Reuters Insider - STREAM: UK’s Osborne, BoE’s Carney keynote speeches
16/06/2014 03:53
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Description: Britain’s Chancellor George Osborne and Bank of
England Governor Mark Carney give keynote speeches
at the annual Mansion House dinner in London.
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Transcript (May be auto-generated)
George Osborne, Member of Parliament for Tatton. My Lord Mayor, Ladies and
Gentlemen, it is again an honour to attend this wonderful dinner and to speak to
you as Chancellor for the fifth time. As we gather here tonight, I expect many
of you are focused on a familiar set of concerns - intense foreign competition
from the BRICS, excessive pay, lack of transparency, allegations of deal
rigging, but so much for FIFA, and thank you, Lord Mayor for the fixtures card.
I apologize to all of you, having to be here and listen to these speeches rather
than watch the first few minutes of the Brazil game. And I see the Italian
ambassador here, and I'm sorry, Ambassador, you're going to have such a
disappointing night on Saturday. Now Lord Mayor, I remember coming here to
Mansion House, just weeks after the government was formed in 2010 – with
Britain on the brink of an economic crisis – to give my first major speech on
the task ahead. I set out for you the economic plan we would follow, and I drew
on the words that Winston Churchill had uttered in this very hall, to say that
while Britain could not pretend our travails were at an end, we were at least at
the end of the beginning. In the four years since, supported by the resolution
and sacrifice of the British people, we have worked through that plan. Now we
are starting to see the results: Britain growing faster than any advanced
economy in the world. A record number of people in work. Now strong business
investment on the back of low business taxes. And a budget deficit this year set
to be half what it was. Last week, the IMF said that our resolute fiscal policy
had been in their words an "anchor for the British economy" that it maintained
confidence and stability in the face of the storm. And I want to say to the
business and financial community: you did not waver; you stuck with us and I
thank you. But the task is far from complete; and there are many risks to the
progress we have made. Abroad, the risks stem from the weak Eurozone,
unpredictable geopolitics and the slowdown in some emerging markets. At home,
our economy is still too unbalanced, so I am the first to say we need to
continue our efforts to boost business investment, exports and housing supply.
But the biggest risk comes from the tendency in parts of our body politic –
the left and now too the populist right – to wage a war on enterprise,
regulate prices, propose penal taxes, close Britain to business and return to
the old ways of borrow and spend. We must win this battle. And go on confronting
Britain's problems with long term answers that will build an economy for
everyone. So while I know this is my fifth speech to you as Chancellor; I hope
it is not my last. For I want to finish the job. Lord Mayor, tonight we are
joined by someone attending their first Mansion House dinner. Our Governor of
the Bank of England. Mark, we all thank you for the integrity, intelligence and
international reach you have brought to the challenges of the last year. And we
look forward to what you have to say. But if there are those who think that this
is the first time a Canadian has spoken at this historic dinner, you'd be wrong.
Ninety-seven years ago, of course, guests were treated to the speech of Andrew
Bonar Law, a native of New Brunswick and then Chancellor of the Exchequer. Now
unfortunately, Bonar Law sets a very unhappy precedent for he fell out
spectacularly with the then governor of the bank. And I'm afraid to say, Mark,
ended up sacking him. The final straw came when the governor denied the
chancellor access to the nation's gold. But given recent history, Mark, you'd be
forgiven for doing the same thing. And what was the name of the unfortunate
governor a century ago?
Cunliffe. How dare anyone say things never change at the Bank of England? Now
our 3 new Deputy Governors – Jon Cunliffe, Ben Broadbent and Minouche Shafik,
together with Andrew Bailey, complete what I immodestly think is the strongest
team of any central bank in the world. The Court continues the oversight of the
Bank's work, and at the end of this month Anthony Habgood will replace David
Lees as its chair. David, thank you for helping steer the Bank through the big
reforms of recent years and the appointment of a new Governor. And thank you too
to Charlie Bean for the 6 years he has given our nation as Deputy Governor. We
are lucky that one of our greatest economists has chosen to dedicate his life to
public service for so long. Thank you very much, Charlie Bean. Now the Bank of
England sits back where it belongs, at the heart of our financial system –
supervising the prudential regulation of our banks and insurers, thanks to the
reforms I announced in my first speech here at the Mansion House in 2010. And in
each speech since, I have set out new steps to strengthen the resilience of our
economy and the financing that underpins it. 2011, ringfencing our retail banks.
