Refinitiv Newscasts - BoE's Bailey speaks to lawmakers about financial risks 1

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19/01/2022 18:30

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Source: Reuters

Description: Bank of England Governor Andrew Bailey and other top Bank of
England officials speak to lawmakers about the BoE's half-yearly Financial
Stability Report, released in December.
Short Link: https://refini.tv/3ryHm50

Video Transcript:

>> The proceeding will start shortly.. >> The proceeding will start shortly.
>> And welcome to committee and our hearing into the Bank of England December
2021 Financial Stability Report. Very pleased to be joined by four witnesses
this afternoon. I'll ask them to very briefly introduce themselves to the
committee. They are all very well known to the committee already, but for
those viewing. And perhaps Sir Andrew, we can start with yourself please. >>
Andrew Bailey, Governor of Bank of England. >> Thank you and welcome. And Jon.
>> Jon Cunliffe, Deputy Governor for Financial Stability. >> Thank you Jon.
And Collet. >> Collet Bowe, external member of the Financial Policy Committee.
>> All right. Welcome Collet. And Elisabeth. >> Elisabeth Stheeman, external
member of the Financial Policy Committee. >> Welcome all. Thank you for
coming. Can I start with inflation? Andrew, I put my first question to you. So
we've just had the latest release for 12 months December, 5.4% a bit more than
the market. And some economists were expecting not wildly more, but a bit
more, 0.2%. >> 0.2%. >> Nonetheless, we are still we think on an upward
trajectory. And I think our own prediction is about 6% in April. Can I come
back to this discussion that we've had on this committee many times before
around transitory versus more permanent inflationary pressures. Particularly
in light of the latest data on the labor market, which once real wages appear
to be falling or have fallen in recent times. Nonetheless, is very tight at
the moment, I just wonder if you could just share your thoughts on that to
start with. >> I'm happy just to put it into a bit of perspective, we are just
really as of yesterday actually and the early stages of doing the next
forecast on the next monetary policy report. And obviously we'll be publishing
those two weeks tomorrow, that's right. I think we've got a hearing in about a
month, just over a month's time. >> Yeah. >> So I can't comment on that at the
moment, but what I can happily do is put it into the context particularly of
the decision we took in December. And might draw out one or two points from
that. I think it's important. Liked I'd asked quite often actually, well, how
long is transitory? To which the answer is, there isn't a fixed length of
time. I think it's more of a description of a condition if you like. And
you're right to say that, there are some aspects of this inflationary pressure
that ought to be transitory. So the two of them ought to be transitory. One
related to commodity prices, including energy prices, but I'm going to come
back to that in a moment. The second one ought to be transitory, is related to
global supply chains that is, and might come back to that briefly. Those are
what sometimes gets called first round effects in inflation. Second round
effects, which is where we particularly come in. They're things that if you'd
like, build off that. And I'll not certainly going to go a way of their
involution as it were. And I'll draw two things out there that can cause those
and they are closely related. One is inflation expectations, which can become
embedded with higher expected inflation expectation. The second one is labor
market. In the labor market, often it's related to obviously the effect that
can run through inflation expectations into wage bargaining. The points I draw
out, particularly here and it was really I would say certainly in my mind in
terms of the interest rates increase we did in December. Yeah, very prominent
in my thinking and something we had discussed in this committee previously, is
the pressure in the labor market. And let me draw out a couple of points
there. We'd over see ourselves, we're quite uncertain about the effect of the
ending of the furlough scheme. Not least because of the number of jobs that
were furloughed right up to the end of it, which was a lot more than we
thought they would be. But I think we've now seen the evidence and frankly,
the ending of the furlough scheme did not have any real impact in terms of
certain impacts. >> That's a judgment call that you got wrong in terms of then
thinking about what you might do about interest rates? [inaudible 00:17:35] >>
Well, that's a hindsight judgment I will be saying so. I mean, we wanted to
see the evidence one way or the other of the end of the furlough scheme. It
was obvious by December we can see that evidence, that it wasn't leading to
any dislocation in the labor market. And that was an important point behind
our decision to raise rates. The second point I'd make about labor market and
this is treated like, it is very tight in terms of labor supply. I'm sure you
get it when you discuss it with businesses in your constituents. I get it when
I do, because it's around the country it's the first, second and third thing
that businesses want to talk to me about, which is the labor supply. It is a
very tight jobs market at the moment. And it's interesting just , I'm going to
be very brief, to look at what's driving some of that. As we can see from the
numbers that were issued earlier this week, unemployment is now broadly back
to where it was pre-COVID. Inactivity, which is people who don't have jobs,
that are not searching for jobs is higher [inaudible 00:18:47] interestingly.
And it's now concentrated amongst older people who've withdrawn from the labor
market. We don't know frankly, whether people are going to come back into the
labor market or are we going to retire earlier than they perhaps anticipated
they would, but participation is down. The public sector has expanded. So
that's creating more competition. So public sector jobs probably about 400,000
higher during the course of COVID. The total labor force we think, it's not
easy to measure, but we think it's probably smaller than that, was anticipated
it would be by now. And I would say we can't I'm afraid, separate out the
effects there of COVID and Brexit, because they both are probably restricting
the inward supply of labor, but we don't know frankly what the effects are.
But if you put those things together, you can see that it is a very tight
labor market. And that obviously is a concern, because it's good news from the
unemployment point of view sense, I don't suggest otherwise, but it is putting
a lot of pressure on the labor market. It has got the potential to put a lot
of pressure on earnings [inaudible 00:20:13] negotiations. If I could finally
come back to the energy point on transitory, the other thing that has happened
and this has happened really actually since we had our December meeting. I
mean, wholesale natural gas prices are A, very elevated, so they're somewhere
between 3.5-4 times the level pre-COVID. They're very volatile. >> Over the
Christmas period, they were at one point, this is the price I think, they were
laid 200 pence per firm and no point there were 400 pounds from it is a very
volatile market. The thing that has changed and I would emphasize is that when
we were lost tip over them, certainly when we did the November and monetary
policy reports. The profile of market prices of natural gas, had it coming off
really next summer. It started to go back in the market pricing towards where
it was before COVID. Now, it doesn't come off until, middle of next year,
towards the tail end of next year. That is quite a big shift, and of course
it's relevant to your point about transitory shocks that has a much longer in
terms of market pricing, elevated price of natural gas. You know am not expert
and that Mark, he asked me, what's happened in that period that is costless. I
when I would frankly, I wouldn't mention that obviously the attention on the
Ukrainian border with Russia in this I think is the thing that has really
elevated join that period. That is a concern, I have to be honest with you.
That is a very great concern because if we're going have a more elevated
energy price. The oil price is also applying itself about 12 percent since
install to the share. It's installed in January, so that's another, it
contributes. If you think about this relationship between transitory and then
these second round effects that can make it much stronger, that's again as a
source of pressure in this story which is a concern I have to be honest with
you. >> Yeah. >> I'm sorry, for the answer. >> No, it was worth listening to.
I'm on the labor market point two, it is obviously tight as you say. What are
you picking up in your surveys and the data that you're looking at there? Is
there anything that's suggesting that wage price pressures might start to
emerge?. >> What we're picking up? The earnings numbers are very noisy because
there's a lot of base effects from now, she ever fallen off and I'm sorry. But
what we pick up? The circle quit rates has gone up, so in the people moving
jobs has gone on. Can you see the same thing in the US? There is, I think
certainly when I talked to firms and employers, they talked about evidence of
people moving to as a route to increase earnings. In terms of pay settlements,
the lost numbers I Look at were interesting because they suggested quite an
increase in the dispersion of pay settlements. By which I mean, some pay
settlements are very elevated and some are not, and the dispersion has got
bigger than it normally is. Now that may not be surprising because what that's
telling us is that there are particular pockets of the economy, in particular
pockets of the labor market which are very tight, and others which are perhaps
less tight. What are would say with the quit right points and it's turnover
points. And I think we probably, I mean, I think we said there's an awful lot
of organizations say it is that if that leads to a situation where you've got
people within your organization doing broadly similar jobs but if they've been
hard recently, they're on a different level of pages and knots. I mean, you
can withstand that pressure for so long and then it does get difficult within
an organization once people work out well, what are the people running? That
does tend to again, the risk is that it leads to an upward drift. >> I guess
that you've got, you've got your hotspots in the labor market where high wage
increases are occurring, and then this is a question as to whether that spills
over. Perhaps street. >> Is inflationary. >> Expectations being the anchor
doesn't work. Do you see any evidence of that? Usually it's something you're
concerned about or do you? >> Yes, I am concerned about. >> I know
theoretically who said that clearly. >> Yeah. >> But it's a real concern about
because you're saying that wages might more broadly, I think more difficult.
