Jesse Norman

Questions to Sir Mervyn King about Bank of England Accountability, 17 January 2012

Q29 Jesse Norman: Governor, when did you first learn our recommendations about the changes to Court?

Sir Mervyn King: When your Committee report was published. 

Q30 Jesse Norman: And when was that?

Sir Mervyn King: It was before Christmas.

Q31 Jesse Norman: It was 9 November. So why have we had to wait until this point, with one sitting day of Parliament, before we see a very substantive response from you and from Court on this rather delicate and important issue?

Sir Mervyn King: I did consult your Committee, through the Clerk, and it was suggested to me that January would be an appropriate time. There was no opportunity for you to call us here before today.

Q32 Jesse Norman: Well, I must say that this is a delicate matter. It would have been enormously helpful if you could have given us more than one sitting day of parliamentary time to consider it. I think it is rather disrespectful to the Committee, even if the Clerk did so advise or give any input. These are important and delicate matters.

Sir Mervyn King: Of course they are, but the legislation has not been introduced into Parliament yet.

Q33 Jesse Norman: If you are coming before us, we should have an adequate period of time to consider serious recommendations—on which you have consulted internally for months—before we have a chance to discuss them.

Sir Mervyn King: No, not for months. We are very happy to come back again if you wish to raise it at a time of mutual convenience.

Chair: Given the interest in this subject, I do not exclude that, Governor. Furthermore, we may need to reconvene to look at the FPC material as well.

Q34 Jesse Norman: Thank you for that, Mr Chairman. How much internal review has been done so far of the Bank’s performance before and during the financial crisis?

Sir Mervyn King: I shall be writing to the Chairman after this hearing about that. We have carried out reviews and we have published them. All the Bank’s responsibilities were subject to internal reviews, and we published those reviews. Indeed, the reason why the Chairman asked the question, I suspect, is because we actually move faster than most members of this Committee were aware. We published a review of our provision of liquidity insurance. Another document went out for consultation with the market, and we changed our arrangements. We have acted on the lessons we learned, and we published a completely new red book that governs the arrangements for liquidity insurance. There is no doubt that we could have done better in ensuring that we drew your attention to all this—I certainly accept that—but we did carry out reviews and we published the material.

Q35 Jesse Norman: Was a review of the internal decision processes within the Bank and the decisions made about the level of regulation and scrutiny to be adopted before the crash?

Sir Mervyn King: Sorry, can you expand on that last point?

Q36 Jesse Norman: Was there a substantive assessment, as part of that review, of the decisions made by you as Governor and other senior executives in the Bank before the financial crisis?

Sir Mervyn King: The decisions we made were exclusively to do with our legal responsibilities, and they were the provision of liquidity insurance. We have also sent a document to your Committee--

Q37 Jesse Norman: So it sounds like the answer is no. It sounds as though there was no substantive assessment of whether the right decisions were made in preparing the Bank for the collapse of the biggest asset bubble seen in recent memory.

Sir Mervyn King: That is not true at all. The responsibilities we had were non-existent in the area of bank regulation, and in terms of handling bank failure we had no direct responsibility at all. That was a matter for the FSA and the Treasury.

Q38 Jesse Norman: It still sounds as though there has been no substantive analysis or review of management or other organisational decisions by the Bank in the run-up or afterwards.

Sir Mervyn King: Our responsibility in the event of a collapse of a bank was to act as a lender of last resort and to think about liquidity provision to the banking sector more generally, and that we have carried out reviews into. We have published all our arrangements on that and the review that we carried out, and we consulted with the market. We have actually implemented them: we have not just published a review; we have done it. We have a completely new arrangement for the provision of liquidity to the banking system. It clearly would have been better if that had been in place before, but we carried out the review and we acknowledged that—as, indeed, “The run on the Rock” report from your Committee pointed out. We responded to that, we reviewed our arrangements, we reformed them and we changed them.

Q39 Jesse Norman: Your case for the oversight committee suggests that it is rather hard for anyone outside the Bank to challenge policy making on financial stability.

Sir Mervyn King: No. I think that was a point that you made in your report. The argument for having some kind of internal oversight committee was precisely because it would be harder in the area of financial policy for people to challenge the Bank, because not all the information was in the public domain.

Q40 Jesse Norman: Sorry, I do apologise, I am just quoting. It says, “Together, these differences will make it more difficult for an authority outside the Bank, like the Treasury Committee, to challenge and question individual financial stability policy makers.”