2012, launching Funding for Lending with the then governor. Last year,
restructuring the Royal Bank of Scotland and firing the starting gun on the sale
of our stake in Lloyds. It would be tempting this year, at the Mansion House, to
pause for breath. But our task is far from complete – and today I will
announce further changes to build that resilient economy for all and the strong,
competitive financial services that should contribute to it. Lord Mayor, the
City of London has emerged from the wreckage of what went so badly wrong,
stronger and better regulated, more international and more responsive to the
needs of customers here at home. Our financial exports grew 10% last year, and
our surplus in finance and insurance has reached GBP45 billion – twice as much
as our closest competitors. We've welcomed to Britain the headquarters of some
of the world's largest insurance firms. And we have been chosen as the location
for the International Forum of the world's Sovereign Wealth Funds. In my first
Mansion House speech, I said I wanted British financial firms and markets to be
at the heart of financing China's extraordinary expansion. Now two-thirds of all
Renminbi payments outside of China and Hong Kong now take place in London.
Chinese bonds are being issued here, Chinese assets are being managed here,
Chinese banks will be able to apply for branches here, a Chinese clearing bank
is soon to be appointed here - and next week, when the Chinese Premier visits,
we will take the next big step forward in the economic partnership of our two
great, historic trading nations. I can also confirm tonight our intention in the
next few weeks, subject to market conditions, for Britain to be the first
Western nation to issue a sovereign sukuk – an Islamic bond. For I want
Britain to be not just the western hub of Chinese finance – but of Islamic
finance too. It is with these active steps that together we are making Britain
the undisputed center of the global financial system. But all this can so easily
be put at risk. By badly-conceived EU rules that only reinforce the case for
reform in Europe.
By populist proposals for self-defeating bonus taxes and punitive income tax
rates. And by the potential break up of our nation. Edinburgh is even stronger
as a world-renowned centre for asset management because it is part of a United
Kingdom that is a world-renowned centre of finance. And let us hope it remains
so, for we are better together. We should be candid tonight about another risk.
The risk that scandals on our trading floors call into question the integrity of
our financial markets. People should know that when they trade in London,
whether in commodities or currencies or fixed income instruments, that they are
trading in markets that are fair and effective. The revelations about the
manipulation of LIBOR added further damage to reputation of financial services,
here and abroad. In Britain, thanks to the leadership of Martin Wheatley and
Andrew Tyrie, we acted swiftly to punish the wrongdoers and fix the system. Let
us not wait for the next wave of scandals in financial markets to hit us before
we respond. The integrity of these markets matters to us. London is home to 40%
of the global foreign exchange business; 45% of over-the-counter derivatives
trading; and 70% of trading in international bonds. And Mark Carney and I intend
to keep it that way. So today I can announce that the Treasury, the Bank of
England and the Financial Conduct Authority will conduct a comprehensive review
of standards in our fixed income, currency and commodity markets. The Fair and
Effective Markets Review will be chaired by the new Deputy Governor, and former
Deputy Managing Director of the IMF, Minouche Shafik – and she will be joined
by Martin Wheatley and Charles Roxburgh. This review must work closely with
industry. So I am establishing a panel of market practitioners, chaired by
Elizabeth Corley, chief executive of Allianz Global Investors. The Review will
produce its report in a year's time. And some of its recommendations may require
international agreement. In the meantime, we will act here at home. I am today
announcing that we will extend the new powers we put in place to regulate LIBOR
to cover further major benchmarks across foreign exchange, commodity and fixed
income markets – many of which are currently entirely unregulated. Based on
the Review's conclusions we will publish and consult on the full list of
benchmarks to be covered by this autumn, and we will have the new regime in
place by the end of the year. I am also extending the senior managers regime to
cover all banks that operate in this country, including the branches of foreign
banks. And I can also announce that we will introduce tough new domestic
criminal offences for market abuse, rather than opt into European rules we do
not think suitable or sufficient for our needs. For let me make this clear, so
no one is in any doubt. The integrity of the City matters to the economy of
Britain. Markets here set the interest rates for people's mortgages, the
exchange rates for our exports and holidays, and the commodity prices for the
goods we buy. I am going to deal with abuses, tackle the unacceptable behaviour
of the few, and ensure that markets are fair for the many who depend on them.