>> I think there was a there was a concern that can happen. Yes. I don't
think. >> What we're trying to say concern, what is it that you want to? >>
One source of what drives that is the evidence we get from our regional
agents, who actually are in the process. They do an annual survey of this like
currently in the process of doing it's actually what they I think they told me
at the moment they are beginning to see some evidence of this. We'll be able
to pull this together and obviously refer to it and I'll publication, so I
would imagine about time we have the hearing February, we'll probably have the
results of that amount. >> Does that mean that the bank's current view, which
is always shifting, I guess there's more data becomes available is shifting
more towards feeling that wages might be more broadly taking off in a way that
you hadn't hit the two. >> Be careful not to preface this because by saying
none of what I at social early stages around that, nothing I'm going to say I
should be taking away anybody's listening as a view on how I intend to vote.
Because it would know when they're making, they're making videos on. There's
an ultimately goes in the opposite direction. Which is if this is a hard thing
to say, but it's been obviously in the news quite a bit recently. If you get
pressure on cost of living, pressure on real earnings that will tend to
restrain demand and the economy. This is the argument that higher inflation
does actually restrained demand in the economy and nonsense that could lead to
an output gap opening up. It could eventually of course, leads to higher
unemployment and that would bring inflation back down again. That's always,
that's happened before, I mean, it's not that has happened before. Not
obviously an easy thing to contemplate, but it is one root by which it can
happen. I don't want to suggest that therefore, we don't know what are we to
consider it necessary. We don't have to take an action in terms of the Bank of
England section on interest rates, we were those who judge that ourselves. But
there is another channel there which we can demand in the economy. >> Can't
bring keratin. >> Because it is on the market pressures, and I can appreciate
that going into the end of the furlough scheme that you didn't know what would
happen. But now it has happened, I noticed that the top story yesterday on the
BBC News was being collectors in Eastbourne had gone on strike asking for 20
percent and they'd settled for 11 percent and 20 percent over two pay rounds.
These are really significant. >> Yes mum. >> Precious, and now that they are
evident and that we can see that redundancies are at a record low after the
end of the the furlough scheme, I think it will be harder for people to
forgive the bank giving Loan for not acknowledging quite how significant some
of these pressures have become than it has been up till now in the
unprecedented conditions that we've found ourselves. >> I don't want please
don't think that we don't think these are serious pressures I know. I dont
want you to think that at all. I would just come out to what I said also about
how this reflects on the labor supply. Mrs. say this is a very tight labor
market in terms of a balance between demand and supply. >> Would it be a fair
summary of our discussion to say that the banks view of the likelihood of
wages taking off in an unhelpful way more broadly, has been sharpened in
recent weeks. >> We're about to go into detail on this in the forecast process
literally. So again I'll be in much better place to answer that when we come
back in February and can answer that question in the context of the report,
the decision, and the forecast. >> Any other members of the panel want to
comment on any of the issues we've just discussed? Yes, Kenny, please. Yeah.
>> Just Obviously the banks still central prediction for inflation. 24, 25 is
2%. Is that still the case based on what you're looking at now? >> I mean with
such an early stage of the forecasts that, I'm not going to move on from the
one we published in that sense. And of course, we have to then use the
forecast and all the other inputs to set policy to return inflation to its
target, which is 2%. So that will be the decision we have to take. There is a
reason why it tends to come back to steep sudden and obviously, that's the
objective. >> Professor Miles want to give evidence in his interview about his
role on the OBR, said he could see interest rate is going to have to go to 3.5
% to be able to control inflation. And that's a scary thought for many
households and many people are trying to budget. >> Yes, I wasn't and hear
what David Miles said exactly, but I would just say going the other direction
that there isn't a structural reason why interest rates have been in our as
low as they are and not just in this country, but actually in the world
economy. And we often talk about that in terms of the equilibrium real
interest rates. And it's to do very much actually with the consequences of
aging populations in the world and the balance of saving and the demand for
investments. Something to do with low productivity in the world economy as
well. And certainly our view is that we don't at the moment see developments
in the world economy oriented including here, which actually change that
structural story. So when I see people saying, well, we're going to go back to
the old days pre-financial crisis days, let's say. I think I would counter it
by saying that would require quite a change in the story on the equilibrium
interest rates and we don't really see that story at the moment. Now that of
course is not to say that interest rates won't rise, it's to put it into
context of how much. >> Angela wants to come in. >> Just wondering governor
whether you worry about the weakness of monetary policy given the interest
rate are so low. And whether you have the firepower to deal with the kind of
rising inflation we've seen, especially if it were to persist, obviously your
judgment today it is that it's going to be a temporary for a moment and then
it's going to come back down. But given the historically low level of interest
rates, do you think that monetary policy is going to be robust enough to deal
with any unexpected persistence of inflation going forward? >> In a way it's
an asymmetrical story. We've got obviously far more potential to raise
interest rates in terms of their starting point without obviously getting the
issue that we get it the other way on the lower bounds question. I think the
issue that I'll come back to there is a slightly different version of that
issue, which is number of these important underlying issues as many
commentators say monetary policy went to dress. So I'm afraid we can't bring
the gas price down. Labor supply we can always say monetary policy will have
an effect on the balance of supply and demand in the economy, but in terms of
the supply of labor in the economy, that's not meant to. We can do some things
there, but we can't affect more structural things. And again, in terms of
global supply chains. Obviously, it's not something anybody's monetary policy
is going to directly affect. >> Do you also plan or worry about QE and the
level of it and when, if, and when that begins to unwind, how that will affect
the way that you deal with inflation? >> Well, we spent a lot of time on that
question over the last year or so. And what we announced last summer was that
when bank rate gets to 0.5%. So another 25 basis points. Our intention is to
cease reinvestment. In other words, to start the natural unwind. And whatever
point when and if it gets to 1%, we will transfer it, we will consider the
case for active sales. Now I would say this in terms of that is a tightening
tool. Our view is the QE is quite state contingent in terms of its effect. So
it works much better in some states of the world than others. Particularly
works when you've got financial market disruptions as we had in March 2020.
Not that it doesn't work another we have more effect. Although we've got very
little experience around the world to draw on in terms of QTI constant
tightening about never done it. Starting from the principle I think it's
reasonable to think it probably is symmetric. We obviously would not decreed
teacher in period of financial instability. So if we're doing it in periods of
what I might call relative calm in that sense, the impact of QT is probably
going to be less than that sense. It won't be nothing but it will be less. So
obviously we'll factored it in, but I wouldn't if we're doing it in Michael
relatively normal times, it probably won't have that big impact. We certainly
can't rely on it too much then. >> Governor you were talking about
unemployment being a route to bringing down inflation. Obviously not from a
policy perspective, not a price worth paying. >> As an economics point. >>
Yes, or indeed even economics given precious in the economy. We've got more
less scope for migration to tackle the labor shortage and the pressures on
wages. The other thing that I just wanted to observe is that the inflation
rates already gone up without the wage pressures kicking in. So to associate
wage pressure to where we are now seems odd. If we continue in that
trajectory, then we could associate it after 10 years of wage stagnation.
Would it be appropriate to assign wage pressure as the reason why we are where
we are? >> We think, as I said earlier, there's a lot of noise in the wages
set against the earning data. But we think that best effort at stripping that
noise out that the underlying level of increases around 4-4.2% on how it's
been for one and that's quite high given the state of the economy we've been.
And so there is some pressure on that. >> Yeah. >> Also as we were saying, I
mean, whether it's an exponent or wherever, I mean, as I was saying that
you've got this very dispersed pattern as well of [inaudible 00:36:08] >> We
also have a vicious cycle of inflation then knocking off the value of the
negotiated wage increases. It seems like the bank is in a very tight corner
now, do you see a way out without policy interventions from government to
address these interacting challenges that you face. It looks like it's
actually going to be really difficult for the bank to be able to resolve this
without policy interventions or we can take the pressure of price increases on
consumers, for instance. >> We can and will do everything we can do on can
assure you of that. The reason I pointed to a number of other things, of
course, this is not something that's just for the UK. I mean, the gas price
story, which is a European story, is not somethimg we can do with, I'm not
saying the UK government could do with it. I'd say, but it is a very serious
issue in terms of the overall, it's a single largest contributor to it to
effect on the numbers of the previous was 5.2, we reckon it was about 1.5%
points of that what's coming in. >> The UK, government can take the pressure
off consumers who are facing the brunt of this sudden increase in inflation
and the cost of living pressure is [inaudible 00:37:23] >> The choices
obviously can be made. I know it's a very active debate at the moment. I agree
with you that the impact of this is something we do look at. Obviously, it has
a far bigger impact on level. It's very interesting. I was looking at your
ownership. If you type the family survey and you split it up into deciles, ten
tenths or sets of equal sets of by income. And then you look at the energy
costs as a percentage of the income [inaudible 00:38:02] is hugely isometric.
The lowest decile has a much bigger share of energy costs in its spending than
any of the others do. >> Thank you. I think we're going to move on. And I
should've mentioned earlier actually, there will be some divisions. We may
have mentioned that at four o'clock, so I think we're going to crack on pace.
