LONDON Nov 22 Bank of England Governor Mervyn
King, Deputy Governor Paul Tucker and executive director for
financial stability Andy Haldane spoke on Thursday to a British
parliamentary commission on banking standards.
Following are highlights of their remarks.
KING ON RING-FENCE CLARITY
"As a regulator, my experience would be that I would place
as much weight as possible on the clarity. I would be worried if
the definition of the ring-fence were left to the regulator to
"I think the lesson from this ... is (that) for the
regulator to be effective, it has to be able to use judgement.
But if judgement ends up simply as a negotiation between the
regulator and the regulated bank, there's only one winner in
that and I think that will be a very bad outcome.
HALDANE ON DIRECTORS' DUTY TO A RING-FENCE
"I think there will be value in having the directors of the
ring-fenced bank having a duty to ensure the integrity of the
ring-fence as the first line of the defence against burrowing
KING ON NEED FOR CLARITY THROUGH LEGISLATION
"We haven't got to the clarity required... Clarity will be
in secondary legislation. I think it would be mistaken to have
too much detail in primary legislation, because that's
notoriously hard to amend ... but equally I think it would be
wrong to leave it purely to the discretion of the regulator,
because that would increase the pressure of lobbying of banks
directly on the regulator and indirectly on the government and
KING ON NEED FOR AUTOMATIC REVIEWING OF RING-FENCE
"We're always told that the Bank is far too powerful, and
this is another power that I do not want to receive. I would
like it set up in such a way that whatever came out of this
there is a mechanism for reviewing - an automatic mechanism for
reviewing the ring-fence and whether it's working - which can't
be dodged or pushed into the long grass."
HALDANE ON VICKERS BILL
"The third rung on the ladder, could be the possibility of
vesting in the regulator, a further sanction, which could be to
require the reorganisation of the ring-fenced bank to ensure
that the objective of the Vickers Bill - insulation of core
services and continuity of those core services - was preserved.
I think we would need further legal work to see whether that
ultimate sanction was practical."
HALDANE ON FEAR OF LENDING
"I'd be resistant to the notion that the mere having of this
sanction power would cause banks to look inwards, to hoard
capital and not lend. I think we've heard the argument far too
much over the last few years and we must not be held hostage in
doing the right thing by the notion that the banks will stop
lending. At the same time, I think the way to avoid any averse
behavioural consequences would be to ... seek absolute clarity
about where the boundaries of the ring-fence were drawn.
KING ON DIFFERENT APPROACH FROM VOLCKER
"What he's done is gone to other end of the spectrum and
said what is it that we clearly don't want to have contaminating
the basic core services - proprietary trading - and put that
into a different organisation.
If a bank screws up and mismanages itself it can be resolved
and ownership changed without any disruption to those basic core
banking services. Now if that's the approach, the natural thing
to do is to start with the banking services, define those and
put the ring-fence around them. And I would need to be persuaded
to go much further than that.
So that's how I would start doing it and that really, I
think, illustrates the approach that is different from the
Volcker rule approach.
KING ON CHANGING CULTURE OF INVESTMENT BANKS
"I feel that the economics of investment banking is changing
- has changed considerably - and that itself is driving the new
generation of leadership in banks to recognise that it is in
their own interest now to change the culture ..."
TUCKER ON EU LAW
"If the resolution directive going through Europe is passed
in its current form, that will give the PRA a power where a bank
- including a ring-fenced bank - is not resolvable to say: you
need to do one of a number of things, including shift around
your organisational structure to ensure you are resolvable."
TUCKER ON RELATIONSHIP BANKING
Even if we were to go to full separation, the challenges of
culture in retail banking stem in part from infection from
investment banking but I don't think they arise entirely from
that. There's been an industrialisation of high street banking.
They've drifted away from relationship banking, branch managers
are much less empowered than they were 20 or 30 years ago and
that is a major problem of culture change in its own right -
irrespective of what happens to global investment banking.
TUCKER ON DIFFERENCES WITH KING ON SEPARATION
Asked whether he agreed with King's preference for full
separation, Tucker said:
"Not completely. First of all, I absolutely agree that we
should get on with Vickers and I think it will be damaging in
all sorts of ways, most importantly to credit conditions if
there is a further prolonged period.
"The question about should there be full separation is not
well defined. Do I think we should go back to Glass Steagall? Do
I think we should draw a line between the ring-fenced and the
non ring-fenced banks? Those are completely different things.
"Under Glass Steagall, the securities dealers could not take
deposits and if you draw a line under the ring-fenced banks and
the non ring-fenced banks, the crucial thing would be - the non
ring-fenced bank is a bank. It could take deposits, it could
take non-insured deposits.