We're not going to wait for more scandals to hit– instead we are going to act
now, and get ahead. Ladies and Gentlemen, robust financial markets are an
important part of building a resilient economy. But tonight, I want to address
another market which can create a risk to Britain's economic stability and
prosperity. Not a new risk, but an old and very familiar one to us in this
country – and that's our housing market. The challenge is that we want several
things which don't sit comfortably together. For most people, their home is the
biggest investment of their lifetime. And, of course, they want that asset to
increase in value over time. But a home is also a place to live and build our
lives – and we want all families to be able to afford security, comfort and
peace of mind. That means homes have to be affordable – whether you're renting
or buying. The only way that can be achieved over the long term is by building
more, so supply better matches demand. But we are a small and crowded island,
keen to protect our green spaces and ready to object to new development. So the
British people want our homes to go up in value, but also remain affordable; and
we want more homes built, just not next to us. You can see why no one has
managed yet to solve the problems of Britain's housing market. Instead we have
the repeated cycle of financial instability driven by high household debt; and
we see the social injustice of millions of families denied good homes. But that
should not deter our generation from trying to fix the housing challenge – for
the price of failure is too high. So my message today is this. As Chancellor, I
have never shied away from confronting Britain's problems and the housing market
is no exception. I'm determined to back aspiration in every way I can, including
the aspiration to own your own home. But I'm not going to opt for the easy route
of some of my recent predecessors: duck the issues, risk a housing boom, and
keep my fingers crossed that it won't damage the economy. So no irresponsible
gambles with stability; no short-term fixes. Housing is a long term problem –
and our economic plan will provide long term answers. Here's how. First, we have
to be clear-eyed about where the risks to economic stability lie today. The
risks come when people borrow too much to pay for rising house prices. In
excess, that debt can cause serious difficulties for them and the banks who lend
to them. And it can cause difficulties for the economy as a whole if an overhang
of debt suppresses consumer spending. Now, today, house prices are still lower
in real terms than they were in 2007 – and are forecast to stay below that
peak for some years to come. At the same time debt-servicing costs remain at
near record lows and rental yields are in line with long term trends. So there
is no immediate cause for alarm. Indeed the most recent data shows that mortgage
approvals have actually slowed in the last couple of months.
But we need to be vigilant. For there are on the horizon things that should give
us some causes for concern. If London prices were to continue growing at these
rates that would be too fast for comfort. And the rate of price rises is now
beginning to spread beyond London. Across the country, the ratio of house prices
to incomes is high by historical standards. And while average loan to value
ratios for new lending are still well below normal, average loan to income
ratios have risen to new highs. Let me spell it out: does the housing market
pose an immediate threat to financial stability today? No, it doesn't. Could it
in the future?
Yes, it could, especially if we don't learn the lessons of the past. So we act
now to insure ourselves against future problems before they can materialise.