And I'm going to go now to Kevin all solvency stress testing. >> Yes. Thanks
very much. Chair. Yes. Looking really probably address the questions, I said
John, initially, really, how much we can read into this stock solvency stress
test based on the amount of money that governments put in ways to support the
economy. How relevant that is. I think the FBC said that the banking system is
resilient to outcomes for the economy that are much more severe than the NPCs
for central forecast. But didn't really take into account when governments put
in huge amount of money, 0.5 trillion pounds with the money to support the
economy. How it can be read into the solvency trusted on that basis. >> It
might be helpful if I just explained rationale behind the solvency stress test
and then how much comfort, one can take from it. The solvency stress test is
not a normal annual stress test. At that point when we started it last year of
COVID crisis, what we wanted to know was not how the banks had fed over 2020,
where we'd large coupled support. But what would happen if there was another
really COVID hit as bad as the first one with no government support. So the
solvency stress test took the beneficiary positions of banks at the beginning
of 2020, applied. >> Pretty much another full COVID stress. So unemployment
goes up to 12%. The loss of GDP is double what had happened. The cumulative
loss is double what had happened up to that point. So we assumed if a vaccine
resistant variant that would cause us to go back into lockdown. The same
economic stress that we'd seen 2020. But we assumed no government support. So
the stress was really to test exactly the point, I think you're making, that
with no government support, and a second COVID stress of equal or greater
magnitude, which was not the MPC's focus. The MPC's focus was for the economy
to recover. But to go back into that recession short and sharp in the same way
that 2020 was, could the banks then handle that without government support?
And the banks started with a high level of capital at the beginning of 2020.
And they had the level of capital to pass the test with some to spare. So I've
seen comments that this test doesn't tell you much because of all the
government support. We deliberately turned off the government support and
turned on another very severe COVID stress and say, what would happen? You can
I think take comfort or we could then take comfort from the end of last year
from that position. >> It is your understanding then from that, that the banks
have the wherewithal to withstand that kind of economic shock? >> Yes. >> Any
other thoughts from any of the panel members on the same basis? Elisabeth. >>
Yeah. I'm happy to add to that. And perhaps also just a step back where stress
distinct came from. So obviously it's evolved significantly during the crisis.
Whereas as you will appreciate previously, we would have done an ACS, so an
annual cyclical scenario. We initially in 2020 did the reverse stress test to
see how much would certain numbers such as unemployment, GDP have to go down
in order for banks to get into difficulty. And then as Sir. Jon just explained
the solvency stress test, then took that one step further. Now that we think
that there's some normality coming back, we will return back to the ACS in
2022. We haven't set yet the parameters, obviously that's what the FPC gets
involved in to look at the different parameters and then decide what scenarios
we think we should use. And then together with a PRC, the Prudential
Regulation Committee we'll then look both macro for the FPC and then PRC bank
by bank. So that we'll come back to some, as I said, normality in 22. >> To
you, Andrew, in terms of scenarios, potential scenarios, a lot of these things
we've been talking about in terms of inflation and potential interest rate
rises are global issues, not domestic issues, inflation is higher in the US
than is here. What assessment have you made in terms of stress testing for a
global shock based on these issues, embedded level of inflation and interest
rates. >> All our stress tests they have global shocks built in, so they are
global scenarios, in that sense, so they all feature reduction in global GDP.
I would say that's relevant for two reasons. One is because actually the
coherence of the economic shock requires that, you can't really just
[inaudible 00:43:41] UK only shock. Second thing I would say is because our
banks have exposures around the world. As we all know, we've got two banks
that are particularly exposed to one part of the world. So we have to focus on
that. So we have to build global scenarios to run these stress tests, and
always have done. I would just say, as Elisabeth said we're going to go back
to an annual stress test this year because we have PC judged and it's last
round of meetings that we're back into what we tend to call a standard
situation. Broadly you can run two stress tests in terms of interest rates,
you can run what we tend to call the rates ups scenario where you obviously
stimulate an increase in rates. The 2017, '18 and '19 stress tests were all
rates up scenarios and they all have the property of taking the bank rate back
to 4% or to 4%. You can run a low for long scenario, which we have done as
well. We haven't finally decided what we're going to dish, but I would venture
to suggest that one of those two is much more relevant to the situation we
find ourselves in at the moment. So I would think we'll end up with the rates
up scenario, again would be my best guess. >> Looking at the scenarios you
considered, what scale of global recession is a possibility in the back of
maximum inflation and interest rate rises. At what level of global recession
would it take to bring about a banking crisis in the UK? >> Well, can I just
define what we mean by banking crisis? Because the way we test this, we're not
testing to insolvency because we want them not to get there. In fact, what we
don't want them to get is beyond the point where they can't lend to support
the economy. That is obviously a level quite well above any level of
insolvency. And that's what Elisabeth was saying. In the reverse stress tests
where we actually have to impose a level of loss into the system. We actually
use the 2019 calibrations, we have just over 5% [inaudible 00:45:56] off their
capital ratios. If you imagine, I think one we did last year, the starting
point for the banks because they had quite a high capital ratio. The starting
point was about 15.8 or something like that. And we talk about 5 point
something off and it came down to about 10 point something. Actually the
threshold is about 7.6, the so-called reference points. But we don't want them
going below levels where we don't think they can slowly become because that's
what financial stability is all about. Jon you want to come in as well. >>
Maybe two points. It's not just the level of the trough, how much global GDP
goes down, it's how long it lasts for. The stress tests we did up to 2019,
were pretty much modeled on a business cycle recession or actually the
financial crisis, where the recovery was very slow. That actually stresses
banks quite considerably for a number of years. The stress test we ran, the
one we've just run, the SST was much more COVID shock where you get a very
sharp drop in GDP so that the drop in GDP was 10% in world GDP in the first
quarter of 2020 in that stress test, but it recovered quickly. So 10% seems a
huge amount. And some people said, well, 10% is never happened, it was only 3%
in the global financial crisis. But of course, that then comes back very
sharply because that's the profile of a COVID type shock, which is what we
were testing against. In previous stress tests the drop has not been as great,
but it's gone on for longer. So it's quite difficult to give a number. You
have to give a profile for the test the whole way through. The other point I'd
make is, you can ask, why we're using moving from one to another? And the
answer I think is the reason we do the stress tests is to ensure that banks
are capitalized against the tail event. We've just had a tail event. Banks
were capitalized against it. You can say there was government support. We've
just run the experiment of turning off government support. So that's before
you hit a stress. When you hit a stress, if you then say we're in a stress and
we want you to be capitalized to a further tail event. So we're already in the
tail of probability and now we're going to a further tail event, we will be
asking banks to raise capital in the middle of a stress. And that is a way to
stimulate a credit crunch. So the decision toward the judgment for the FPC is
to what extent do I need to reinforce bank capital in the middle of a stress,
knowing the impact that will have on credit or to what extent do the banks
have enough capital to continue, as Andrew says, to support the economy? In
June 20, we did a very quick desk-based test against a scenario of COVID
because none of us knew at that point how long-lasting and deep COVID would
be. Three months later we did the reverse stress test. You mentioned to say,
okay, we think they are okay on that scenario. Now how much worse with COVID
have to get to exhaust their regulatory buffers? Then six months later we do
another test that says, okay, now let's assume another dip of COVID. And
that's how we navigate through the period of stress being able to make the
judgment that we don't have to ask the banks to raise capital. Because as we
saw in the financial crisis, asking banks to raise capital in a stress which
you may have to do really can result in a withdrawal of credit, which you want
to avoid because that then drives the economy down, drives more bad losses. So
that's how we navigated through the stress with different types of stress
tests to try and inform their judgment about, did they have the capital to
support the economy? >> One final question. >> Very quickly. >> Just on QE. I
think the IES at a presentation from Professor Condon and [inaudible 00:50:01]
yesterday, they were saying actually inflation has been driven by money growth
it's too high. It's been 6.8% now it's over 15%, it needs to get below 5%. Is
that your intention? >> Smaller we don't regard inflation as a monetary
phenomenon. But the history would tell the relationship to money growth and
inflations is not very good. We could debate this for hours. >> But lets not
do that. In short, sharp answer. Thank you very much, governor. I'm getting my
engineers. If you could cover both the countercyclical buffer and household
indebtedness in Mongo, that'd be great. >> Thank you very much. I'm going to
ask about the countercyclical buffer decision. At the beginning of the
pandemic, because of the uncertainties around COVID-19 variants in the
economic outlook, the Financial Policy Committee took the rate down from its
normal 2% to 0. You've now decided to increase that to 1% with the potential
for further increased to two. And in order to do that, you'd have to think
that the vulnerabilities which can amplify an economic shock to now at
standard level. Do you think that at this stage of the pandemic that that is a
correct judgment? And can you tell me a bit about what you brought to bear to
make that judgement? >> So strictly, when COVID hits, we had announced we were
going to move it from one to two, but haven't actually taken from the fact,
but we would've done otherwise. The decision we have to take in the last round
of the FBC and it was ended last year was, clearly from the point-of-view of,
I would say the banking system conditions high for its own. So what level of
formality in terms of they faced. Well, they took a very substantial
impairment provisions. I have not actually experienced large impairments. It
was like it meant to normalize points on the world's governments and action
involved in that as well. Moreover, the depletion of the bank's capital has
been very smart enough to know naturally. We were faced with a decision. Now
it seems like the right time to start to rebuild the buffer. I should say, by
the way, the banks have got this capital. >> Yes. So you're just asking them
to such a question? >> Yeah. The question really was do we go straight to two
or do we go as we did, go to one, but announce that if things remain as they
are, and we don't see another shock coming along our intention to go back from
one to two, to go the whole way? We decided to do the second largely because
Omicron started come on the horizon, and there was uncertainty stairs,
residual uncertainty about obviously the perfect COVID thereafter. But it was
very clear, I think speak to your messy that we wanted to give a signal at
this point that unless there is a bad outcome that we say we will go to two.
