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

13 MAY 2008

  Q220  Mr Mudie: Can you use some of your charm on Mervyn, because he is impervious to my charm, and see if you can get him to take some interest in this?

  Ms Knight: Can I just make a point about rates. As far as rates are concerned, you know where rates lie. You can see that from both the rates that are given to savers and the wholesale market. That is the lending rate.

  Q221  Mr Mudie: I can I ask you couple of official questions?

  Ms Knight: Pity, I thought I had done those!

  Q222  Mr Mudie: Mr Moulton stated just before you came in that Basel II is too complex; it stems, as we know, from too many compromises because of its nature. Do you agree with that characterisation? He is sitting behind you, so be careful!

  Ms Knight: I think it certainly is complex, and we have not actually fully brought it in. I think we have just fully implemented it here in the UK, it has been certainly not fully brought in in other places, and the European Commission is about to reopen some aspects of Basel. I certainly think that what these last few months are going to mean is that regulators, authorities of all sorts, need to have a clear, careful look at how Basel II does operate, because so much of that, as, indeed, with some of the regimes we are living with at the moment in other areas, was designed in times which were very benign—a good economic environment—and they were stressed-tested only on a theoretical basis. We are not in those times at all, and we are not in theoretical stress-testing, we are in actual stress-testing, and I think it behoves everybody to just carefully have a look and see what it is that we have got, how it has performed, what is it its complexity and what it is that needs to be reviewed, changed, thought through, or whatever.

  Q223  Mr Mudie: In the first question when the Chairman was asking you about how you were dealing with it in an Anglo Saxon way behind closed doors—

  Ms Knight: An Anglo Saxon way is in the open actually.

  Q224  Mr Mudie: —you went on to say it would be better done behind closed doors, by harsh words, dirty linen and all that. The second thing, which I thought was very significant and, I think, right, is that the real reforms have to be dealt with in an international field because so many of the banks are international, but when we asked about reforms in the international field the Governor said, "Not in my lifetime." I do not know whether he was saying in terms of his lifetime as Governor of the Bank of England, but, in view of that, is this just not the banks stalling for time to get over this crisis and then assume normal practice?

  Ms Knight: No, it is certainly not us stalling actually. There are some things that absolutely have got to be done on an international basis. Certainly there is some work which we have undertaken ourselves (and I think it is getting wide acceptance) on cross-border regulation. That might sound a little bit down in the engine room, but it is not in the engine room if you have got a bank that gets into difficulty that is operating in a number of countries. You have to be able to take action and quickly. The transparency stuff: FSF (The Financial Stability Forum) made a statement a couple of weeks ago—three weeks ago, four weeks ago, whatever it was—and they said in 100 days the industry had got to look at its valuations, look at its risk, put things into the public domain, be more open, and so forth. We are actually doing that here in the UK, so I think that it is a bit "where there is a will there is a way". There are some things that I imagine various countries will die in the ditch on, but I think there is quite a lot which can be done internationally, and I think that there is a role that the industry can very strongly play in that as well.

  Q225  Mr Mudie: One of the things, I would say, having sat through enumerable hearings since Northern Rock, is that there is a cosy consensus building up that the FSA are totally to blame—the regulator—and the Bank of England have escaped proper scrutiny, and the banks have swung in to support the Bank because, if the FSA can be the scapegoat, it saves real questions being asked of the other participants. How would you react to that?

  Ms Knight: It certainly appears that if ever I react to anything the Bank of England says I am in permanent trouble. I will give it a whirl. Do I think that the regulators were at fault for the Northern Rock? The answer is, yes. Anybody who has read their report knows that. I think they have been pretty honest, frankly, at the way that they have reviewed themselves and bunged it out to the public domain. So I give them congratulations for their honesty, I give them marks for starting to change but I think that what they did was pretty lamentable. Equally, as we were running up through the summer of 2007, there were some pretty strong representations being made about the flexibility requirements of the money market, and the provision of liquidity, in a way that it was being made available certainly in Euroland, because the money market is part of the whole piece. You cannot say we have got the regulators over here, we have got the money market over there and the two are not joined. They are joint and one requires both to work together, and sometimes, if you have a liquidity problem, that is where the money market actually starts to play its part. Some say that if the money market had not seized, if there had been the sort of arrangements that we have got now, that the Northern Rock would still have been in difficulty but it would not have hit the buffers in the way that it did. That may be the case, it may not—we cannot rewrite history—but certainly the performance of the money market is important in all this, as is defining the roles of the regulator and the Bank of England so there is no confusion about who does what. Whether we do it in the way that some want or others want is, to a certain extent, a second order question. The first order question is that it is clearly defined who does what, that they talk together and interact; and we think that is all part of the process.

  Q226  Mr Mudie: That just confirms that if you represent the banking industry you are content with just heaping it on to the FSA. Northern Rock happened. It was a bank. It got caught out. It has been dealt with. The credit crunch is beyond Northern Rock, and it was not the FSA that caused this, it was dodgy securities—

  Ms Knight: Yes.

