the exchange rate on the

other—were in some sense the cause of interest rate movements in both

directions. I do not feel confident about saying in advance, given that you

might have both again: one moving the optimal interest rate in one

direction and one the other. I am not confident enough about the mix or

balance of those to say what the net effect would be.

Q48 Rushanara Ali: That leaves households and businesses in quite a

difficult position if they are facing a no deal Brexit, doesn’t it? Ultimately,

you are saying—and it seems sensible—that you do not know which way

you are likely to respond until you get closer to the situation.

Ben Broadbent: Perhaps I can come back to J Powell remarks and some

of what I said in that submission. The most important thing for people to

understand is that interest rates will do what is necessary to meet the

objective. There is no time when you can say what that means for

interest rates with 100% certainty. You are giving up a degree of

freedom if you commit to that path. That is the more important thing.

The MPC will do what is necessary to maintain price stability no matter

what the economic disturbances are, including Brexit.

Where it is possible, you might want to give some general steer as to the

direction of interest rates. The effect of this Brexit shock, both the one we

had in 2016 after the referendum but also in the event of a no deal, are

quite complex. They are complex. There are lots of things going on at

once that they might produce and I think it would be misleading to say

we know what the implication for the policy instrument would be. The

most important thing it seems to me to understand is that it is an

instrument of policy. It is not the aim. What remains stable throughout is

the remit, the target and the instrument will vary with whatever shock

and whichever direction is needed to attain that objective.

Q49 Rushanara Ali: There are different views about how big that shock

might be, including among you and your colleagues. In the event of a no

deal, how quickly would you expect or need to act to make a decision

about monetary policy in those circumstances?

Ben Broadbent: It will be difficult. Again, I would not want to say with

certainty it will be this direction. I cannot tell you precisely the date as

well. One of the issues we will have to contend with is: was output to

weaken or output growth to fall in that event, would it be because of

growth demand or would it be because of loss of confidence? In which

case, you might expect unemployment ultimately to go up. For a given

exchange rate, at least, you might want to ease policy. Or would it be

because of supply bottlenecks?

Q50 Rushanara Ali: That implies you need some time to look at that.

Ben Broadbent: We may well need some time.

Rushanara Ali: Whereas, a no deal Brexit could happen by the end of

October. Those are quite different situations.

Ben Broadbent: Yes, but the best response would be to take that time,

if indeed it is necessary. I should emphasise again that—

Rushanara Ali: Even if there was panic?

Ben Broadbent: If there was panic and we saw clear drops in business

confidence that would militate probably more in favour of easing. There

may be things that we see—if they occur with sufficient magnitude—to

which we do respond quite quickly. What I was trying to describe

qualitatively is that this is the kind of process we would have to go

through, however long it takes, for policy to change.

Q51 Charlie Elphicke: Good morning. You mentioned how, on the FPC, you

brought in mortgage affordability rules in 2014. You said that was

important and the prudent thing to do. Are you aware, though, that it has

also created a problem in that there are now 200,000-odd mortgage

prisoners who are stuck in mortgages that they simply cannot escape,

paying rates of 5% or more?

Ben Broadbent: I do not think those affordability rules are the cause of

that. The affordability rules do not apply if you move borrowers unless

you increase your debt. If you do not increase the principal on your

mortgage, you are not covered by those. You can move an existing

mortgage to another lender at a lower interest rate and you do not

breach those affordability rules, so I do not think that is the cause of the

mortgage-prisoner issue.

Q52 Charlie Elphicke: That is not our understanding. Our understanding is

the FCA is currently having a consultation—

Ben Broadbent: No, that is the FCA rules not the FPC’s mortgage

affordability. The FCA ones, you are right, and the FCA is currently

consulting on those but I would distinguish the two sets. The FPC’s are

different. Our rules I don’t think—this is my understanding—apply, unless

the principal on the loan is increased when you move. The FCA is

consulting about its own affordability rules on precisely that issue.

Q53 Charlie Elphicke: Why is there a difference between what the FPC is

saying and what the FCA is saying?

Ben Broadbent: They are different rules. We are not talking about the

same rules.

Q54 Charlie Elphicke: Take us through the rules of the PRA, the rules of the

FCA and the rules of the FPC in this area. In what ways are they the

same and in what ways are they different as regards mortgage prisoners?

Ben Broadbent: For mortgage prisoners I do not think the FPC has any

role, those FPC rules. You must talk to the FCA about precisely the rules

it has in those areas. There will be some cases where if the debt has gone

up sufficiently and the equity in the particular house has gone sufficiently,

it will not be possible. That is just a prudential thing to do on the part of

the lender. It is not the regulator that has caused that issue, but there

may be—

Q55 Charlie Elphicke: Why has the FPC said, “It is fine, you can move to

another lender as long as you are not increasing the balance”, and why

has the FCA said—

Ben Broadbent: I do not know, you would have to ask the FCA, but the

FCA is consulting on precisely that issue.