So it was deliberate, take it into stages, but give the signal now that we're
going to the second stage unless. >> You are likely to do that in the second
quarter. >> Yeah. >> What sort of thing happening would make you perhaps look
at that again? What things would you be thinking of in terms of keeping an eye
on before you make that final decision? >> I think we've come up some of the
events were suing the stress tests, for instance. It would have to obviously
disturb the performance of the banking system for foreign economic shock. >>
So John, did you have something? You've ripped your mask off? >> Quite
difficult with the mask. >> Very subtle really. >> Hopeful they are going to
get. It was quite a recent decision to run in a standard environment with a 2%
CCEYB. But the reason is that you don't always have warning when a crisis is
going to strike and you want to have some capital that you can release if you
get a sudden shock. That was the reason for 2%. It turned out that the shock
didn't, as Andrew said, didn't consume back capital because of government
support, because of vaccination, because of other things in the way that one
might have thought in March 2020. But of course, we also have to tell the
banks when we're going to turn it or the earliest point at which will turn it
back on again. Because if they feel we're just going to re-impose it quickly,
they won't use that capital to maintain lending. They'll actually say, well,
it's going to come back in six months time no matter what the Bank of England
says. >> It's a very blunt instrument, that you have to get the timing of the
buffer. The bank's executive director for prudential policy, Vicki, supporter
recently said that there may be stigma associated with the use of a regulatory
buffer that banks are unwilling to be seen to be dipping into it. Does that
mean that the whole concept of having a buffer is not as effective as you
think it should be? And are you worried about that? >> For the countercyclical
buffer, it's the opposite. It's because we release it. And it is no longer a
requirement for capitalists available to banks. There's no stigma. They all
automatically have. The 2% is now no longer required for regulatory purposes,
and they can use it. For the other buffers, the capital conservation buffer in
particular, there, I think there is some evidence that a bank can dip into it,
but it's an individual bank that takes that decision. There're I think there
is some evidence that stigma and nobody wants to be the first. To do that
means banks will defend the capital ratios above the buffers, which if you
like, they control. But the great advice and one of the reasons for putting
more into the countercyclical buffer is it takes away that problem because we
just really sit for the system as a whole, and there is no stigma. But I think
for the other buffers, whether they are usable to support lending is one of
the questions I think that has arisen during this crisis in which
internationally is being looked at. >> And perhaps you could answer this as
well, Elisabeth, listening to Sir John's explanation, which makes sense. Does
that mean that actually there's an argument for having larger countercyclical
buffers to ensure that there's a more of a capacity in a more volatile world
to respond quickly without putting particular bank to under stress or pressure
from their shareholders? >> Am happy to have a go and then let always come in.
About I think almost three years ago, we went through process of just looking
at how buffers have evolved since the financial crisis. We realized that it
actually takes quite a long time for banks to build buffers. And that's where
the original discussion came in from thinking that actually really the
standard level should be at 2%. And such onset, it's actually something which
can be released very quickly. So the point I was going to make, which took me
some time to get my head around, is when you're building the buffer. So given
that we said and December '21 that we wanted the buffer to go up to 1%, it
actually has a one year time lag. So the 1% would only come into effect
December '22. If we were to then bring it up to 2%, say from second quarter,
again, that would take another year. So it takes quite a bit longer to build
the buffer, releasing, we could do at anytime. As you see, second half of
March 2020 where we released the buffer to 0, and then immediately the capital
was available and could be lend to the economy. So I think it's a really
interesting question whether countercyclical buffers should be higher because
to some extent, they are more flexible in terms of being able to release them
much faster hence no one stigma or less stigma. >> Another was an issue within
that as to whether we should raise the countercyclical buffer on its own, or
whether actually we should look at the composition to John's point, it's
actually out there, whether we should look at the composition of the buffers
as a whole and say, yes, they would be more useful if they were consolidated
into account countercyclical to counter that. John said it's already now
subject to international review. We're giving the numbers on the stress test,
when I said, well, the banks started with, I think 15.8% weekly stress test,
took 5.5 off to leave them with 2.4. I think it was a template form, sorry.
Now, you could welcome back at me and say, well, implicit in there as an
assumption. And I said that the whole point of this is to ensure they continue
to lend. The implicit assumption is that they're prepared to say 5.5 go down
and continue to lend because if they're not protecting these buffers, then
there's an obvious flaw in the process. >> If I may Joe, I was just going to
make another point in response to Angela's question. Angela you said something
about the CCU-IV is a bit of a blunt instrument. I was at that time a new
member of this committee when the pandemic struck. And I was very interested
to see that the bank had the ability to release this order, the release of
this buffer immediately. In my book, that's the definition of quite a sharp
instrument. Actually, for a central bank. It's not a particularly blunt one,
it's something that you can do like that. So I just want to put that bit of
Newell Thrones around this discussion. It's something that the bank can do at
speed, which means it's an important part of its crisis response toolbox. >> I
just want to ask one more question. I'm conscious of time and it's about
household indebtedness. And given that there's a cost of living crisis looming
very fast and large in front of all of us. We've seen a lot of evidence that
low-income households have been increased their debt burden in recent years
and then in fact, also suffered much more than others in terms of income loss
and indebtedness during the pandemic. Is there any sector of the financial
system particularly exposed to increases in this indebtedness amongst
low-income households? And do you worry about that from a financial stability
point of view? >> I would say that it's most, first of all, is the consumer
credit industry. So the evidence from economics would suggest that households
will prioritize mortgage payments servicing, or rather their servicing. So
that would suggest that it's consumer credit that is more exposed elements so
there is nothing history would enforce that. >> Thank you, Joe >> Thank you,
Angela and Joe. >> Joe, can mortgages. Following a recent review, the
financial policy committees proposing to consult in the first half of this
year on withdrawing it's affordability test recommendation while remaining the
loan to income flow limit recommendation. What exactly from this reviewing
comparison to the other three carried out previously, led you to conclude that
the affordability test was less effective? And what are the timetable for the
consultation and what responses are you looking to receive? >> Well, I have to
solve this for others can come in. I mean, put simply, we review the housing
tools frequently. And the reason for that is because they obviously have a
much more direct impact on people than the counter-cyclical capital buffer,
for instance, which is a bit removed from everyday life of people. So we're
very conscious that these things actually have direct impacts on people, and
therefore, we feel it's our responsibility to review their tools, pretty
frequently which we do. The points I would draw out is that we introduce these
tools, I think I'm on saying in 2014, we've now got more evidence to draw on.
