Order. Welcome to the Treasury Select Committee on Wednesday the 29th of January 2025. We're delighted to welcome the Governor of the Bank of England, Andrew Bailey, today to talk about the Financial Policy Committee's work at the bank. He's joined by Nathaniel Benjamin, who's the Executive Director for Financial Stability Strategy and Risk, and also by Liz O'Keeffe, who's an external member of the Financial Policy Committee, and Dame Colette Bowe, who's also an external member of the Financial Policy Committee. So a warm welcome to you all. Governor, you and the Chancellor at the Exchequer have exchanged letters. She wrote to you shortly after the election, but I thought it would be helpful if you could summarize to us before we go into the main session today what do you think you're going to be doing differently as a result of the letter that the Chancellor sent you. I know you've written back to her, but perhaps you could put it in simple, understandable language.
Well, I'll put it into context. Obviously, the primary objective, and obviously we're talking about the FPC here, but we can also, the PRA is obviously sort of allied to this if you like, the primary objectives haven't changed in terms of financial stability. But the government has changed some of the language around the secondary objectives and particularly obviously to emphasize growth and competitiveness. Now let me be clear, I mean we obviously welcome this. I mean let me start by saying that you know it is important that we raise the growth rate in the economy. It's important for all sorts of reasons including financial stability. And so I'm very supportive of the work of the government and of course the work of the previous government. I should say this is not a new thing in this sense. We've had, and I say that because we've had a low, what I call potential growth rate in this country really since the financial crisis. So go back 15, 16 years now. So addressing that is an important question. What I did emphasize in the letter was that you know fundamentally financial stability is a foundation for growth. So there isn't a trade-off in a fundamental sense. Of course we've seen the impact that a loss of financial stability can have in the financial crisis. I think there's a very interesting question as to what exactly is causing the low rate of potential growth and of course it's not unique to the UK by the way. I mean the US is somewhat the outlier if anything rather than the UK. Because it goes back to the financial crisis and I think there is an argument which you might say well you would say this wouldn't you that in many ways it was the loss of financial stability during the financial crisis that had an impact on investment in the economy and has had an impact on growth. But having said that, I do hold very firmly to the view that there isn't a trade-off and that we must maintain financial stability. I do agree that having said that there are choices to be made about the sort of particular choice of regulatory instruments, the particular choice of how regulation is operated to enable us to achieve not only the primary objective of financial stability but also support the secondary objectives including the growth and competitiveness objective. And we are very supportive of this.
So you see it in that context, your support for it. So what are you actually going to be doing that's different from you received the letter? Is there anything?
So we have addressed a series of questions around bank regulation and insurance regulation. And we'll go on doing that. Some of those have been enabled by the UK's new position post-Brexit. Some of them are to do with international standards. There is also the question of the way in which regulation actually operates in terms of the burdens it imposes. So let me draw out two things that we're very keen on, although they come more from the PRA world, they have an impact on financial stability. So one is we want to introduce a different regime for smaller banks. The reason we can do this now is, or will be able to do this in the future, is that the European Union approach is to apply the international standard for large banks to every bank. That's not the way it's done in the US for instance. Not done like that. This will be for, you're thinking some of the fintech challenger banks that are small? Yeah. And Sam Woods has called this the 'strong and simple' approach to simplify regulation. We want to do that now. In order, I have to say that in order to do that we do have to implement the Basel, the new Basel rules because that's because we need you to do something in Parliament to unlock this, to unlock the ability to...
Was it just for these? Of anyone who might not be a banker or Bank of England follower maybe tuning into what you're saying, what would that mean for the consumer then? What difference do you think that will make?
Well, I hope it would improve the competition in the banking industry. So it would improve the choices that consumers have. Actually, I mean we've had quite strong entry into the banking markets in the last decade. The number of new banks created has been higher than ever before I think. Now the question is not so much that, it's actually ensuring that these institutions can grow into real sort of challenges for the public. So that's important that we do that. So we do need an agreement on Basel going forwards. That's, we have delayed that because of the uncertainty from the US angle because there's a competition issue there as well. We'll come into some of that later but that's one example. I think we can do a lot on data reporting to simplify it. We'd like to make quite a substantial investment there with the industry both to simplify it and in terms of the amount we collect but also to make it more efficient. And I think we could do a lot on that front. So a number of things we can do there and we will do. On the insurance front, I mean there has been quite a lengthy process, Mr. Glen will be very familiar with this, the so-called Solvency II regime that came across from Europe. I think we've now broadly settled that but it's obviously got to be implemented and put into effect. And I think there we've had a lot of discussions with the industry. There is the potential for very substantial investment to come out of this. This is really out of life insurance, it's in that world. And again that will support growth. Now the FPC's job is essentially the overarching view, you know are all these things consistent with financial stability? And I think they are is the answer. We can do these things consistently. We'll get into detail on some issues.