Charlie Elphicke: Why is there a difference?

Ben Broadbent: You would have to ask the FCA. We are different

institutions. As I understand it, the FPC affordability tests do not prohibit

people moving, or at least you are not in breach of those particular

affordability rules.

Q56 Charlie Elphicke: In relation to the issue about bank interest rates and

whether they are passed on to borrowers, you will know the Treasury,

through its UKAR division, maintained very high rates for a very long time

on the Northern Rock residuary book, which has been quite oppressive as

far as the so-called mortgage prisoners are concerned. Do you think that

they should have been cutting those rates as the Bank of England was

cutting rates?

Ben Broadbent: That is not an issue for me to talk to you about. You

would have to ask the people at UKFI. That is not a decision for the

macro regulator.

Q57 Charlie Elphicke: From the Bank of England stability point of view and

the respect for rate setting, is it not troubling that organisations like that,

and, indeed, the vulture funds that have been buying up these mortgage

books, do not pass on rate cuts and continue to charge around 5%?

Ben Broadbent: Let’s be clear. We are concerned with macro issues,

whether it is macroprudential policy or the MPC is concerned about the

overall interest rate charged on mortgages. Those have not only come

down but they have come down faster than bank rate. At a level of the

whole economy we have seen the opposite. We have seen the spread

between mortgage rates and bank rate narrow significantly over the last

five years.

Q58 Charlie Elphicke: Does it not trouble you that homeowners in this

situation are not seeing those rate reductions being passed on to them,

that the Bank of England rate setting is being ignored by a division of the

Treasury and by the vulture funds that buy up these books?

Ben Broadbent: As I say, we are concerned with the overall level of

mortgage interest rates. It is that that affects the way we do our job on

the MPC and the FPC. Those overall mortgage rates have come down

faster. It is not for me to comment on the policy of individual lenders.

Q59 Charlie Elphicke: So you are happy. As long as you are doing your bit,

the FCA can do whatever it likes, the Treasury can do whatever it likes,

everyone else can just ignore everything the Bank of England is saying

and that is fine?

Ben Broadbent: As I said, everyone else is not ignoring. There is a very

tight correlation between bank rate and the overall mortgage interest

rate. Indeed, if the two have differed at all in recent years, it is that the

mortgage rate has come down faster than the bank rate.

Q60 Charlie Elphicke: Do you think that there is a case, from a financial

stability point of view, that mortgages as a whole should be regulated—

not just the writing of mortgages but the holding of mortgages should be

a regulated activity—to make sure that in some cases excessive interest

rates are not applied and that people are not stuck in the position that a

couple of hundred thousand people find themselves stuck in, namely

being mortgage prisoners?

Ben Broadbent: Banks are among the most heavily regulated

institutions that there are, so they are regulated, obviously, both from a

conduct perspective and from a prudential perspective. You asked about

how it affects financial stability. From that perspective, I will say again

that what we care about is the behaviour of the system as a whole and

the behaviour of the aggregate mortgage interest rate and, as far as the

prudential risk is concerned, whether banks have sufficient capital to

cover the losses. We are not concerned with conduct issues and policies

of individual lenders.

Q61 Charlie Elphicke: To pick that up, you say banks are very heavily

regulated anyway. That is true, but the conduct of the Treasury does not

seem to have been particularly in line with any form of regulation.

Indeed, its sales to unregulated funds mean it moves out of the

regulatory envelope, meaning that people are put at greater risk than

perhaps they might be. Is there not a case for saying that mortgages

may only be held by regulated entities not by unregulated entities?

Ben Broadbent: You would have to ask the Treasury about that. That is

not for me to say.

Charlie Elphicke: That is not a matter of interest from the point of view

of the Bank of England?

Ben Broadbent: Not from a macroeconomic, macroprudential point of

view, no.

Q62 Charlie Elphicke: Let’s turn to cash. Is the availability of cash of

interest, from a macro point of view, to the Bank of England or is the

Bank of England happy to see it all disappear?

Ben Broadbent: Again not macroprudential, no; not monetary policy. It

is clearly an important social issue. It is not our responsibility, as it

happens, to ensure that availability. That is more a matter for the

Payments Regulator. It clearly matters. There are still significant numbers

of people in this country who rely on cash, even some people still without

bank accounts. It is an important social issue. Those tend to be the

economically disadvantaged or some older people, so I think it is an

important question.

