LONDON, March 6 (Reuters) - Bank of England Governor Mervyn King and Andrew Bailey, who heads Britain’s Prudential Regulation Authority, spoke to a parliamentary committee on banking standards on Wednesday.
Following are highlights of their remarks.
“I would certainly be prepared to lend my support to those who would argue that it is better to recognise it and we shouldn’t worry about the consequential impact on the apparent scale of public debt.”
“The problems at RBS have actually had macroeconomic consequences. So it is a problem.”
“This has dragged on unnecessarily long. I don’t want to blame anyone for this but I think the lesson of history is we should face up to it.”
“In order to sell back to the private sector ... it should not take more than a year to do this. There are plenty of people around the world that have done this for a living, they need to be given the authority to take decisions and get it done. That’s the whole purpose of taking banks into the public sector in order to recapitalise them.”
”The whole idea of a bank being 82 percent owned by the taxpayer, run at arms’ length from the government, is a nonsense. It cannot make any sense.
“I know it was put there for good reason. People didn’t want politicians running banks. But I think it would be much better to accept that it should have been a temporary period of ownership only -- to restructure the bank and put it back. The longer this has gone on the more difficult that’s become.”
”The idea was that we needed to recapitalise the banking system and it was necessary to restructure it and to take it into public ownership, not because it was a good idea to put the banks into public ownership but because the medium of public ownership was the vehicle by which they could be recapitalised and restructured and then sold back to the private sector.
“It’s four and a half years on and there is no immediate sign of it going back to the private sector. So I think that means that we have not been sufficiently decisive in either recapitalising the banks or restructuring them.”
“To have this open for so long, on such a scale, is damaging and creating uncertainty which is affecting the capital position of the UK banking system.”
BAILEY ON BANKS’ “ROPY” MODELS
”There has been quite a bit of work done already by the Financial Policy Committee to essentially tell institutions you cannot actually run models that deliver these results.
”And that has been done in a number of ways, partly by putting capital add-ons on, saying I‘m sorry, I don’t accept that.
“Secondly, probably the best known example is the area again of commercial property where we have essentially thrown out a lot of models and said I‘m sorry, in essence the problem is that these assets are too lumpy, the modelling is frankly ropy ... and we’ve introduced a very simple approach which says here’s a certain set of characteristics of your assets, store those characteristics and put it into a bucket.”
“We knew when we created the FLS that there were at least three major UK banks that were going to contract their balance sheets and lending to the UK real economy. There was nothing we could do about it. What we could do was design a scheme that would give them an incentive to contract their lending to the UK real economy by less than they would otherwise have done and I think we have achieved that.”
KING ON BANKERS’ ACCESS TO POLITICIANS
“I was surprised at the degree of access of bank executives to people at the very top, it was certainly easier access to people at the very top than the regulators had.”
“(Before 2007 regulators) knew that if they were tough on a bank the chief executive could go straight to Number 10...over time this has changed clearly since then, but the access probably hasn‘t.”
“I would be much happier with leverage ratios of 10 to 20 than I would be with 25 or 33.”
BAILEY ON BANKERS’ REMUNERATION
“Fixed remuneration is essentially cash out of the door. It is much harder to get fixed remuneration back once it’s paid...what we have seen this year is quite substantial progress in two respects, one is requiring banks to reduce the pools of variable remuneration...(and) also where...there is effectively a cancellation of previous unvested remuneration and losing those two incentive mechanisms before we get to a solution for the too big to fail problem is something that concerns me.”
BAILEY ON EU PROPOSALS TO CAP BANKERS’ PAY
“My concern about the EU proposals is that, in setting this hard limit, it looks quite tight, it runs the risk as you said, that it will push up fixed remuneration because of the type of ratio arrangement.”
“There are some aspects, particularly on leverage, where the financial policy committee would like to have greater powers and where we feel that the original Vickers proposals on leverage were the right ones and that the concessionary leverage that’s been made was a mistake and it would be better to go back to the original Vickers proposals.”
“I agree with Michael (Cohrs, FPC member)that banks are still too important to fail. Too big to fail. And I think that is the single biggest challenge facing the new PRA.”
“On a global level, if we fail to solve the ‘too big to fail’ problem, there are only two countries in the world that will have big banking sectors - the United States and China - because their economies are so big that their taxpayers can afford to bail out the system.”
”The unknown question is whether the powers that we’ve been given will in fact be adequate to get rid of the too-important-to-fail problem.
“My own personal view is that it would be sensible to have a proper review after four or five years not just of the ring-fence but of a whole range of issues that I would put under the umbrella heading ‘Has the United Kingdom solved the too-big-to-fail problem’”.