Sir Mervyn King: Yes, and we are agreeing with the point that you yourself made in your own report.

Q41 Jesse Norman: This is the conclusion of an argument—I can see that you have made an argument—where you say, “Financial stability policy is different” from monetary policy. That is why this is an argument.

Sir Mervyn King: Yes, and we agree with your report in that respect.

...

Q44 Jesse Norman: Good. So you hold that view—the key point is that you hold that view yourselves. Why is it the case, then, that you think the oversight committee should commission the views on financial stability policy from outside expert authorities, when you have already accepted—indeed, made the argument—that outside authorities cannot effectively hold the Bank to account?

Sir Mervyn King: Because with the benefit of hindsight, after at least a year—as in your own report—an ex post review could be carried out by a knowledgeable expert as to whether the right judgments were made.

Q45 Jesse Norman: Where does it say in our report that an oversight committee should do that? It doesn’t say anything of the sort. It talks about a supervisory board of the Bank of England.

Sir Mervyn King: Mr Norman, please read carefully the report. We have said that the oversight committee can commission from external experts—which could range from the IMF at one extreme to a UK individual expert on another—their views on the actual decisions that were taken and whether those decisions were appropriate. The oversight committee can then confront the FPC with that report and say, “In the light of this report, do you think you should change the way you carry out your work? Do you think you should have done something rather differently? What changes do you wish to make in the light of this?”

Q46 Jesse Norman: I apologise if I have "not read" adequately a report that I had one sitting day to review. You say that it is not possible for internal reviews to take place because of the risk that any internal review may be seen to take sides. Am I right about that?

Sir Mervyn King: That is a review on the substance, yes, and it is a very important point—it is a point I made before, to Mr Thurso. Let me give an example. Suppose you applied this to the MPC—you are more familiar with the MPC, so here is an example. If you are going to have the oversight committee say on the MPC, “We agree with the majority, and disagree with two minority members on the MPC about their stance on interest rates,” and then those two minority members have a concern about the processes and whether they are being given adequate resources or information in reaching their judgments, the only court of appeal they have is Court and the oversight committee—so, non-executive directors. If they feel the non-executive directors have already taken up a position on their own policy stance—to disagree with them and say that they agree with the rest of the Bank—I think you will find that those external members of the FPC or the minority members, whoever they are, will feel that the situation has been prejudged.

Q47 Jesse Norman: It is a very curious thing to suggest that what the oversight committee is really doing is substantive, because what you have said is that the oversight committee does not seek to second-guess the decisions of policy makers. So those judgments are not actually going to engage in any of the substance, as one would probably consider it, at all.

Sir Mervyn King: It will engage in the substance.

Q48 Jesse Norman: In other words, Governor, what you are preparing and have presented to us, which we have had very little time to scrutinise or reflect on, is a situation as follows—if this is wrong, correct me. The Court has no substantive responsibilities and the substantive body will not tackle any issues of substance—that is to say, second-guessing decisions of policy makers—and will not be accountable. How on earth can we be expected to have a situation where we want substantive accountability and you’re giving us an approach that offers the Court with no substance and the oversight committee with no accountability?

Sir Mervyn King: I find your view quite extraordinary, to be honest. We want to be accountable to you in Parliament on substance—that’s what it’s for. I thought what your report suggested was that in certain areas, particularly financial stability, it was difficult for you to hold the FPC to account in the way you hold the MPC to account, because of the existence of information that at times is not available to you or the public. Therefore you need an oversight committee to do it. But as for the idea that you are going to create a Court of the Bank that is somehow going to say, “Actually, we think interest rates were set at the wrong level”, or, “FPC decisions were wrong”, or, “What not the PRA? They should have done something else to our bank,” why on earth do you have an MPC, an FPC or a PRA to make those decisions? Their role is a key one. It’s not to second-guess the substance of individual decisions; it is to hold those bodies accountable.

Chair: That point is made very clear in our report. We agree with that point.

Sir Mervyn King: Absolutely.

Chair: So to be fair, you seemed to be, at that point, rehearsing arguments we’ve set out very clearly.

Ten Minute Rule Bill: Speech on Taxpayer Funding of Trade Unions, 11 January 2011

1.38 pm

Jesse Norman (Hereford and South Herefordshire) (Con): I beg to move,

That leave be given to bring in a Bill to provide that pay for hours worked on behalf of trade unions by trade union officials during hours when they are paid by an employer should be refunded to the employer by the trade union; and for connected purposes.