Because economic security comes first. The first challenge then is to be clear
about the issue, and we are. The second is to act on it. When I spoke to you in
2010, I said one of the weaknesses of the system of financial regulation I'd
inherited was that no one was looking for broader risks across the economy, in
areas like housing. So no one saw the rising debt levels – or had the tools to
do anything about them. I have changed that. The new Financial Policy Committee
in the Bank of England has been given the authority and the macro-prudential
tools to act. They have also insisted on the toughest stress tests for our
banks, so that this time around they can withstand the worst. Before Christmas,
the Bank acted with the Treasury to refocus the Funding for Lending Scheme away
from mortgages towards small business lending. And earlier this year, our
regulators put much more rigorous mortgage standards in place. These are all
important steps. The FPC already have further tools in their armoury. But today
we go further. I want to make sure that the Bank of England has all the weapons
it needs to guard against risks in the housing market. I want to protect those
who own homes, protect those who aspire to own a home, and protect the millions
who suffer when boom turns to bust. So today, I am giving the Bank new powers
over mortgages including over the size of mortgage loans as a share of family
incomes or the value of the house. In other words, if the Bank of England thinks
some borrowers are being offered excessive amounts of debt, they can limit the
proportion of high loan to income mortgages each bank can lend, or even ban all
new lending above a specific loan to income ratio. And if they really think a
dangerous housing bubble is developing, they will be able to impose similar caps
on loan to value ratios – as they do in places like Hong Kong. It's important
that decisions to use these powerful tools are made independently of politics by
the Bank of England. We saw from the last crisis the dangerous temptations for
politicians to leave the punch bowl where it is and keep the party going on for
too long. And just in case there is any doubt. I say today, very clearly: the
Bank of England should not hesitate to use these new powers if they think it
necessary to protect financial stability. And I commit that while the Bank and
the Treasury will need to design how these powers will work in detail, and will
want to consult on them, I will make sure that they are legislated for and in
place before the end of the Parliament. And I also commit today that if the Bank
does act in future to limit mortgage lending then the same rules will be applied
to every single Help to Buy mortgage. I know that some would take a more
ideological position and end the Help to Buy scheme altogether. They would
return to the situation where only those first time buyers lucky enough to have
rich parents would be able to afford the large deposits demanded by the banks.
My approach will be dictated by the facts, not by ideology. And the facts show
that Help to Buy is working as intended. As the IMF concluded last week, it is
helping lower income families, overwhelmingly first-time buyers outside London,
to buy homes priced well below the national average. It is not fuelling house
price inflation in London or at the top of the market. It is helping families,
and that is how we intend to keep it. So today I've taken big new steps to
protect financial stability, strengthen the new role of the Bank of England and
completed the range of tools at their disposal. This addresses the economic
problem of how we stop rising house prices leading to an unsustainable rise in
household indebtedness, and threatening the wider economy. But it does not
address the social problem of how we stop young families being priced out of the
housing market altogether. That requires a third pillar to our housing strategy,
alongside the clear analysis and new financial weapons. We need to see a lot
more homes being built in Britain. The growing demand for housing has to be met
by growing supply. The alternative, as in any market, is that prices will rise
so that homes become unaffordable to many of our citizens and take up ever more
of their incomes. We've already taken big steps to deliver those new homes.
We've reformed our antiquated planning system. The changes were hard–fought
and controversial, like all things worth battling for in politics, and now they
are already starting to work. Last week we saw permissions for new homes rising
by 20% in a year. We've got the biggest programme of new social housing in a
generation; we're regenerating the worst of our housing estates; and we've got
the first garden city for almost a century underway in Ebbsfleet. Now we need to
do more. Much more.
We have beautiful landscapes, and they too are part of the inheritance of the
next generation. To preserve them, we must make other compromises. If we want to
limit development on important green spaces, we have to remove all the obstacles
that remain to development on brown field sites. Today we do that with these
radical steps. Councils will be required to put local development orders on over
90% of brownfield sites that are suitable for housing. This urban planning
revolution will mean that in effect development on these sites will be
pre-approved – local authorities will be able to specify the type of housing,
not whether there is housing. And it will mean planning permission for up to
200,000 new homes – while at the same time protecting our green spaces.