But before we go into the session, Rachel, thank you very much Chair. You set out that there are opportunities after Brexit and with international standards and you also said that the economic growth objective isn't new. And so I'm interested in obviously Brexit is a change and international circumstances and standards is a change, but I'd really like to understand why those changes that you're talking about around data reporting and then also data reporting are new and why you're able to change them now rather than previously.
A lot of the data reporting actually does follow from having more scope post-Brexit to choose what we do. The EU arrangement, and I should say I always preface this by saying I take no position on Brexit per se. So this is not me suddenly sort of giving you a message on Brexit, I'm not going to do that. But there is an opportunity and the opportunity is that it gives us more choice. The EU is quite prescriptive when you're in the EU over data reporting for instance. So we do have more choices. You know there is quite a lot of that reporting which when you talk to the people who supervise banks, they say actually we don't use it all. So there's an opportunity to be more nimble frankly I think on that front.
So are you saying then that that opportunity with changing to EU regulations is the only thing that could possibly have changed since from previous governments' objectives around economic growth? What I'm trying to get at is you identified some categories of opportunities and I'm trying to get at what detailed opportunities there are that aren't linked to Brexit.
Well, I think there's a whole set of other opportunities that come along as a consequence of technology changing. So as a consequence of the fintech, financial technology changes there which can make it more efficient. We are also I think like all organizations looking at how we can use artificial intelligence in terms of what we actually do. So that's important as well. We've also made a number, I mean we've made several other changes. So you may be aware we've changed some of the way in which we regulate remuneration. Now you may say well that's although nice, does that really contribute to growth and competitiveness? Well the fact is we thought these, we were never strong supporters of these regulations. So in terms of reducing the burden of regulation, we think those are sensible things to do as well.
Okay. And just to come back on your observation around additional competition in the banking sector, are there other benefits to consumers that you can identify?
Well, I think there are benefits in terms of the cost of financial services. Now it's not obviously, it's not easy to map those one for one, don't get me wrong. But I think we have to admit regulation does come with a cost. There's no question about that. I mean the industry will tell you that quite forcefully I'm sure. So I think again we have an obligation to ensure that the efficiency and cost of regulation is an objective because it does get passed through to consumers ultimately. So yes in that sense.
Okay. I think much for now. Miss Blake, Dr. Jupp, Sandra and Preet to you.
Thank you very much Chair. Thank you all for coming Governor. I wanted to ask you about some of your actions around the APF, QT, especially its impact on financial stability. Could you outline how you at the Bank of England are now approaching unwinding and selling off the assets you created underneath quantitative easing and the implied effect on interest rates?
Yeah, so I made a speech at the London School of Economics last, just before the day before the election was declared actually last year, coincidentally by the way, just to be clear on this, setting out our approach towards this. And really setting out that there are in my view two phases to this. And the reason for that is that if you look at our balance sheet, on one side of the balance sheet is a set of what we call reserves, which is the balances that banks hold with us, and that is the highest in a sense quality stock of liquidity they can hold because it's effectively cash. And on the other side is assets. And those assets are essentially at the moment the stock of quantitative easing. So it's gilts. Now the question we face then is if you look at history, if you go back to before the financial crisis we had a very small stock of reserves. It was too small. You can operate monetary policy with a very small stock of reserves in normal times. Unfortunately for financial stability purposes you need a larger stock of reserves because that is, I say, the liquidity buffers that the banks maintain so that every day they've got cash available. It also runs the payment system as well. Now obviously during the quantitative easing program we increased that stock of reserves and we increased it very deliberately above the level that you would need in normal times and that was deliberate because of the monetary policy objective. The objective today is, the first phase of the objective therefore is to bring that stock of reserves down to what is the sort of equilibrium level. Now we don't know what that is because we've gone from a pre-financial crisis it was too low to a deliberate excess during quantitative easing. And so we've got to find that middle ground. And the distance is very large. I mean we had getting on for a trillion pounds of reserves at the peak. Pre-financial crisis we were actually operating sometimes with only about 30 billion pounds of reserves. Now we've done quite a lot of work to say well where is that equilibrium. We'll know it when we see it sort of thing. We talk to the banks a lot about it. They give us numbers which are in the range of sort of 400 to 500 billion pounds but we don't precisely know and it can change over time. So but the first phase is therefore to get down to that level and we're well on the way. I mean we think based on conversations we have with the banks that we may get there later this year. We'll see.