Particularly more evidence to draw on on the question of what is the
additional benefits of the FPC having it's own affordability test over the two
other elements of this structure. One is the FPCs loan to income flow limits
and the other is the FCA is consumer protection mortgage affordability test,
which is a lower level. And we concluded that the marginal additional
contribution of the affordability, to our affordability test is not very
large. Amongst the two tools we have as the LTI flow limit, that does the real
work. And the combination of the flow limit and the FCAs, consumer credit
affordability test, really got his most of the way there. So that's the basis,
and depending that is a view that we do have to obviously regulate
efficiently, we actually have a duty to recognize efficiently. And so
proposition that we've put forward is that we don't think it adds enough to
warrant having it on it's own. >> Test data points. As to what we learned over
this period, and why we didn't learn it in 2016 or 2017. I think this question
of the role of the affordability test was coming up in the last review before
this one, and we decided to wait a bit. First of all, the affordability test
is keyed off reversion rates. So when you come to the end of the mortgage,
you're supposed to be able to withstand a 300 basis point increase on the
reversion rate when the mortgage was set. And even though mortgage rates have
come down, the spreads between mortgage rate and bank rate has narrowed,
reversion rates have proved remarkably sticky since 2014. So they're still
running at about 4%. If you take out a mortgage today, you might take it out
at 1.6 or 1.8 on a 80% LTV, but your reversion rate is 4%, which is where it
would have been when the mortgage rate was much higher. We don't know how
banks would respond if interest rates go up. Will they put the reversion rates
up in lockstep or will they still stay at 4%? So this question of the behavior
off reversion rates means the affordability test, it's stringency is
unpredictable because it actually depends on the behavior of the thing it's
based on, which we can't determine in advance. And that's become more apparent
over the period as mortgage rates have changed, we've just seen the stickiness
of the reversion rate. The other thing is we can't observe the affordability
test directly because it's kind of millions of decisions about individual
borrowers. And it takes into account the income of the individual borrower,
but also their expenditure commitments stand on individual basis. We've had to
put together information from a number of surveys, wealth and assets survey,
the English Housing Survey, and build quite complicated models to try and get
at what the affordability test is actually doing. For those of you who have
lots of spare time, I'd refer you to the one of the section, the FSR that sets
out how the modelling has worked and the different stresses we put it under to
try and get a view for that. But we really needed a run of years to be able to
do that. And we needed, we're using survey data. Now somebody's a couple of
years old, which we didn't have obviously a couple of years ago because the
surveys lag to some extent. So it's a combination, I think of just seeing how
the banks have behaved over the period. And then just having the
comprehensiveness of information to put together the modelling to do something
which we can't observe directly. Whereas we can observe the 4.5 limit directly
because we know how many mortgages, are 4.5, how many not. We don't know how
many people have been turned down on the affordability test or how it's
applied to individuals. That's really why we've had to wait until we've had
this body of evidence. >> One in 10 adults owns a second home, while four in
10 don't own their first. What impact do you think that low-interest rates and
high deposits have on the housing market for first-time buyers in comparison
to those who are already homeowners? >> The biggest constraint on first-time
buyers is the deposit and the size of deposit has increased markedly over the
last 20 years and the reason the size of deposit has increased is two reasons,
one, because house prices are growing faster than incomes and therefore the
number of years you have to save out of your income for a 5 percent deposit
has grown and the other reason, I think is there have been periods when 95
percent mortgages and above have not been available. Obviously, if your
mortgage is 80 percent, your deposit is four times as great, it's going to
take you four times as long to save. We published some charts, if you look at
what happened in the two great periods of housing boom in the UK, so the
period from the mid-'80s to the early '90s, and then the period from the late
'90s to the financial crisis, it's in those periods when house prices are
growing at double the rate of incomes that you see the decline in first-time
buyers and you actually see the decline in homeownership as well. Since we
introduced the tests in 2014, the market's been stable. I should say there's
many reasons why the market has been stable, but there's some evidence to
suggest that some of it is to do with the housing measures in the way the
banks have implemented them. I'd say that the biggest constraint is the
deposit, not these particular tests. The reason why deposits are out of the
reach of first-time buyers is the growth of house prices relative to income
and actually as I said, since 2014, we've seen a much more stable period,
we've actually seen the share of first-time buyers in mortgages rise slightly
for the first time, but the decline has stopped. So this is really, I think, a
question of the affordability of housing and the role that the necessary
deposit place in access to housing. >> Do you think the stamp duty holiday
announced during the pandemic helped or hindered the divide between those who
own and those who don't? >> I think we'll have to see what happens to the
housing market going forward. We've started to see an increase in house prices
three-quarters of the way through 2020 and at the time the question was how
much of that was to do with stamp duty. It now looks we've put out some
research on this that a fair proportion of the increase we've seen in house
prices has not come from stamp duty, it has come from changes in people's
housing preferences, the so-called race for space, the preference for houses
over flats, the preference for areas of the country away from the normal areas
of house growth, like London and the Southeast , towards other areas. But
clearly, some of the pressure on the housing market in that period also came
from the stamp duty holiday and you can see that in the rush to get
transactions through or not. >> The reluctance on the part of the banks to
provide 95 percent mortgages given the amount of work that is involved in them
trying to get through the end date for the scale before all putting pressure
on those who have against those who don't. >> I'd say one thing about the
banks though, at a period when you didn't know what was going to happen to
house prices because we didn't know about the pandemic or government response
to the pandemic, how long it would last, clearly banks preferred to have a
bigger equity cushion when they lend an 80 percent mortgage than a 95 percent
mortgage because if you get as in our stress test a 33 percent drop in house
prices then the bank is much more at risk. But I don't think we'll know for a
number of years what role the stamp duty holiday played, I think the market
had effectively shut by the middle of 2020, so you can see the reasons why
from a government point of view trying to smooth the path of the pandemic
seemed a sensible thing to do, but how it's affected the market I think we'll
only know when we look back over a couple of years. >> We saw a withdrawal of
high LTV lending value banks in the early parts of the COVID crisis and then
actually a pretty strong return of it last year. >> Sorry Chair, if I could
just quickly add to Chivon's question. By the way, this isn't either really a
financial stability point, so I'll comment on government policy. But it is
undoubtedly the case that for renters who were trying to get a deposit and
everything else together to get onto the housing ladder the stamp duty holiday
must have helped. My colleague John has just given you a very learned account
of what the research has shown us and everything but I think we probably all
know anecdotally that for a lot of younger people who were desperate to get
into the market, undoubtedly the stamp duty holiday helped them. Now, whether
long-term, that's in a good, bad, or indifferent, I'm not sure, but certainly,
when you look at the problems that those younger people have trying to get a
deposit together, particularly in London and the Southeast, it must have
helped. I think that was part of the underlying thing of your question, wasn't
it? >> I have a different point of view. >> Right. >> I believe that banks
withdrew those mortgages that particularly helped first-time buyers because
they had so many people who already own their own home who wanted to take
advantage of the stamp duty holiday to buy their second home or buy a home
that suited their needs as they perceived them more, and therefore the
availability of the mortgages that supported first-time buyers reduced. >> As
John says, time's going to tell, but I think we ought to keep talking about
this because this is obviously one of the biggest issues facing, not just
people like us worrying about financial stability, but facing all of us when
we think about what's happening to our young people. I'll stop doing this
short-term and about young people much. >> Thank you very much for that. Thank
you Chivon. Quick question on this topic. >> Just a follow-up question on
housing, I've had a long-term interest in homeownership rights and housing
economics. I just want to follow up the point that Sir John made about the
main barrier for the first-time buyers is increase in deposits and increase in
deposits is because of higher house prices, but also because of fewer high LTV
mortgages. Now isn't the reason for fewer higher LTV mortgages partly because
of the capital restrictions imposed on banks and there are other factors and
Andrew mentioned about the change in COVID came in? But isn't that part of the
reason if the requirements on banks to be more financially stable? You can
answer if you want but he was the one talking. [inaudible 01:15:38] >> In
short, isn't potential policy part of the reason why we've had a decline in
home ownership rights? >> I think, yeah, but I'd say potential policy is one
of the reasons why banks can withstand a big shock to their mortgage books.
One of the reasons why you go into this crisis with stronger banks than
otherwise. We haven't put any limits on loan to value, we leave that to banks
to decide. But I think the withdrawal of loan to value, and you see this in
the after the great financial crisis, the withdrawal of high loan to value
products following an economic shock is not so much to do with bank capital,
but much more to do with banks being concerned about the equity cushion that
they've got. So 2009/10, the mortgages at 1995 and above, there were some
crazy ones of course before, but those get withdrawn very sharply. And I think
the withdrawal that we see in the first nine months after the COVID shock is
very much a withdrawal to do with. >> But doesn't prudential policy
incentivize that now in a way that it didn't? >> I'll put it the other way
round and say prudential policy and banks and risk management now recognize
the risks in housing. And so they don't take the losses on housing that
they've taken in previous episodes. >> I wouldn't just want it to
observations. We touch wood. We've come through and of course, severe,
obviously economic shock and not had a housing crisis in the mortgage lending
crosses, which isn't true of the pulse. Secondly, I mean, as you know, we are
still dealing with mortgage prisoner problems created by some of these lending
practices in the past. I mean, it's not something that comes and goes without
leaving it's mark. >> Very quickly. Yeah, sorry. Precisely on that point. I
mean, what you seem to be doing is swapping a very specific affordability test
requirement that you've got for something far more open to interpretation that
lenders might have. I think the requirements is that lenders consider the
impact of likely future interest rate increases. They might just say, I don't
think there's going to be any therefore, we can just lend irresponsibly and
which has been the cause of two major crisis. >> Except the loan to income
flow limit is an our assessment all the evidence. We now have a much more
powerful tool that we have amongst the two and that of course we're not
changing now. >> I think for the FCA rules, I'll make two points. One, they
all conduct, the mortgage conduct of business. So some of this is to protect
borrowers against lending practices that lead them into taking on more debt.