Tomorrow, Boris Johnson and I will jointly set out plans for new housing zones
across London backed by new infrastructure, so that we see thousands of new
homes for London families. And we'll take the same approach in the rest of the
country; with almost half a billion pounds of financial assistance in total set
aside to make this work. Now I suspect there will be people who object to new
building, even on the brownfields of our cities. But let me be clear. I will not
stand by and allow this generation, many of whom have been fortunate enough to
own their own home, to say to the next generation: we're pulling up the property
ladder behind us. So we will build the houses Britain needs so that more
families can have the economic security that comes with home ownership. And
today I will give the Bank of England the powers it needs over mortgages, so
that Britain's economic stability always comes first. And that is what our long
term economic plan is delivering. Lord Mayor, Ladies and Gentlemen, Insisting on
the integrity of our financial markets. Confronting the risks from our housing
market. Tackling the long term challenge of housing supply. These are the
further actions I take today to ensure that we learn from the mistakes of the
past and build a resilient economy for all. These last four years have required
difficult decisions. We embarked on the hard task of rebuilding our economy; and
making sure our country could pay its way in the world. That task is not
complete. Our national prosperity is not yet secure. But if we carry on working
through our long term economic plan then we can say with confidence that
brighter days lie ahead. Thank you very much. Remain silent for the governor of
the Bank of England Mr. Mark Carney. My Lord Mayor, ladies and gentlemen. A year
ago when Mervyn King delivered his final Mansion House speech, he noted that
there were clear signs of a modest recovery in the UK. We're now faced with the
challenge of turning that recovery, a recovery that's steadily gained in
momentum and breadth into a durable expansion. To do so, we need balance. Its
absence can have serious consequences. There's many examples in British economic
history. Consider 1931 when Britain's economic prospects were strained by high
unemployment, a large budget deficit, a deteriorating balance of payments. In
the ensuing Sterling crisis, we are forced off the gold standard and the
government of the day did the honorable thing and resigned. And the Governor of
the Bank of England? With the uncanny foresight of a central banker, Montagu
Norman had already left the scene to get a bit of rest in Quebec for, and I
quote "I have had a very hard time of it lately and I haven't been as well as
I'd like." Now however tempting, I'm going to lean on Canada not for rest and
restoration but for a nautical analogy to describe how we should address the
challenges that we all now face. And rather than appeal to the stately Duchess
of York on which my predecessor sailed, I'll look to the trusty canoe – a
craft that can navigate the most rapid and treacherous waters provided its
paddlers all work in sync. Right now the economic currents are flowing swiftly,
with the economy expanding at an annualized rate of around 4% and jobs growing
at a record pace. But there are rapids ahead, with old imbalances persisting and
new ones emerging. The economy is still over-levered. The housing market is
showing potential to overheat. And the current account deficit is at a record
level. Navigating these hazards will require close coordination between all of
those in the boat; between fiscal, monetary and prudential authorities. And
tonight what I want to explain is the Bank's contribution to delivering a
durable expansion, one that's characterized by balance in the macro economy, and
the housing market, and in the financial sector. But before I do so, I'd like to
join the Chancellor in paying tribute to two outstanding colleagues. The first
is Sir David Lees, who as Chair of Court, has overseen the transformation of the
governance and responsibilities of the Bank. I'm also enormously grateful for
the wise counsel of Charlie Bean throughout my career. And Charlie is always
working, so he is tonight, discharging his duties as President of the Royal
Economic Society. Although I have to say, I find it curious that their meeting
started about 35 minutes ago and is taking place in front of a plasma TV. Now
throughout his career at the Treasury, in academia and at the Bank, Charlie has
pursued macroeconomic balance. Internationally he has inspired countless
policymakers. So on behalf of colleagues past and present, I would like to echo
the Chancellor in thanking Charlie for his exceptional period of public service
and the enormous contribution he has made to the economic well-being of this
country. Now as for Mr. Cunliffe, a dangerous and insane colleague, at least
that was the verdict of Montagu Norman and I for one is reserving judgment for
the moment. The British economy is currently unbalanced internally and
externally. Internally, there is wasteful spare capacity concentrated in the
labor market. The MPC estimates this gap to be around 1% to 1.5% of GDP although
we caution against false precision given the uncertainties. Our current guidance
makes clear that we will set monetary policy to meet the inflation target while
using up that spare capacity. And this has implications for the timing, the pace
and the degree of Bank Rate increases. Now of course there's already great
speculation about the exact timing of the first rate hike and this decision is
becoming more balanced. It could happen sooner than financial markets currently
expect. But to be clear, the MPC has no pre-set course. The ultimate decision
will be driven by the data. And at this point it is safest to conclude, as the
MPC has, that there remains scope for spare capacity to be used up before policy
is tightened and that a host of labor market, capacity utilization, pricing and
wage indicators should be watched closely to determine how that slack is
evolving. Growth has been much stronger and unemployment has fallen much faster
than either the Bank or anyone else expected at the last Mansion House dinner.
