MS ANGELA KNIGHT CBE, MR PAUL CHISNALL AND MR ALEX MERRIMAN

13 MAY 2008

  Q154 Chairman: Good morning and welcome to the Committee's hearing on financial stability and transparency. Could you introduce yourself and your colleagues for the shorthand writer, please?

  Ms Knight: Good morning. My name is Angela Knight. I am the Chief Executive of the BBA.

  Mr Merriman: Good morning. I am Alex Merriman. I am the Executive Director responsible for wholesale business in the British Bankers' Association.

  Mr Chisnall: I am Paul Chisnall, the Executive Director responsible for financial policy and operations.

  Q155  Chairman: You will all be aware that the Governor of the Bank of England gave us evidence a couple of weeks ago and he spoke about the bonuses and incentives in the City. In a speech recently you said that it was not helpful to argue about executive compensation in the public eye. Do you think this is legitimate now?

  Ms Knight: I think it is legitimate to look at executive compensation, yes, but perhaps I could say why I do have concerns. We are looking, and quite rightly so, at the issues that have arisen here in the UK generally as a consequence of the credit crunch. We are doing it in the Anglo-Saxon way in which it tends to be done publicly, predominantly through hearings such as yours, but also more widely as well. Close attention is being paid to what we are saying externally and wherever I go outside the UK there is commentary and that commentary is not particularly favourable. We know problems have risen in other centres as well. What I would prefer to do is for us, at the same time as we look at the issues here in the UK, to be mindful of the face that we are presenting to the external world. We are a big financial centre here and we need to recognise that others want what we have got.

  Q156  Chairman: We are in the biggest mess we have ever been in in the financial services sector. The public has had to rise to the rescue. The Governor has got real concerns, the regulator has got concerns and Jon Moulton, who is an active participant, came before this Committee this morning and he has got real concerns. Surely you are not saying that the incentive structures have got nothing to do with the current crisis. Richard Lambert has made critical comments as well. Was he wrong to make those comments? Surely we will only get a way forward if there is going to be public pressure in ensuring that banks change their incentive structures. It is wholly inappropriate for you to say we can do this in private, in a monastic way.

  Ms Knight: Chairman, can I first of all just emphasise again that I do believe that we need to look at a broad range of factors of which executive remuneration is one. In any event, our procedures and processes here in the UK through the involvement of shareholders with remuneration has the effect of putting issues to the vote in a way that is not necessarily replicated elsewhere. I am not arguing with any of the people whom you have just quoted, but I do say again that we need to be mindful of our international reputation. I know that you are also mindful of the international reputation of the UK.

  Q157  Chairman: I understand, but Mr Moulton has just suggested that banks should be limited to activities that can be regulated. Do you agree with him?

  Ms Knight: I have not heard what he said and I would have to look to see what he said first. What I do know is the way that banks have developed the broad range of services and the products that they have offered has not only been good for the UK economy but they have been good worldwide. Before we look at trying to restrict overtly or excessively the functions that they undertake, again, we need to look at it in a wider context. The regulation of the industry in any respect is under review right now through the consultation document of the Tripartite. We are also seeing proposals come out of the international fora, and, if I may say, that is where I do believe that executive pay should be discussed, in the international fora. Because these are international institutions, and we have to be mindful of that as well. So the broad brush of regulatory change is all about the global nature of the industry, the way that regulation takes place on a cross-border basis and the international standards. That is a debate in which we believe we should participate and as an organisation we are certainly participating in it.

  Q158  Chairman: I can anticipate where Mr Moulton was coming from after listening to him. It was the broader complexity and people not understanding what they are selling or what they are buying, and that has been reinforced by the witnesses who have come before our committee. For example, Edward Corrigan of Goldman Sachs, who came across especially from Wall Street, said to us that there was no question that over recent years the workings of the financial system have become enormously more complicated and complex, and Professor Buiter, who came before the committee, described many securitised structures as ludicrously complex and said it was doubtful that even the sellers and designers of these products knew what they were selling, and in a visit to Europe I heard Alexander Lamfalussy make the point in his speech, "I know of cases where the in-house experts were unable to carry the message to top managers." That culminated in one of the chiefs of the investment banks coming before our committee not being able to explain what a CDO is. We are really in a ludicrous situation and we really need a radical prescription for the way forward. I would like you to be in tune with that rather than deflecting all that and saying, look, things can go on as they did before; they really can.

  Ms Knight: Chairman, if you look at the written evidence that we gave to this committee—we have given, I think, four lots now, in the first two that we gave right at the start of the inquiry, you will know that we highlighted the needs for transparency, we highlighted the complexity issues, we highlighted aspects relating to credit rating agencies and more. We too believe that there are some very serious issues here which need to not just be looked at but, indeed, addressed as well. We have not run away or hidden from the need for reform or for the need for review. We do believe that that needs to be undertaken. We have continued to engage not just with yourselves but authorities in the UK and in the wider context. We are, yes, representatives of the banking industry, and I can say four-square that the banking industry well recognises that there are issues here which warrant review and reform.

  Q159  Chairman: The way LIBOR measures interest rates has been called into question. Why do you think that LIBOR remains a relevant measurement?

  Ms Knight: LIBOR has stood the test of two decades. It is widely used around the world. LIBOR fixes in many currencies. The three main currencies of LIBOR are dollar LIBOR, sterling LIBOR and Euro LIBOR. What LIBOR represents is the rate in the market, and that rate is fixed at 11 o'clock every morning here in the UK. You will have seen that LIBOR has drifted up and is, in sterling and euro terms, significantly higher than the base rates. That does not mean that that is a problem with LIBOR. What that does is say this is what is happening in the market. To go through the technicalities briefly—do you want me to do that because I will do with pleasure, Chairman?