The Bill addresses an issue that has recently attracted great public attention: the funding by the taxpayer of public sector employees who in fact work not as nurses, teachers, social workers, local government officers or civil servants but as trade union representatives.

Telegraph op-ed: Why are taxpayers still funding the unions?

Say the word Pilgrim, and the mind conjures up images of devotion: the pilgrim fathers landing at Plymouth Rock; the pilgrims that flock to pray at Lourdes; the muslims who make their once-in-a-lifetime pilgrimages to Mecca.

Last year, however, the word “pilgrim” took on a new and less devotional meaning: that of a union representative in the public services who spends all their working time on union activities, yet is funded by the taxpayer. The term was coined in honour of Ms Jane Pilgrim, a nurse-turned-union rep at St George’s Hospital, Tooting. She told the press that Andrew Lansley had lied about cuts to the NHS on a visit to the hospital, in a meeting she had never attended.

FT op-ed: The Tories must lead our soul-search on capitalism

Blamed for the credit crunch, reviled as the cause of the eurozone crisis and despised by protesters in St Paul’s churchyard and on Wall Street, there is no doubt about it: capitalism had a terrible year in 2011.

This should be of great public concern.  But it sets free market conservatives a special quandary.  It is now 30-odd years since Margaret Thatcher’s government took the decisions to open up the British economy, float sterling, dismantle state subsidies, attack cartels, privatise industries and deregulate the City of London.  Are current events an indictment of that long arc of government?  Has the Conservatives’ belief in free markets been a mistake?  Or is something else going on?

New paper: The Case for Real Capitalism

My short paper The Case for Real Capitalism is published today by the Free Enterprise Group of MPs.  It can be found here under Books, or on the Free Enterprise Group website.  

Update:  The full version has much more detail and political analysis.  It can be found here, or again under Books.

Guardian op-ed: The FSA's report on RBS does not do enough to counter crony capitalism

As yesterday’s report by the FSA shows, the purchase of the Dutch bank ABN AMRO by the Royal Bank of Scotland will be seen in retrospect as one of the illusions of the epoch—the high water mark of the crony capitalism of the past decade.  

Lest we forget, led by its accountant-turned-banker Fred “the Shred” Goodwin, RBS launched a spree of bank acquisitions after buying NatWest, a bank three times its size, in 2000.  It became the fifth largest bank in the world, its assets rose by over four times, profits soared, and Goodwin was given a knighthood by his fellow-Scot, Gordon Brown.  In 2007, he capped it all with a huge mainly-cash bid for ABN, trumping a rival bid by Barclays.  

Telegraph op-ed: Why we should celebrate the death of PFI

In the interests of security, the head of North Bromsgrove High School recently asked BAM, the PFI contractor managing the facilities, to price up the installation of three locks and deadlocks to three sets of double doors in the school atrium. BAM’s charge for this was £961.85 in capital costs, and a recurring sum of £49.40 in “lifecycle” costs for the remainder of the contract. There are 26 years still to run on this, meaning a total of £2,246.25.

Evening Standard comment: PLAN B shows Labour are still woefully short of a credible economic strategy

PLAN B, published this week by the Compass thinktank, is a good-faith attempt to fill the gaping hole where Labour's economic policy should be.

The authors generously credit me for putting the question they try to answer:  Where is the Left on the economy?  The first thing to say is that their report is far more thoughtful and constructive than Ed Balls's own five point plan, whose centrepiece is a very risky cut to VAT costing £12.5 billion a year.

New Statesman op-ed: Despite the rebellion over the EU, the Tories remain united

The EU Referendum debate on Monday was all set to be one of those great parliamentary occasions.  The Commons chamber, deliberately designed to be on the small side in order to maximise proximity and conflict, heaved as MPs of all parties thronged the gangways.  On the green benches the big beasts of the past anxiously pawed the ground, eager for the off, while younger colleagues sniffed the air expectantly. 

ConHome: The fate of the Eurozone hangs on leadership from Mrs Merkel

Five weeks ago I wrote in rather apocalyptic terms that we were very close to a renewal of the secondary banking crisis.  Money markets were seizing up, credit default swap spreads were widening sharply, the US dollar-denominated debt markets were closed to banks, and a much larger number of banks were being directly funded by the European Central Bank than ever originally contemplated.  I predicted that events would move far faster than the next anticipated deadline, the Greek sovereign debt repayment in March 2012.