So far this has been largely matched by indicators which suggest that there is
more capacity in the labor market than we'd previously thought. As a result of
these two welcome developments, pay increase and unit labor cost growth have
remained subdued. The MPC expects the rate at which slack is eroded to slow
during the second half of this year as output growth eases and productivity
growth recovers. But the challenge in deciding when to begin normalizing policy
is that actual output can be observed but potential supply cannot. And thus far
there are few signs of a deceleration in output growth whereas to assess
potential supply, the MPC is monitoring a broad range of indicators including
coincident ones such as wages and prices. Of course navigating just the upcoming
bend in the river isn't the end of the journey. The MPC has rightly stressed
that the timing of the first Rate increase is less important than the path
thereafter. In particular, we expect that eventual increases in Bank Rate will
likely be gradual and limited. And that is because the economy faces the ongoing
challenges of public and private balance sheet repair, a 10% appreciation of
Sterling over the past year, and muted growth in our main export markets.
Moreover, a highly indebted private sector is particularly sensitive to interest
rates. And caution over the path of rate increases once they begin is also
needed because we start from a point at which interest rates cannot easily be
reduced. The effects of an excessive or an excessively rapid tightening of
monetary policy could prove damaging and difficult to undo. It's perhaps for
these reasons that financial markets expect Bank Rate to rise to only 2.25% over
the next three years, and, on that basis, the MPC expects the economy to move
towards internal balance – almost closing the output gap – in the same
period. But just achieving internal balance won't be enough to guarantee a
durable expansion. It matters how we do so. Excessive reliance on consumption or
non-tradable sectors, such as housing, all financed by borrowing abroad at an
overvalued exchange rate would prove only temporarily satisfying. Indeed, no
circumstances I might start to think about booking my own passage back to
Canada. But at present, the UK's current account deficit is not a cause for
alarm. As the world and particularly Europe recovers, demand for our products
and importantly returns on our investments should increase. Not like in Montagu
Norman's time, our exchange rate will remain flexible. Nonetheless, borrowing
from abroad to consume at home is hardly a recipe for a balanced and sustainable
expansion. Borrowing to invest, to improve productivity, competitiveness and
incomes is. Creating the right conditions for our investment is thus essential.
And in a world of corporate caution, this will likely require interest rates
consistent with our guidance. But let me assure you that the Bank is well aware
that such a monetary policy stance could encourage other risks to develop. For
instance, there is evidence of growing vulnerabilities in financial markets.
Across asset classes, implied volatilities are well below their long-term
averages.
Spreads in high yield and peripheral bond markets have collapsed. And
covenant-light is the new normal. George, it says if everyone's on the fight
too, end joke. While the banking system is much more robust to spikes in
volatility, end investors may not have fully absorbed the extent to which recent
financial reforms will distribute shocks across the financial system. This may
be a case of still waters running deep which is often the most dangerous time on
the river.
That is why an essential counterpart of our monetary policy stance is
macroprudential vigilance and activism. Across the country, house prices – I
want to turn the bounce in housing – across the country, house prices have
risen by around 10% over the past year, approaching levels last seen in 2007
levels. Price inflation has broadened and accelerated across regions.