"We've also learnt since Glass Steagall that the securities
dealers even at their narrowest fall are now resolvable because
they finance themselves by repo, so the really big question is,
if the society of the economy went for full separation, it isn't
about how to make the domestic retail banks super resolvable,
it's what kind of beast do you want to allow in the rest of the
"The thing that has worried me most about this debate from
the beginning ... is that people fall into thinking 'if only we
could make retail banking safe, the financial system will be
safe' and frankly I think that is nonsense.
"I think the financial system and the economy will be
capable of being blown up by vast wholesale dealers and non
banks, so the question of separation is part of a much wider
debate of how do you make non-banking finance safe and so we
would need a very careful review of how to do that.
TUCKER ON CONCERNS ABOUT PRIMARY LEGISLATION
"I don't think that the objective in primary legislation
needs great clarification, I think that is broadly OK. I think
what the FSA is concerned about - certainly what we are
concerned about - is that, as drafted, the primary legislation
allows the meat of the regime to set out either in secondary
legislation or in PRA rules or a combination of the two. And
therefore, technically, it would be possible for the secondary
legislation to be almost silent, leaving the whole of the regime
to be set out in PRA rules.
KING AGAINST RING-FENCED BANKS BEING ABLE TO SELL DERIVATIVE
PRODUCTS TO BUSINESSES
Questioner: "So your advice to us would be: don't permit the
sale of derivative products in a ring-fenced bank, but if you
feel you really have to do it, make it a very small number and
don't be tempted to try and define the difference between a
simple and complex product."
KING ON PERIMETER OF THE RING-FENCE
"It is very important to go much further than the current
state about where the ring-fence is. Secondary legislation has
to contain more detail about what is in the ring-fence and what
is outside it. And if you allow far too much flexibility to the
regulator we'll be right back to the problems we've discussed
"So I would like to see more specification of what's in and
what's out. And I think with mortgage lending for example ...
there is a good debate to be had about what to do about SME
lending because I worry about the definition of SMEs. But
certainly you've got to spell out much more clearly what is in
TUCKER: RING-FENCED BANKS SHOULD HAVE TO OFFER SME LENDING
"The important thing about SME lending or indeed about
mortgage lending is that the ring-fenced bank has the capability
to do it, by which I mean the technical capability, the know-how
to do it, because in the worst crises, that is the bit of the
financial system - it needs to be super resolvable. That's the
bit that we will keep going without tax payer money somehow.
TUCKER: NON RING-FENCED BANKS SHOULD OFFER SME LENDING TOO
"The fact that the ring-fenced entity should have the
capability to do these things doesn't mean they should do all of
that business and it's quite different from insured
deposit-taking where you do want all insured deposits inside the
HALDANE : LOANS, MORTGAGES AND SME LOANS SHOULD BE DONE BY
RI NG-FENCED BANKS
"I would, working backwards from the continuity objective,
personally mandate a broader set of services to lie within the
ring-fence, including loans, mortgages and SME loans. The reason
for doing that is to think backwards from the unintended
consequences of not having that.
"Imagine a world in which all SME lending was done by one
bank. It was permitted to do all that lending out of the
non-ring-fenced part of the business. Alongside that it decides
to run a proprietary trading operation which gets itself into
TUCKER ON OVER-CONCENTRATION IN UK BUSINESS BANKING
"I do think one of the lessons of the crisis and one that
hasn't been discussed enough is, we had a great concentration of
UK business banking and I think that has ended up being a bit of
a disaster for the UK now.
KING: 33:1 IS MUCH TOO HIGH FOR A LEVERAGE RATIO
"Vickers proposed that leverage would be restricted to 25:1,
the current legislation says 33:1. For my taste, 33:1 is much
too high, but it's a matter of measurement. If you asked me, I'd
go back to the original Vickers proposal."
KING ON IMPACT OF LIBOR CLASS ACTIONS ON FINANCIAL STABILITY
"I think there are two areas in which there might be, in
your phrase, aftershocks. One is we do not know how the
class-action suits will evolve. I think one of the additional
burdens on banks at present and for which they will need to
provide capital is the increasing consequence of regulatory
fines of all kinds, not just Libor, but other kinds.
The transactions could potentially be large but I'm no
lawyer and I don't understand how big they could be. But it's
certainly an uncertainty - it's one of the uncertainties that is
weighing on banks and will add to the difficulties they will
have in obtaining funding.
"The other (aspect) is that ... problems may not be confined
to Libor but to commodity markets or other areas in which quotes
were used as a basis for transactions. And I think the biggest
consequence of all this is not a shock of any kind but a big
"People around the world and certainly the central banks are
discussing it in Basel... to try and encourage the market to
move away from quote-based transactions - prices set by quotes -
as far as they can. It doesn't make sense to have so much of the
derivatives market linked to a quote based on a small number of
banks that can't easily be monitored or checked."