And so just the impact of this quantitative tightening on interest rates, what do you see that as being? So Dave Ramsden in June '23 said there was an unexpected increase of around 10 basis points but he doesn't say what the implied increase in interest rate. So do you have an estimate if you like on what your quantitative tightening is doing in interest rates?
The best, I mean that remains actually around about the best estimate we have, 10 to 15 basis points in terms of term effects. Now what I've said a number of times in this committee in the past however is to be very clear of course when we set the, I'm not going to talk about much post this afternoon but I'll talk about the sort of the framework if you like, to be clear when we set the official interest rate, bank rate, of course we set it taking everything into account in terms of financial conditions including that 10 to 15 basis point impact. So to be clear it's not an add-on to, you know, it's taken into account when we set the levels. Now this at the moment we are doing very little in terms of gilt sales because we have this year a very large natural maturity of the portfolio. So we maintained the overall run-off at 100 billion for this year but actually 86, 87 of that is just natural run-off. So we're actually not selling much at the moment. We're doing very few auctions relative to the past. Now if I could just say going to the second phase, when we get to the sort of equilibrium level as I said in the lecture at the London School of Economics, we will then have a decision to take as to what we do thereafter because we're not then trying to reduce the level of reserves because we will have hit the natural level. However we will have interest rate risk on our balance sheet because we've bought gilts and on the reserves we remunerate them at the prevailing bank rate. And as I set out in the lecture, my objective would be over time that that interest rate risk should go back into the banking sector. It should not be on our balance sheet and it should not therefore be on the balance sheet of the public sector. It should go back into the outside world. How quickly we do that to be decided, that will be the decision for the second phase.
Okay. I think to try to get to Governor, is in this your regime in the Bank of England has active sales of bonds and in the United States they haven't done so. Yes. And at the very least if you're winding it down quickly need a faster increase in interest rates. And I would say on the term premium side, mine is standing from the lecture of Dave Ramsden and I'm happy to be corrected but the 10 to 15 basis points is about unexpected sales not the run-off of sales. Because whatever quantitative easing was doing in the beginning you would expect a symmetrical increase on the other side. I'm not sure 10 to 15 basis points would add up to kind of what we'd expect the impact of QE to have creation.
That's our assessment of it. So I suppose the question is the United States and Canada and the ECB are not doing active sales but you are. Well can I explain the difference? Yeah. So take the US as an example as you said. The US public debt stock has a much shorter average maturity than the UK public debt stock. So when the Federal Reserve did its QE program it bought very short maturity assets. The UK public debt stock is much, it's been a deliberate policy of UK governments for quite a long time to lengthen the maturity of the stock of gilts. So when the Bank of England started its quantitative easing program back in the financial crisis the decision was taken that we would buy a stock of gilts which essentially matched the profile of the stock of gilts initially. We didn't want to, and that was deliberate because we didn't want to start affecting the relative price of gilts across the curve by us being more in one part of the market than another. What that meant was that we've ended up with a much longer duration and maturity of gilts than the Federal Reserve. And so what it means is the Federal Reserve is in a position where it's actually having to take the reverse decision. It can just let these gilts, their stock would just naturally run off very quickly and actually the decision they've had to take as they start on it is actually how much you let run off or how much do you throttle it back by buying continuing to buy short stuff to stop it too fast to run off. We've had the opposite issue which is that the stock is very long so we would be, the stock would be with us in substance for decades. So it puts us in a different position to your question about sales than many of the other central banks. Not some others do, Sweden for instance are selling as we are, but it puts us in a different position to many others.
On the side of when you're realizing, I want to come to what the kind of the impacts on the fiscal side are right. In terms of what it's doing, you're actively selling bonds. Yes. If the base rate falls, the loss if you like the Treasury have to identify would also if you like fall through time, is that correct?
So by doing so at the moment, by doing active QT now you are directly increasing government borrowing where if you let them run off just a little bit longer there is if you like a fiscal saving. I appreciate...
One thing we just be very clear that of course there is a balance here because the longer we leave them you've then got the cost to carry because remember as I said earlier we've got this interest rate risk. So we're remunerating reserves at bank rate, that's how we essentially anchor the short end of the curve for monetary policy reasons. Obviously the gilts we hold because of when they were bought during the very low interest rates era have lower coupons on them. So I would just, I always correct this point that well if only you held on to these gilts you wouldn't have the same cost. Actually in an efficient market it would balance out. You'd have the cost of carry, the interest rate differential versus the cost of selling and those two things have to be seen together to actually in a sense calculate the effects.