It's not really a financial stability point. But there is a floor that they
have to test. The rules are you test against the market rate, but there's a
minimum of 100 basis points. They can't just wave away the test. >> Thank you
very much to you. Moving from the household to the corporate side of corporate
indebtedness. Can I ask, from your report being published, business and
solvency figures that came out this week said that there were 20% higher than
the number of registered in the same month, previous year and 33% higher than
the number of registered two years previously, so December 2019. I think
submission for Sir John, could those significant increase in solvencies as
we're seeing in some of these figures, have an impact on financial resilience
more widely? >> The aggregate picture for the corporate sector, taking large
corporates and small and medium-size together is they've come through the
crisis with a relatively small increase in indebtedness, I think it's about
3.5% increase, 45 or 46 billion pounds. So if we think about the aggregate
resilience of UK corporates, we haven't seen really any deterioration and
interest coverage ratios at that level, and we haven't seen a big increase in
debt. The aggregate, of course, hides a number of things. The issue is, I
think much more around small businesses, small and medium-sized businesses,
particularly in the worst affected, so the worst COVID hit sectors like
hospitality, personal services, and the like. The credit that SMEs have taken
on, the SMEs have built up cash balances. I think much of it has been covered
and guaranteed, and the repayment is over the six years with the pay as you
grow provisions for firms that can't meet that. I think the chance of that
turning into something which is big enough to trigger a financial stability
problem is quite small. That doesn't mean they won't be insolvencies. In some
sectors they may be quite high. There may be some financial institutions that
are particularly concentrated on those sectors that may have problems with.
That's one of the things we looked at in the stress tests and we didn't see
enormous concentrations that would do that. I think COVID will leave a scar in
terms of insolvencies. They've risen, they're above pre-COVID levels now.
There's probably some pent-up insolvency because of course, winding up orders
were suspended as part of the one of the COVID measures. We'll see that I
wouldn't expect it to cause a financial stability problem. But I acknowledge
there will be problems in some sectors and among some firms. >> Are you able
to account for that pent up insolvency rate? Are there a volume of
insolvencies that you're expecting to see? >> No, I think to some extent, it
depends on how quickly business comes back. It's a bit like furlough in a way.
You don't know what's going to happen afterwards. It depends on the kind of
evolutionary economy. But it also depends on structural shifts. Are we less
willing to go to pubs and eat in restaurants now? Once we get through COVID
will our preferences change? Will we be more interested in buying home
exercise equipment, than going on holidays? And those shifts are quite
difficult to map. I don't think we have a number. But when we looked at this
at the beginning of the pandemic, we thought the financing shortfall would be
larger than it has been. A lot of that, of course, has been to do with
government support. For some, it has been to do with vaccination and other
things that brought the economy back quicker than you might have expected in
2020. >> If it's worth repeating a point, that in 2020, the banks made, I
think around 22 billion pounds of expected loss credit provisions. First-off
last year, I think they released about 2.7 billion pounds of those, but this
is still a very large stock of expected lost credit provisions in the system.
>> And it said within the Financial Stability Report, the SMEs, as you've
said, they're tough financial pressures. Do you have any sense of how that
crisis has affected SMEs? Any further detail on how that's distributed? >> I
don't think we have sub sectoral detail of SMEs other than the obvious points
the way you see the drops in revenue are the areas you'd expect. That's one of
the unusual things about the stress that it's been very concentrated in
particular parts of the economy, but we haven't done a microanalysis within
each subsector of them. >> Could I just add something. On SMEs, as John said,
it's been very concentrated on SMEs and overall, the debt levels of SMEs have
gone up 25%. Well, I was actually interested enough in large corporates, the
overall debt level is now below end of 2019 levels, so end of 2019 Q4. So it's
actually quite interesting that there's quite a difference in terms of debt
levels. So SMEs, clearly have borrowed more. And as you may have seen in the
Financial Stability Report, many of those SMEs had actually never borrowed
before. That's also an important point. That was the first time they actually
even built a banking relationship. >> So does that add a different level of
risk if it's people who haven't borrowed before? >> It obviously depends on
this type of situation. For some of them, it clearly was a question of
survival because otherwise, they would not have been able to continue
business. And then depending on how the business will come back and their
ability to repay those loans, that will obviously determine how they will
survive in the future. >> Well, I'll leave them with a balance sheets, which
was not the one they were either expecting or used to. And I think, it was
used to report what is important there. >> Especially with low cost not being
added on in terms of energy prices and other things as well. Can I ask, the
crisis has obviously seen a bit of a restructuring of the economy in some
places in relation to the nature of work, such as working from home, which
then has an impact on real estate, it has an impact on city-center shopping,
for example, [inaudible 01:25:59] they're now closing one of their stores and
leaving another big gap to it as well. So what impact does that then have on
those parts of the financial system that takes to do with real estate, with
commercial property? >> I'd say the first may be obvious point is we don't
know how some of those shifts would have been. The high streak was being
affected anyway before COVID by the move to Internet, Internet shopping and
also by out of town centers. And both of those I think clearly suffered during
the pandemic. How much have we seen a big increase in Internet shopping? How
much that will continue, it's not clear. On the office space side, again, not
clear because we don't know to what extent people come back to work. But if
you put it together, I think it's reasonable to say there'll be less demand
for commercial real estate, either retail or office than there was beforehand.
In terms of bank exposure to commercial real estate, which we tested, we've
tested specifically in the stress test, lot of commercial real estate has been
funded from abroad. A lot of it has been funded outside of the banking sector.
It is an area where traditionally UK banks have made big losses. Losses on
commercial real estate have been bigger than on residential property, which is
why there's a 33% drop in commercial real estate prices in the stress test.
But the banks, we thought have the capital to absorb those losses, but I think
they will be and my guess is we'll see some pressure on that. There are things
that argue the other way. What one hears from the residential property side,
sorry, from the office side is there is demand for higher-quality office
space. People can spend less time in the office. So it's actually the low
quality offices that will be a problem. The high-quality is there and of
course, the High Street, is trying to reinvent itself away from retail. But my
guess is there'll be some strains in commercial property not expecting them to
be. That's one of the reasons we do the stress tests. I know there's some
comments, oh why do you do the stress test if people keep asking them? I guess
we do it to make sure that they do keep asking them. But commercial property
is one thing we singled out, specifically, and the UK banking sector, I think,
is resilient to quite a large commercial property stress. >> Could I also add
one thing given my professional interests in commercial real estate. I'm
sitting on a few boards which are involved in that outside of the UK. So I
think the point that John made in terms of how commercial real estate
especially office real estate, we believe is an important one. And I've
certainly seen that when people who are looking for commercial real estate or
looking to remodel their office space, we'll use it very differently. So
people won't necessarily sit in long rows of desks on with their computers,
but breakout space where you actually use the space more creatively is more
important. One asset class within commercial real estate, which has done
really well through the crisis is storage. So if you think about people buying
things more online, obviously, they will need to find space and where that
needs to be on stored and interesting enough, when I went on a regional visit
to the Midlands few years ago, just before the pandemic was really interesting
that even then, everybody wanted storage space and the loop of brokers found
it really difficult to find it and prices were certainly moving up then
already. And that's only intensified since then. >> Thank you very much. >>
Thanks, Anna. >> Thank you. >> Can I just say we've got 30 minutes exactly
before revision bell goes. So three more members to come in. So do the math.
Just under 10 minutes is great for everybody, please. >> I'm going to ask
about global vulnerabilities and then climate change, so global
vulnerabilities first. The global financial crisis started in the US and then
moved to other parts the world, including here and the mispricing risk of
residential securitized mortgages in the US led to the collapse of three banks
in the UK. What do you see is the main global vulnerabilities now and what is
concerned about them coming to the UK? [inaudible 01:30:32] >> Well, I mean,
one of the things that's interesting is that actually global debt levels have
increased more rapidly than the UK debt levels in the corporate sector, which
I must say it was that was not a thing that I would expected necessarily at
the start, but it is interesting. We're saying that actually for larger UK
corporates actually, they haven't increased that. That's not true actually in
other parts of the world. So that's one thing that comes through the
indicators and early warning indicators that we see there's a larger
contribution to the early warning indicators from debt levels outside the UK.
