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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 989 HOUSE OF COMMONS ORAL EVIDENCE TAKEN BEFORE THE TREASURY COMMITTEE BANK OF ENGLAND FEBRUARY 2013 INFLATION REPORT TUESDAY 26 FEBRUARY 2013 CHARLES BEAN, PAUL TUCKER, PROFESSOR DAVID MILES and IAN MCCAFFERTY Evidence heard in Public Questions 1 - 114 USE OF THE TRANSCRIPT 1. This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others. 2. Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings. 3. Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant. 4. Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee. 1 Oral Evidence Taken before the Treasury Committee on Tuesday 26 February 2013 Members present: Mr Andrew Tyrie (Chair) Mark Garnier Andrea Leadsom John Mann Mr Pat McFadden Mr George Mudie Jesse Norman Mr David Ruffley John Thurso ________________ Examination of Witnesses Witnesses: Charles Bean, Deputy Governor, Monetary Policy, Bank of England, Paul Tucker, Deputy Governor, Financial Stability, Bank of England, Professor David Miles, external member of the Monetary Policy Committee, and Ian McCafferty, external member of the Monetary Policy Committee, gave evidence. Chair: Thank you very much for coming before us this morning. As you probably know from experience, the acoustics of the old part of Parliament is not quite as good as the rest, so we would be particularly grateful if you can speak up for us. I hope that you can hear us, Charlie. Can you hear? Charles Bean: I am fine, thank you, just. Q1 Chair: You can hear only just, okay. Perhaps I can begin with a question to you, Mr Bean. What do you think the essential ingredients of a banking union are and do we have one at the moment in the eurozone? Charles Bean: Okay. I think I would identify five components. The first is a common supervisory mechanism—regulatory arrangements—and obviously there is discussion taking place at the moment between members of the eurozone, and some other countries for that matter, on how to set that up and operate it, and they are some way down that road. Q2 Chair: Is that a necessary condition? Charles Bean: I think so. Obviously, when you ask about what is necessary for a banking union I am assuming you mean a banking union that we think is durable and works reasonably well. Some of the items I am going to give you you may not have, in which case you run more risk that the banking union may not function well. Chair: That is fine. I was just trying to check that we are not talking about what is desirable; we are talking about what is essential. Charles Bean: I think they are sensible ingredients for a durable banking union. Chair: I would like to talk about what is essential for a durable banking union, only that. 2 Charles Bean: Yes, okay. Q3 Chair: We need a single supervisory mechanism? Charles Bean: Single supervisory— Chair: Do we have it at the moment? Charles Bean: No. As I say, that is the thing that the primary discussion within the eurozone is about. The plan is to have something in operation probably towards the end of this year, beginning of next year, with the ECB taking the primary role in supervising systemically important financial institutions. Chair: Okay. You have four more. Charles Bean: Okay. The next four are all going to be dealing with what happens when things go wrong. The second one would be a supplier of liquidity to banks that get into difficulty, a lender of last resort, and that clearly you do have in the form of the European Central Bank and the constituent national central banks. That is in existence. Q4 Chair: What about the transfer of losses? What happens on the fiscal side? Charles Bean: Let me just go through the list and I think you will see how everything fits together. As far as lender of last resort goes, central banks when they are providing support lend against collateral so there should not be any losses associated with that. Q5 Chair: Sorry, before we go any further, what do you think about the quality of this collateral across the eurozone at the moment? Do you have any views about the quality of that collateral? Charles Bean: I think it is reasonable to think that the collateral has certainly been impaired, say, in the periphery countries and that is an issue obviously that a central bank always has to take on board when it decides whether to provide support to a bank that is in difficulty. Essentially, will it get its money back? Inevitably, that collateral, as I say, is going to be impaired in some countries at the current juncture. Chair: So that is the lender of last resort. Charles Bean: Lender of last resort. The third ingredient would be a suitable resolution regime for handling failing banks, winding them down, restructuring them or whatever. Now, the Financial Stability Board has identified key attributes that you want in a good resolution regime. I think it is fair to say, although Paul may correct me because he knows more about this than I do, that it is not true to say that all countries in the eurozone presently have resolution regimes that are consistent with those key attributes, but they are in the process of implementing them. Q6 Chair: Just to be clear, we do not have that either, yet? Charles Bean: Not yet, no, but that is in train. Q7 Chair: So, so far three essential ingredients, none of them in place? Charles Bean: No, the lender of last resort is. Q8 Chair: You have not explained how this collateral is going to be made effective in the periphery. Charles Bean: Well, that is not a problem about the lender of last resort not being— Q9 Chair: Who is going to pick up the tab, Mr Bean? Charles Bean: Okay, let me get to that in a minute. The final two I think do connect with your concerns. The fourth item that I would identify is a common deposit insurance, and 3 here you may need the ability to bring in funds from outside a country. A country that is in fiscal difficulty may not have the wherewithal to provide the support to depositors unless the deposit scheme has been prefunded. Q10 Chair: I am sorry to keep interrupting, but just for clarity—these are only questions for clarification—what we are really talking about here is northern tier countries insuring Greek bank deposits? Charles Bean: In all likelihood, yes, or Cypriot bank deposits or whoever it may be. If the liabilities associated with the banking system exceed the capacity of the Government to pay them, to make the deposit insurance scheme credible and, therefore, discourage depositors from withdrawing their money, people need to think there is a backstop there, which in this case, as you say, would need to be probably the northern countries. The final ingredient would be a mechanism for injecting fresh capital into banks that have failed and need recapitalisation. Just as with the deposit insurance scheme, you may need a source of funds outside for that if the country in question is in fiscal difficulties. Q11 Chair: Do we have that? Charles Bean: No, certainly not at the moment, although there is the suggestion that the European Stability Mechanism should be able to provide that in the future. Governments, particularly like Germany, have been keen that those injections should not take place until other elements of the banking union, like a supervisory scheme, were in force. We are short of that at the moment but, in principle, you have a facility that could provide that. Q12 Chair: The one item that was identified in a recent IMF report on this subject that you have not mentioned is a common macroprudential regime. You are thinking of that as something that is perhaps desirable but not essential? Charles Bean: Certainly, the way I would think about a banking union is to do with the micro supervision, the micro arrangements for the banking system. A macroprudential overlay would be highly desirable. The idea of macroprudential policy is it takes on board systemic financial concerns, but it is not something I would regard as essential; desirable but not de rigueur. Q13 Chair: What we have here is five essential requirements of which four and a half are missing? Charles Bean: Well, I am not sure I would say the half. I think the lender of last resort— Chair: Of which four are not yet in place. Charles Bean: Not yet fully in place, some of them in progress, but clearly well short. Q14 Chair: When Mario Draghi says he will do whatever it takes to protect the eurozone, there is a touch of the “wing and a prayer” here, isn’t there, because he does not have any tools? Charles Bean: Well, his comment was particularly in connection with the heightened concerns in financial markets that some countries would leave the eurozone so that you were getting what is referred to as a redenomination risk into those countries’ bond yields.
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