Q63 Charlie Elphicke: Can I put it to you that maybe the Bank should

consider social issues, not just for the 200,000 mortgage prisoners who

find themselves very impacted but, also, the availability of cash for the

vulnerable, the poor, the rural and the people who struggle to get by,

who need the availability of cash? Should not the Bank of England be

doing that bit to help make the lives of the least well off that bit easier?

Ben Broadbent: Our responsibilities, in whatever area, our remits, are

given to us by you. You ask us what to do and then we do it. It is not for

us to claim responsibilities in areas that have not been given to us. It is

for others—for the Government, for the Payments Regulator—to

determine what is the policy for the country as regards access to cash. I

think it matters but it is not my job to go and claim that as a policy.

We are responsible for ensuring that the wholesale distribution system

that exists currently works as efficiently as it can. That is important

because, as the use of cash falls—and it has been, as you know—that

wholesale distribution will have to change. It will have to become leaner,

precisely in order to sustain the availability of cash. But to decide that

this is a necessary thing, that it is a social good that we are going to

promote or ensure, that is not for us to go and claim as a policy.

Q64 Charlie Elphicke: Let me reframe the question. You say social good you

are not interested in but in financial stability you are, how is it wise to

have a society with hardly any cash and put all our eggs in the electronic

basket and then there is a massive system outage? From a financial

stability point of view, we ought to maintain the availability of cash.

Shops ought to be taking cash and it ought to be available to each and

every citizen in this country, for the stability of the system, to make sure

we do not have that systemic risk.

Ben Broadbent: Let me say again, it is not that I am interested in this

or uninterested in that. It is what you have told us to be interested in. It

is not our responsibility. I think it matters; I do think it matters. I don’t

think it is necessarily the case that the answer to the question if a banker

cannot—by the way, I do not think that a banker cannot. Banks are far

safer than they were 10 years ago. That is indisputably true.

Charlie Elphicke: The TSB might not be quite so confident.

Ben Broadbent: As I said earlier, they have 10 times as much capital in

aggregate[2]. Their capital ratios are as about four times as much as they

lost in the last financial crisis relative to risk-weighted assets. I do not

think it is the answer that the primary tool to ensure financial stability is

to make sure people use more cash as opposed to bank deposits. I do not

think that has much bearing on financial stability.

I will say it again that I think it does matter. It is an important social

issue. It is just not for us—because you have not asked us to do it—to

deem that it is a priority for the Government. That is not the way the

system should work.

Q65 Charlie Elphicke: My final question is: where there is cash, are you

concerned about counterfeit notes in circulation as the replacement of the

£20 notes approaches, and what is your general view on counterfeit and

forged cash?

Ben Broadbent: Always, always.

Q66 Charlie Elphicke: Have you detected any more of that lately?

Ben Broadbent: Funnily enough, no. We were prepared for that

possibility, precisely because of that. Of course, the reason that would

happen, and why you might have expected it to happen, is that the

polymer note if it is not impossible to counterfeit is pretty close to it. Not

just because it is very difficult to reproduce the actual material but it

allows for all these extra fancy security features. That was one of the

reasons we moved to it.

The experience of countries who had this substrate, as it is called, had

the polymer notes for longer—Canada and Australia. Obviously we are

always concerned. We have very good scientists working on fancy new

security features and all sorts of things. Funnily enough, I do not think

we have detected an increase in what was already a very small number. I

certainly feared it could happen but it does not seem to have materialised

so far.

Q67 Mr Steve Baker: Very briefly, you made the point moments ago that

some things are and some things are not your responsibility because you

do what Parliament asks you to do. Do you think you have adequate

mechanisms for communicating to Parliament whether you have the right

responsibilities and how you would like change to be brought about?

Ben Broadbent: I hope so, yes; through fora like this one.

Q68 Chair: This Committee presumably has a role in that.

Ben Broadbent: Exactly, a very important role; probably the most

important. These are very important and at times onerous

responsibilities. We do not spend a lot of time asking the question, “What

should we do? We do not want this. We do want the other”. If I think

Parliament asks us to do things that we thought the tools of a central

bank—whether it is monetary policy or prudential tools—are unable to do,

we would probably say so. Our job is to do the best to meet whatever

objectives you set us and not to actively say, “We want this” or “We do

not want that”.

Q69 Chair: Presumably, there is a conversation, whether it is you or the

Governor or the House or the Treasury, at various points feel able to say,

“This is a developing situation, this is something new. We think now we

do—”

Ben Broadbent: Yes, that is true. There will be such conversations after

Brexit, for example, about the great body of some of the regulation

coming back from the EU. That will be an important issue, you are right.

They will be technical issues, some of it.

Chair: We look forward to hearing more about that. Dr Broadbent, thank

you very much indeed for your evidence this morning and for the

questionnaire that you have filled in. We hope to issue our report shortly.

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