Because obviously those can spill over as you were saying and so they can
spill over. That's one thing. The second thing we dealt with is China. Now,
what I would say there is, I mean, we saw last week and we're seeing a slower
growth in China. I think the authorities in China are very clearly trying to
reduce the reliance on the property sector for growth. I have to say I don't
speak [inaudible 01:31:30] we were all most surprised about the Charleston
FSR, which shows the proportion of Chinese property landing for what we would
call second and plus homes. I mean, I just did not realize this, but of course
it's linked to the speculative property. >> The Evergrande problem obviously
is extensively reported. I would say at the moment that what we're seeing is a
fairly protracted resolution of it. We're seeing contagion within China, but
it seems to be being kept under control. They're managing it by effectively
preferring onshore to offshore creditors that I think is one thing we do have
to note. But obviously, it is a concern to us. And as soon as I was saying
earlier, it's obviously a concern to us when we look at the stress test
because we've got, obviously banks that are more heavily expressed in that
area. >> I was going to ask, is that the transmission mechanism in terms of
financial prices from the Chinese property market to the UK will be through
the banks, HSBC, Standard Chartered, I guess? >> It could obviously go through
but it could also go in directly because it's not necessarily through direct
exposures of our banks. It can go through other parts of the system as well
because this is obviously large components of debt. So we watch that though,
very carefully. Looks like at the moment it appears to be being managed. And I
think it's consistent with the slight reduction in the slow rate of growth
that we're seeing in China at the moment. >> I want to ask in my strict 10
minutes about climate change as well. So in the latest remit letter you had
from the chancellor, he asked the FCC to continue to regard risks from climate
change as relevant to your primary objective of financial stability. How are
you doing that, John? >> The bank contribute in a number of ways. One, we can
ensure that the financial sector itself is resilient to the impact of climate
change over a number of years. And that is really about the change in the
evaluation of their assets as carbon-intensive assets just become worthless
and we have stranded assets there. And the bank has done a lot of work in that
area. And of course, we've got the climate stress test. Now if banks,
insurance companies, which asked them to look at stress over a much longer
period than we normally would against three scenarios. One, no action. >> No
action getting to net zero, you mean? >> No action getting to net zero and the
rise in temperature above two degrees, back loaded action, and then
steady-state, because all of those will affect the price of assets and risks
in different ways. Second, I think, the bank has a role in supporting a smooth
transition to net zero. And that is about ensuring disclosure and that markets
understand those parts of the economy that'll be on the transition to net
zero. And again, the stress test and the scenarios around the stress test help
with that as does our efforts internationally as well on just getting
consistent disclosure standards. >> That's the climate related financial
disclosures. >> Yeah, TCFD. And this has to happen internationally because you
need for investment to support transition. Investment supporting transition is
not the same as necessarily divesting from carbon assets. It's understanding
where assets sit on the transition path and the like. And then by the exemplar
effect that the bank can have with its own actions are particularly there, the
corporate bond portfolio. And we out put our proposals the way we intend to
tilt corporate bond portfolio to those companies which actually are taking
action to make the transition. So there's a range of areas where we can have a
direct impact and some of it goes to financial stability and also where we
could support the company attempt on the transition to net zero. >> You've had
a letter recently, I think the last week from Sir Chris Hohn, who is the
chairman of the Children's Investment Fund, which funds a lot of climate
related work, criticizing you for not requiring banks to collect admissions
data from their portfolio. What's your response to that? You don't do that at
the moment as I understand it. >> Two things, Collet's going to come out I'm
sure on this. And this I guess is what John was saying. We need clearly
standards for disclosure and reporting disclosure to do this consistently. We
are doing it in the climate exploratory scenario, the stress test thay John
referred to. That's our own initiative. We've done it I think for the hundred
largest exposures. But to do this fairly, we've got to have an international
reporting standard that provides the basis for doing that. Now the good news
is that was a great at COP26 and the process is now taking place as the
International Sustainability Standards Board, of which Collet is involved in
the governance. >> Indeed I am. I'm a trustee of the IFRS. As you're
interested, Anthony , in climate change, you will know that we have recently
announced the setting up of the International Sustainability Standards Board.
Which is going to be chaired by Emanuel Faber and we're pressing on very
rapidly with the establishment of new standards. Now going back to Chris
Hohn's letter which raises of course very interesting and powerful sutle
points. We've got to have some consistent standards about how firms do this.
Because otherwise, there will be all scope for [inaudible 01:37:30] Well, you
said that I didn't say that, but very well. So I'd just like to add to John's
point that the bank has been highly supportive of the work to set up this
International Sustainability Standards Board. The reason I'm banging on about
this bit is that I can't really exaggerate the importance of the establishment
of this board which has got support from all around the globe for these
standards which both capital markets, banks, regulators all need. So we've got
to hope. >> Getting agreements on the international standards can take
decades. >> It can but we haven't got decades. >> No, not quite. That's what I
was going to say. So when do you think we will get sufficiently consistent
standards so that they can start being implemented in the UK? >> We have got
plans to develop standards in the course of this calendar year. Their adoption
in the UK is not a matter of me or indeed for the bank. It's a matter for the
endorsement board of the United Kingdom. But I can assure you that everybody
concerned knows that we haven't got much time. >> So if you develop the
standards this year, they could be adopted? >> I suggest you'd better get the
endorsement board interested in that. >> And the endorsement board answers to?
>> Base. >> Base. >> Yeah >> So this is a question for base then? >> Yeah. But
look, I'm not saying this to make this as a small point, but everybody knows
that this is of the utmost importance. There's enormous support for this. You
saw what happened to Corp, everybody is behind this. And I hear what you're
saying about how IFRS standards take a long time. >> I know that they do take
decades. >> In this case they're not going to because we haven't got decades.
>> We do have to report back to the G20, a couple of heads of governments, and
financial stability boards. And that's where John and I come back in again. >>
The other criticism from environmental groups in particular is that some other
regulators all ready require these emissions disclosures. I think the European
Central Bank, does for example, and in some other countries but I don't know
what standards they're basing it on. >> Well, let us just note the fact that
the ISSB has got wide spread global support and that existing standard
starters in the field have already joined in the work of the ISSB. So I think
you can take it that there's massive convergence. I don't think we're getting
to see competing standards here. >> I'll take my time. Thank you very much. >>
Thank you. >> Thank you very much. Harriet. >> Thank you very much. And I
wanted to ask John about the point you made about crypto assets and you
highlighted crypto assets in your report. They are growing fast. You say that
this could potentially feature into financial stability. Could you elaborate
for the committee, please? >> Yes. Firstly, I said crypto is a technology and
it can be applied in lots of different ways in the financial sector and
outside. It's got a record keeping verification trust. >> It's clearly being
used in lots of different areas. The question is really, which of the areas
that we see Crypto now in the financial sector that could be a financial risk;
95% of the crypto assets that are out there are unbanked speculative
investments, bitcoin, crypto coin of that sort. That's got to about 2.620,
which is I think 1% of global assets. So it's not big at the moment, but it's
growing very fast. And I think, since the beginning of 2020 investment in
crypto assets grew by about 10 times. >> So it's not quite financial stability
risks at the moment? If It could be in the future, what level would it have to
be out before it becomes a financial stability risk? >> Well, it depends on
really how it connects to the present two things. One, how it connects to the
global financial system. Subprime was not a huge amount, if I can put it that
way. We certainly had 2.6 trillion. But it was connected to the financial
sector through leverage, through long transaction chains, through
insufficiently capitalized entities. So when its price dropped very suddenly
that transmitted to shock. I think it will depend on how quickly crypto assets
grow in scale, but also, the extent to which they're taken on by leverage
players, and they get fed into the financial system. >> How would you mitigate
the risks around leveraging the crypto asset market? >> Well, I think you can
mitigate the impact on the existing financial, the traditional financial
sectors. So the Basel Committee has put out some proposals for the capital the
banks should hold if they take crypto onto their balance sheets. Some banks
were thinking of doing brokerage services, which will actually bring crypto
onto balance sheets. You can bring them onto recognized exchanges and clearing
houses, which margin you can control the leverage. I think, with the rules for
the established financial system, the more difficult thing is that as well as
the connection to the existing traditional financial sector, there is a crypto
financial sector that is starting to grow, which is really about trading in
crypto coin for crypto assets, and crypto derivatives on crypto exchanges.
Some of this goes under the name of decentralized finance. There, I think,
it's more difficult to know how to get a grip on it for two reasons. One,
because we don't have good information. This is outside the regulated sector,
and a lot of it is pseudo anonymous anyway. And also, because these aren't
recognized intermediaries that are within regulation. The answer, I think, is
to extend the regulatory regimes that exist for certain economic functions to
that world. If I give you an example, if the economic function you're
performing is transferring settlement assets to make systemic scale payment
systems then the rules that apply for the security and robustness of payment
systems using commercial bank money needs to be extended. So they cover when
crypto is being used to make payments in the same way. And the International
Committee that I chair on payment system standards or whatever, has just put
out the consultation for how we apply that regulatory regime to this world,
bearing in mind that you might not apply it in the same way. But you want to
have the same level of resilience for that economic function. >> You also
published a discussion paper back in June. I think, it was setting out your
thoughts on new forms of digital money including stable coins. Where has that
consultation got to even the respondent? >> We got a respondent, and in
particular, the treasury has said that it would legislate now to bring stable
coins within the regulatory arm. But the consultation document I mentioned,
setting international standards is effectively for stable coins used in
systemic payment system, that will go to issues like what should be the
backing assets? We put out a number of different options. What protections
should individuals have to redeem their stable coin at par on demand, in the
way that they can redeem. >> When are you going to reply to that? >> We will
reply to that in the first half of this year, but it'll come along, I think,
with the treasury proposals for actually bringing stable coin under the
regulatory arm. >> You saw the House of Lords report that came out while the
central bank digital currency is a solution in search of a problems. >> Yes.
We did read it. >> We obviously have enjoyed reading that, so how do you reply
to the central thesis, which is that it's a solution in search of a problem.
>> Can I make one point? The report was interestingly wrong. It was reported
in some cost that we had innocence going on because we got to evidence to
bring that to advocate central bank digital currency, and not convince them.
