LONDON Jan 15 Bank of England Governor Mervyn King and other members of the central bank's Financial Policy Committee appeared before a British parliament committee on Tuesday to discuss their November Financial Stability Report.
Following are highlights of their remarks. For a Reuters article about the November report, see
KING ON WEAK RECOVERY AND SEARCH FOR YIELD:
"I think one of the things we want to be a bit concerned about is that interest rates have been so low for so long that some of the actions have reduced risk premia to levels where the search for yield appears to be beginning again.
"Now the problem is that if a similar situation occurs, it is at a point where the economy is operating well below full capacity, the banking system is in a stretched position and we are clearly struggling to find instruments to ensure an economic recovery.
"A combination of a weak recovery and yet at the same time people searching for yield in ways that suggest that risk isn't fully priced is a disturbing position. It's one that we will have to monitor very carefully."
ANDREW BAILEY ON EUROPEAN BANKING UNION AND DEPOSIT INSURANCE:
Question: "Do you think that a banking union can be what it says on the tin unless it has full depositor insurance?"
KING ON BANKING UNION:
"The main problem of the euro crisis is the ability to find a way of financing current account and trade deficits. The banking union is only an answer to that in so far as it enables countries which have banking systems that need to be recapitalised to have that recapitalisation financed by other members of the euro area. There is no immediate progress on that front and that's not likely to happen for quite a long while.
"So the question of who supervises banks in Europe may in the long run be relevant to a monetary union... But it certainly is not relevant to the short-run problem of how to finance the current account deficits and in particular the need to attract sufficient capital inflows to finance the recapitalisation of the banking system."
KING ON INADEQUATE RECAPITALISATION OF UK BANKS:
"In 2008, the idea of focusing efforts on recapitalising the banking system was a UK idea. We got there first. Like many UK ideas, the Americans developed it faster and better. And we would have done better at that point to have done more. I think we are now suffering from the consequences of not having done that. The situation has clearly deteriorated."
BAILEY ON BANK COSTS OF MIS-SELLING COMPENSATION AND LIBOR FINES:
Question: "The estimate of PPI losses...and further unrecognised losses will be in the region of 4 billion to 10 billion (pounds), you wouldn't disagree with that I assume? And of course we've got...Libor manipulation. Isn't it true that the losses are going to be much more significant than any bank has taken into account so far?"
Answer: "I think you're right on that... These numbers have now become sufficiently large that we have to take note of them... They are now a considerable headwind on the path to internal capital generation."
KING ON BANKS' BONUS DEFERRAL TO BENEFIT FROM LOWER TAX:
"Well, it's clearly not unlawful... I find it a bit depressing that people who earn so much seem to think that it's even more exciting to adjust the timing of it to get the benefit of the lower tax rate...knowing this must have an impact on the rest of society, when even now it is the rest of society that is suffering most from the consequences of the financial crisis."
KING ON BANKS' MOVES TO SAVE TAX ON BONUSES:
"I think it would be rather clumsy, lacking in care and attention to how other people might be. And in the long run, financial institutions, like all large institutions, do depend on good will and the rest of society. They can't just exist on their own."
BAILEY ON RISK WEIGHTS FOR CAPITAL:
"We need a lot more transparency to the outside world about how the system works... I talk a lot to investors and the analyst community, and other members of the committee too, and they don't understand it and they've lost confidence."
KING ON DEALING WITH ECB:
"In just the same way we have been able to negotiate understandings between ourselves and the United States in terms of how we might resolve global banks which span borders...in Europe I think that kind of parallel would be a lot easier to reach with the ECB than it would be to reach separately with a wide range of individual supervisors."
KING ON ECB ACTION AND BANKING UNION:
"The actions of the ECB have been successful in calming markets and in buying time. It's been very helpful. What it can't do, because no central bank can do this, is to resolve the underlying real challenges of either moving to a transfer union or finding a way to take sufficiently effective measures to change the competitiveness of the member countries of the euro area. And in that sense, banking union is certainly not a magic answer."
MICHAEL COHRS ON AMOUNT OF EXTRA CAPITAL STATE-OWNED BANKS NEED:
"It's hard to give you a number because it depends, it depends on a whole bunch of things... It's a big number."
COHRS ON RESTRAINING CREDIT:
"I believe that if the party ever gets started again and we try and take the punch bowl away there will be a huge row, and only if we are seen as being highly accountable and have had a lot of sessions will it be acceptable to you and your constituents."
COHRS ON BIG GLOBAL BANKS:
"I have said the banks have to explain to us, to the public and to their shareholders what are the benefits of being global and being large? In the absence of that explanation, and why it's good for society and why it's good for the owners, I think the banks are too big, I think that too big to fail is the key question."
ANDREW HALDANE ON UK BANK COMPETITION:
"That's all with a view...ultimately seeking to eliminate that implicit subsidy, therefore levelling the playing field between the big guys and the smaller and medium-sized guys. Is that adequate to enhance competition in the UK banking market? My view on that would be no."
HALDANE ON SOLVING 'TOO BIG TO FAIL" PROBLEM:
"'Too big to fail' and the implicit subsidies that follow are a great one - perhaps the one great issue - and we have done a lot and may need to do more to get our arms around that problem, including requiring the biggest, most interested banks to hold more capital, including ensuring that they all have adequate recovery resolutions."
HALDANE ON CURRENT ACCOUNT SWITCHING:
"For me there's a lot to be said for a transformational technology of facilitating current account switch to improve the efficiency of the banking in this country and also of the proposition to customers."
BAILEY ON FLS:
"What the introduction of the Funding for Lending Scheme has already shown us is that competition for deposits has eased off quite a bit actually, and that has been reflected in a change in the rate paid on deposits."
COHRS ON EMPLOYMENT TARGET FOR FPC:
"I'm not quite sure how we would tie an employment target into our stability objectives, so I'm not quite sure how that would work... I can see the attraction of trying to find a target but I'm just not sure an employment target would dovetail nicely with our objective on stability."
COHRS ON REQUIREMENT FOR FPC TO SUPPORT GOVERNMENT ECONOMIC POLICY:
"I don't think what has been put in place makes this committee unworkable, but is it a concern? Yeah, I think probably it is a small concern, but we can work it."
KING ON FINANCIAL POLICY COMMITTEE:
"I think it's worth a try given what happened in the pre-crisis period. But one has to admit that there is an element of experiment. And we simply do not know yet what the public acceptability of the use of these instruments by the FPC will be."
KING ON BASEL LIQUIDITY RULE:
"It removes the uncertainty about what the regulation of liquidity would be and in itself I think that's a very good thing.
"And we've removed the uncertainty by implementing the LCR in a way that should not constrain the ability of banks to finance recovery."