Expectation that prices will continue to rise are now most marked outside of
London. Underlying housing market dynamics reflect a chronic shortage of housing
supply, which of course the Bank of England can't tackle. Unable to build a
single home, we very much welcome the Chancellor's new measures to increase
supply. To be clear, the Bank does not target asset price inflation in general
or house prices in particular. It is indebtedness that concerns us. And that's
partly because over-extended borrowers could threaten the resilience of the core
of the banking
System. And it's also because an economic expansion is more precarious if
there's a large proportion of heavily indebted households. History shows that
the British people do everything they can to pay their mortgages, but means
cutting back sharply on other expenditures when the unexpected happens. And that
potentially slowing the economy markedly. That's why recessions that follow
rapid credit growth tend to be deeper and longer lasting as we've just seen. It
is for these reasons that the Bank of England's FPC is mandated to address
systemic risks arising from unsustainable levels of debt, leverage or credit
growth. In this regard, as I said at the outset, the UK starts from a vulnerable
position with household debt still at 140% of disposable income. There are some
signs that underwriting standards are becoming more lax, with the proportion of
new mortgages at high loan-to-income ratios now at an all-time high. But durable
expansion requires mortgages to be serviceable over their lifetime not just when
interest rates are at record lows. The challenges that the vulnerabilities
associated with debt build over much longer periods than the ups and downs with
which monetary policy is usually concerned. In that sense, the credit and
business cycles are distinct. Using monetary policy to target indebtedness would
risk undershooting the inflation target and damaging growth. For all of these
reasons, raising interest rates today would be the wrong response to this
potential vulnerability tomorrow. Fortunately, we are not up the proverbial
creek without a paddle. We have many of them, we've just been given more, and we
can use them to steer towards two objectives. The first is to ensure that the
banking system is resilient. And that's why the Bank is conducting a stress test
to assess how our major banks and building societies can withstand a sharp
housing market correction during a prolonged and painful recession. The results
and any consequences that flow from those results will be announced later this
year. The second objective is to reduce the risk of excessive indebtedness
itself by taking out insurance. Given recent experience, few can now believe
that the right policy is to wait to mop up the consequences of debt-driven
busts. And that's more obvious, even more obvious when Bank Rate is at its
effective lower bound. In other words, when you hear the thunder of the falls,
it is wise to get off the river. Measures to take out insurance can be graduated
and proportionate if action is taken sufficiently early. We can limit risks
tomorrow by acting today against a loosening in underwriting standards in new
mortgage lending today. The value of acting early is reinforced by uncertainty
around the precise impact of macroprudential tools. While these have proven
effective elsewhere, they are still relatively novel here. So by acting,
assessing, and if necessary re-calibrating, we are more likely to strike the
right balance to support durable growth over the medium term. That's why
authorities have already moved. Last autumn we took our foot off the accelerator
by removing capital relief for banks on new mortgages and, with the Treasury, by
re-focusing the Funding for Lending Scheme away from mortgages towards business
lending. Those steps were followed by the implementation of the MMR in April to
reinforce banks' underwriting standards and, by the stress test I mentioned
earlier, it's designed to underpin banks' capital discipline. The FPC has a wide
range of other tools that it can deploy if action is justified. We can direct
lenders to raise capital held against mortgages or against all credit. Thanks to
the FCA, we are now able to recommend a tougher interest rate stress for banks
when those banks assess affordability. And we can also make macroprudential
recommendations about the share of high loan to income, high loan to value and
long tenor mortgages in banks' new lending. And in this regard, I applaud the
Chancellor's intention to grant the FPC additional directive powers in relation
to these aspects of mortgage portfolio composition. And I welcome his commitment
to adjust the Help to Buy Mortgage Guarantee Scheme to comply in full with any
future FPC actions. As was mentioned earlier, the housing market isn't the only
market at risk of losing balance. Confidence in some of our core financial
markets has been buffeted by revelations of manipulation of interest rates, FX
and commodity benchmarks. There have been too many episodes to think each is an
aberration. So we are working to restore balance through reforms based on the
firm belief that the City's strength is founded on markets. To restore the
primacy of true markets, authorities are already seeking to align risk and