  Q227  Mr Mudie: —sold for some considerable time, making a lot of people in your industry very rich and now we are all feeling the pain. The only authority of the three—the Bank of England, the banking industry and the FSA—to be honest and to come before us and say, "Hands up, we made a mistake", would be the FSA. It has allowed you and your industry and the Bank to carry on without answering any hard questions. The hard question is securitisation and the behaviour of the banks. Jon Moulton said he wanted to see a time when the banks would be trustworthy again and easy to understand and open to understand. What assurances can you give the committee that there is deep-rooted thought going on within the industry that things have got to change, or has the banking industry moved in a way that cannot be rowed back, divided in any suitable way, that depositors' money is protected and you get on with your financial adventures at your own cost?

  Ms Knight: I think that the banks, first of all, have taken very seriously these problems. Of course they have. Look at what has happened to share prices. Look at the requirements for rights issues. There are some very strong consequences felt by the industry and by the entities that operate in the industry, and that is a driver for change in a way that I think is arguably stronger than any other. I have been asked already, though, in this session today about innovation, and I say it again. Innovation is part of this industry, as it is part of other industries. There is nothing wrong with securitisation. It is being used widely. What has happened, though—the point that you have made—is that some dodgy stuff has got into the system, it has been rated wrongly, there has been a certain amount of trust given to things in which, frankly, it is a great pity that that trust was given, and the result of that is felt in the system and it is also felt in the industry and, in particular, institutions as well. If that is not a strong driver to change—there is no stronger driver to change than reaping the consequences of mistake. Not everybody made the same mistakes as the Northern Rock and not everybody is exposed in the same way as some of the big banks in the US.

  Q228  Mr Mudie: Angela, if Mervyn had offered the same facility as he is offering now, Northern Rock would not have gone down.

  Ms Knight: I said that to you earlier. If the money market had changed at that time, then the Northern Rock may well not have hit the—

  Q229  Mr Mudie: The bottom line is: are you in the industry going to bring forward proposals beyond better regulation? In other words, if we are going to get the regulator right and avoid this in the future, are the industry going to bring forward radical reforms for consideration that will assure us that we will not go through this again?

  Ms Knight: We gave you some at the start of your inquiry in which we were looking specifically in the areas of structured products, of securitisation, of credit rating agencies, of assessments that the industry had to make and so on. We have continued in that area. We have made some proposals in market abuse and we are looking internally at more as well. Of course we are engaged, not just in responding to other ideas, but making our own proposals as well. We would be wrong if we were not, frankly.

  Q230  Chairman: George implies, something I agree with, that in public this is seen as a one-way street for the banks who have got the facility.

  Ms Knight: I know it is.

  Q231  Chairman: And there will be a backlash if there is not a real positive, concerted response from the industry, Angela. One of the things that we will be doing in this inquiry is we will be continuing for quite a few months yet and we will have your members in to question them about exactly what is happening: because if repossessions really go up and there are not any alternative proposals by the banks and building societies, then they are surely going to cause a political storm?

  Ms Knight: Chairman, nobody is more aware than me about what the public at large think of the banking industry. I get it in the neck on a weekly basis in responding to the various questions of the various interviewers, and, indeed, I have got it a fair amount in the neck today in facing you at the Treasury Select Committee. It is important for the industry that there is trust. It is important for the industry to make what changes need to be made in a right and proper way. It is also important for the industry and for the UK that we continue to have this strong international centre quartered here in this country. We have got what others have wanted. Others have lost to us. As we make our move forward we do need to keep our eye on the internationality of the industry; it has got to be kept firmly in front of our face.

  Q232  Chairman: To take George's point and Jon Moulton earlier, should the regulator only be regulating what they understand?

  Ms Knight: I do not quite know what you mean. I would hope that the regulators do understand exactly what it is that they are regulating.

  Q233  Chairman: It is dead easy. Financial products are very complex and we have had a lot of people saying nobody knows what they are buying and nobody knows what they are selling. We have had chief executives in front of us who did not know what CDOs were never mind CDOs squared. That is the type of thing. So should a regulator only regulate what they understand?

  Ms Knight: Yes.

  Q234  Chairman: Good.

  Ms Knight: And that means that the industry has got to try and provide people to the regulator.

  Q235  Chairman: That is a profound answer, Angela. I am delighted with that answer, because we are not against financial innovation. It is all advantageous, but financial innovation is always one step ahead of potential regulation, and that is where the problem comes in, but that is a good answer for us. Last question, Angela: what difference will plea bargaining make in tackling market abuse?

  Ms Knight: What I think is that it will send a very strong shot across the bows to those people who do try to abuse our market, as well as, hopefully, enabling the FSA to successfully catch and prosecute, and we have written to the Chancellor accordingly.

  Q236  Chairman: Good, because we have made that point in our committee. I do not want you to mislead the public, Angela, but this committee is always nice to you, is it not?

  Ms Knight: You do not want me to mislead the public, John?

  Q237  Chairman: No.

  Ms Knight: Then the answer to the question is, no, you are not always nice to me, but please note I always come here!

  Q238  Chairman: Okay. Thank you, Angela. You always have a very good comment. Can I thank you for your attendance today and for your praetorian guard as well.

  Ms Knight: Thank you very much.