We're in the process of examining and evaluating the case. And we did talk at
the hearing in terms of, let's be clear, what problem we're trying to solve
here. For the point of view of saying, there might be no problem we're trying
to solve. But because, I think, you have to answer that question, and it's
still very much an open question in our thinking. >> I tried to move some
money to the states recently, or back from the States. It was really hard and
the transaction costs were very high for the retail consumers. So there must
be in some benefits in terms of lower transaction costs. >> John is leading
work in the world on this subject, so refer to him. But I would say this, yes,
that is a problem. I think, for a very long time, it's been the cost and speed
of cross-border payments. I would say that they're simply introducing Sterling
central bank digital currency, it wouldn't only try and solve that problem, it
might contribute to solving it, but it's on its own acylation charge. >>
Cross-border payments are 50 years out of date. In terms of speed,
reliability, and cost, there are reasons for that. One doesn't need crypto
technology or a CBTC to make big improvements as linking up of faster payment
services. There's improving correspondent banking. But we shouldn't ignore the
fact that some of these new technologies promise whether they're public sector
through CBTC or private sector through stable coin. If well safety regulated,
offer a real opportunity to get the cost and speed down. And so the work we're
doing internationally is trying to operate on existing technologies. But also,
how do you make new technologies robust enough to be used in that way? Because
I do think technology will transform this whole area, whether it's public or
private. And on the House of Lords, the thing that the Treasury Bank of
England Task Force is trying to do is to see what is the case. How strong is
the case, both from a financial stability point of view, but also from a user
point of view on CBTC. So we haven't made up our minds, which is one of the
reasons why the House of Lords report will be a valuable contribution into
that endpoint. >> There is already a treasury FCA Bank crypto assets
taskforce. Does the bank work with that group at all? >> Yes. >> You're on it?
>> I'm a member of it, as chief of treasury. >> Okay. Any other thoughts on
crypto assets from any of the panelists? >> Happy to come in here and perhaps
also adding to what John said, given that I'm an external member of the
financial market infrastructure board. And obviously, that supervises payments
and central counterparties. I would certainly say well-regulated, they can
actually really improve innovation. In some ways, you might call it
sustainable innovation, so it would be positive. It's also, obviously to some
extent, a conduct issue, although not yet on a big scale. I think, the FCA did
some research recently, and it said that as of January 21, 2.3 million adults
owned cryptocurrencies. Having said that, these holdings accounted for less
than 0.1% of the UK households net financial wealth. At the moment, it's
relatively small. Having said that, if you look at other regions, say the US,
obviously, these percentages are bigger. So it's definitely something the FPC
will keep a close eye on. >> Do you see any other countries taking a more
proactive approach? I'm not sure that's the right adjective. But for example,
I think China brought in central bank digital currency. >> China is
introducing central bank digital currency, and I think, they're planning to
use it. Although, I'm not quite sure how many people are going to actually
going to attend to the Winter Olympics now. But the plan was to use it there.
We talked to the People's Bank of China quite a lot on this. Actually, I
think, their experience was that they found that domestic payments systems
were being substantially taken over by Alipay and WeChat, and Tencent. I
think, they got very concerned that they saw the solution was central monetary
function in the system being transferred out into these commercial entities,
and they didn't feel comfortable with them. As well as they've taken, as you
probably notice, some pretty stern action against these companies, and this
has been quite well-documented. But I think, alongside that, they see
domestically, therefore, the case for substituting a central bank digital
currency alongside what these companies were in devising themselves. I think,
they faced that challenge directly. Now, I think, there were big differences
obviously between the situations. But on this point, we met to the House of
Lords committee actually. If Facebook wants to introduce a stable coin, I
think, that replaces a very big challenge to the system. Is it going to be a
form of narrow bank. And the House of Lords Report raises these issues. What
effect would it have on the existing system? Do we think that is the right way
to go? Is it sensible to have that innovation, or is it more sensible to say,
no, we as the central bank will issue digital currency and you can use that
digital currency. And that's an open question. The House of Lords committee
has rather dismissed that document. And I would not dismiss that document. To
me, that actually is central to the, what problem are we're trying to solve
question. >> We've come out of time today. >> You are alert, but thank you.
[inaudible 01:51:59] >> Thank you very much. My questions are about the logo
transition. I think, I've got about eight minutes. >> If we're going to talk
about logo for eight minutes, that's okay. >> Yes, I thought so. >> Well, it's
been two weeks since the majority of LIBOR settings were due to be
discontinued by the end of 2021. How has the transition gone and would you say
it's gone as planned? >> Yeah, actually I would. I mean, it's been six and a
half years of pretty hard work actually. I co-chaired the International
Committee until up a few weeks ago. For all that period we originally set the
deadline. Actually, J. Powell, Chairman of the Federal Reserve, and I, when we
were co-chairing it, originally set the deadline. It was pretty much the most
optimistic deadline we thought we could set, given the fact that back in 2015,
'16 LIBOR was falling apart. >> So you don't see any outstanding risks to
financial stability following this transition? >> No, there's work still to be
done. The work to be done falls into two parts. One, in the non-dollar
currencies including sterling. I mean, substantially it's moved off, and
sterling's case to SONIA, a new benchmark. We've got legacy contracts running
on the insiders, what we call synthetic LIBOR, which is SONIA plus an add on.
>> Until 2023, is that right? >> No, that's dollar. >> Okay. >> That's dollar.
But you can't use synthetic LIBOR for new business. The dollar is obviously
the largest part. Dollar contracts, as you said, mid June 2023. So there's
obviously work to be done there. But I must say given the challenge and the
issues we have to deal with, I'm very pleased with the way it's gone. And I
mean, just to tell you, in December, I think £13 trillion of derivative
contracts in sterling were transferred over to SONIA in December. This is not
a small activity that's going on. >> And have you identified any operational
risks to the transfer to SONIA so far? >> Well, originally we identified a
whole load of them. >> Outstanding. >> I think it's okay at the moment
actually. >> Nothing to be concerned about. >> I'm pretty pleased by the way
it's gone actually. I mean, we monitor it very closely and the bank's heavily
involved in SONIA. SONIA is a much more robust bench markets, it's got more
activity. I mean, the problem with LIBOR was that there was hardly any
activity left in LIBOR. I mean, it was essentially people trying to guess what
the right rate should be. >> And this point about this temporary position,
that synthetic 1-3 months to six months provision, what risks, if any arise
from that situation being moving from temporary to being prolonged? >> I think
the main thing is, these are what we've called the tough legacy, where these
are loan agreements. It's worth saying that a lot of people clearly wrote
LIBOR into contracts because, well, that's just what we did, that mean, it was
just there. There was not a lot of thinking about, well, what happens if it
does get terminated, and particularly what were the coordination mechanisms
for transferring the contracts onto another benchmark because these tough
legacy companies often did not provide for an alternative benchmark. It was
easier to do with the derivatives because it is international [inaudible
01:55:43] that essentially helped us a lot on that front to make the
transition. I think the issue will be now to make sure that these legacy
contracts do get dealt with. That's not a problem in synthetic LIBOR. We don't
want them staying there because there's some very long-lived contracts in
there. >> The deadline to 2023, Mark Cabana, head of the US Rates Strategy at
Bank of America was quoted in the FT saying, "Telling people to stop using
LIBOR is like re-imposing prohibition, and people keep drinking right up till
the last moment." I can think of a few other analogies at the moment. Yes.
Lots of drinking analogies are around the globe. What do you have to say to
that? >> Gosh, there could be polite version there. >> Please think of
something tactful. >> Tactful. Thank you, Collet. There has been more
resistance in the US. I mean, let me put it this way. I think anybody who
thinks that using LIBOR as a long-run solution should look at what happened to
LIBOR during the [inaudible 01:56:55] And should ask themselves, well, that is
a fair way to do business. That's the politest thing I can say on that
question. >> Thank you. I've got, in my last three minutes, a question about,
earlier on we were talking about indebtedness and the differential impacts on
groups, and you mentioned consumer credit. Is there more that could be done
around taking the pressure off this high-interest payments to connect to
interest payments? I know there have been some interventions, but what else
could be done in that territory? Because that's very much fresh on our mind.
>> A question from my former world really. I think that's really a question
for Nichol actually. >> Okay. I'll save it for Nichol. >> And you'll thank me
for that. >> But overall, you're not more concerned about household
indebtedness. >> Not as a financial stability issue. I think you're pointing
to the fact obviously. You know, the FCA has been heavily involved us over the
years and it's been a real priority. It wasn't my time, it was Nichol's time.
I think the question of high-cost credit is a big priority which will remain
probably. >> Thank you. >> Thanks very much, commissioner. Well done to the
committee and to our panel for landing us exactly on the right time. Nick and
I thank all four of you for appearing before us. It's always a pleasure and
it's always very, very interesting to hear from you. Thank you also for
[inaudible 01:58:20] your masks so well. I always think an advantage of the
masks and there are very few, that nobody can see you yawning when you need
to. I can assure you that that was not a necessity today. It has been
extremely interesting, so thank you. >> [inaudible 01:58:36] they're not great
when when you wear glasses. >> It's not a great look. Thank you very much
indeed and that concludes this session order. >> Thank you, Chair. Thank you.
>> Thank you. >> The proceeding has ended. The proceeding has ended