reward by developing a new remuneration code, and we're working to end too big
to fail. And I want to thank many of you in this room who are working hard in
the private sector to make this a reality this year. But as the Chancellor
stressed earlier, we must do more. Recent events have shown the need for
measures to ensure the fairness and effectiveness of our core markets. And
that's why I welcome wholeheartedly the Fair and Effective Markets Review
announced tonight and to be led by the Bank's new Deputy Governor, Minouche
Shafik. And what's the point of this? The point is that through this Review, we
will build true markets: Markets that are open and transparent, markets where
access extends beyond a privileged few, markets where all who wish to trade have
common information and commonly accessible prices, and Markets where the
informational integrity of key benchmarks is beyond question. Some of this will
require changes to the way markets work, including how benchmarks are calculated
and greater pre- and post-trade transparency of standardized derivatives. Some
of this can be delivered, as the Chancellor announced, by bringing more
activities within the scope of regulation. And some may require new codes of
conduct as the Lord Mayor alluded. Broader efforts to raise standards in banking
by the new Banking Standards Review Council will be complemented by specific
codes for professionals who work in markets. For those in markets we need a
simple approach which recognizes a fundamental principle of the City: namely
that true markets are the source of dynamism, prosperity and progress. On the
other hand, seeking to manipulate, to game or profit from unfair markets
transgresses this fundamental principle. It weakens the effectiveness of markets
for all. And it holds back prosperity. It should thus have clear consequences,
including professional ostracism. We must work together to ensure that everyone
on every trading floor understands that dealing in a market means serving the
needs of clients, investors and customers fairly and effectively. And that's why
I joined the Chancellor in being delighted that one of the City's most
experienced and proven leaders, Elizabeth Corley, has agreed to chair a panel of
market practitioners that will inform this Review. Now, recognizing the
centrality of markets doesn't mean that the Bank has a naive faith that all
markets always function smoothly. We don't live in a textbook. We all know that
real markets can seize up in crises of confidence, threatening financial
stability and the wider economy. So just as there will be times when central
banks must backstop the banking system, so too will there be times when central
banks should backstop core markets. And that's why the Bank of England
transformed its Sterling market framework for banks last year. And that's why I
can announce that we will widen access to include the largest broker-dealers and
the major central counterparties. And that's also why we'll examine whether we
should further develop our capacity to lend in currencies other than Sterling.
So allow me to conclude. As tonight's announcements demonstrate, promoting a
durable and balanced expansion will sometimes require coordination between the
Bank, the Treasury, other public authorities and the private sector. On the
other hand, often the Bank will have to act on its own but in a way that uses
all of its tools in as complementary a fashion as possible. As I have discussed,
the FPC is considering using macroprudential tools to insure against potential
vulnerabilities associated with the housing market. Doing so would reduce the
need for monetary policy to be diverted to address a sector-specific risk.
However, macroprudential policy is not a substitute for monetary policy. If
macroprudential policy is used for insurance, it won't necessarily alter the
path of interest rate increases. The need for internal balance, that is the need
to use up wasteful spare capacity while achieving the inflation target will
likely require gradual and limited interest rate increases as the expansion
progresses. And the start of that journey is coming nearer. Unlike a canoe trip,
the quest for economic balance never ends. With economies and markets always-
they always move between equilibria, and in doing so, it's really about the
journey. And by working together we can make sure that journey is as pleasant
and as prosperous as possible. Now, the need to work together extends beyond
policymakers to all in the City. And that's why I'm delighted to take up the
co-presidency of the Heart of the City with you, Lord Mayor. This umbrella group
for City charities, co-founded
by Eddie George 14 years ago, is a fantastic example of how cooperation and
social responsibility can be at the heart of business, building the social
capital necessary for vibrant and inclusive capitalism. Fiona, you are to be
commended for your energy and enthusiasm that you have brought to your role as
well as for the extraordinary hospitality you have afforded all of us this
evening. So let me invite everyone here to rise and join me in a toast to the
good health and prosperity to "The Lord Mayor and the Lord Mayor's Consort",
Fiona and Nicholas Woolf. Raise silence for the Right Honourable the Lord Mayor