I accept there's a, the cost of carry in the market would it be fully efficient right the way we to price it in. So I'm saying more broadly like if I was to sell the bonds at the end of this year as opposed to the beginning there is a possible fiscal implication that tends to reduce on the financial, on the fiscal side of things. Because what I'm particularly concerned about, I think I'll carry on or let others get onto this, but there are investments we have to make to protect our financial ability. I'm thinking about climate change and I suppose my worry is at the moment with the APF and quantitative tightening is are you considering the ways in which your actions around this are reducing investments both by the private sector as well as the public sector and reducing those risks in the long term.
So first of all two points on this. First of all let me just make the point that of course if you spread out the profile of the run-off, I mean you will have the same, you will have an efficient market as we're just saying, you'll have the same cost, you'll spread it over time. Now whether you think that's a good thing or a bad thing, I think different judgments on that but I just want to make the point you don't change the actual overall cost over time. Come to the second point and here you really need to get the people in who are experts in government accounting which I'm certainly not if you don't mind me pleading on that one. How this affects government cash flow and actually how it affects the fiscal rules is important because obviously that is actually determined by the nature of the fiscal rules. The government made a change to the fiscal rules you may remember in the budget in terms of how the stock of debt is calculated including the debt that we hold. And so I say I think if you don't mind me saying so you want people much more expert than I am in terms of how those cash flows and the fiscal rules work to understand the impact of those actions on the overall fiscal position and on the constraints it has. Because it's not as simple and I often read articles saying it's very simple the cash flow is this. No it's not because it depends on how it works within the fiscal rule.
That's very kind, thank you Governor. Much I was trying to say that. Thank you. This question mostly for the Governor but also possibly for Mr. Benjamin as well. The Governor just mentioned this phase two getting to equilibrium possibly in the next few years, or maybe you want to specify the timeline Governor. At that point, you know the banks that are currently getting a much better deal right now because the Bank of England and the Treasury is taking on all of the interest rate risk will be asked to suddenly kind of have a bunch of risk that they might not want offloaded onto them. I was wondering what do you think this means for the banking sector and their response to that side of the bargain as it were. Are they willing, will there be a fight, how do you see that working out?
No, I don't envisage a fight on that front at all actually. I mean I think it is quite natural that first of all they have to choose the level of reserves that they think is appropriate. Now it's not a completely free choice because we have policies obviously on liquidity in the banking system because we can't have it running, well we've tried this in the past and it ended badly to have it running at too low a level. But I think look, I think then of course it's for the banks to decide how they hedge the interest rate risk on the reserves. So which they will do. So they will have a set of deposits with us which they're remunerated at bank rate on. They will have to decide what assets they wish to hold and also what rate they pay on the liabilities but also how they hedge those positions because they all have what I call structural hedges in place which hedge interest rate risk on their deposit book and on their assets over a period of years. And they will choose to, and I think they agree with this, it's not a subject that really comes up much in conversation. The natural place for that to be managed is in the banking system.
Mr. Benjamin's nodding, is there anything you wanted to add?
That's right. The only thing I would add is gradually as we return to this new normal we'll see an increase in the use of our lending facilities in our repo, like the short-term repo and the long-term repo. And that is a feature of the new world that we'll be returning to. So that's a very healthy feature of that evolution towards that new norm.
Yeah, I mean we currently have I think as of yesterday it's about some like 57 billion pounds of lending out in the repo market. It's mostly short term but there's a piece of it there, a bit of longer term as well. So we are providing liquidity into the market at the policy rate. So we take no interest rate risk on that lending. That's the key difference.
Thank you very much. Thank you very much Chair. I wonder if we should give the Governor a rest and I wonder Dame Colette or Liz would be willing to help me with some questions on geopolitical tensions. Now two, two of a report it says geopolitical and global fragmentation risks heighten. Geopolitical tensions pose a significant risk to financial stability. Has this become more or less predictable would you say since November 2024 noting changes in France and other large countries?
I take that, give the Governor a rest for a second. I think the geopolitical situation is complex, has become much more complex in the last few years. It's very difficult in the early days of a new administration in the United States to predict precisely where this, how this is going to play out. But I think we can all see that tensions in, whether it's China and Taiwan or the Russia-Ukraine ongoing situation, continues to put pressure on supply chains, continues to put pressure on the cost of energy more broadly. And there are a whole range of different channels by which that transmits through into the financial sector. Whether it's going to get any better or any worse is almost anyone's guess. And I think that's the challenge that we face is trying to work with financial institutions and advise people or at least identify some of these risks and enable people to take measures or to actually at least look at the situation and consider to what extent are they exposed, to what extent is their environment and ecosystem exposed and are they aware of all of the complexity of the environment in which they are operating in.
And how out of interest does the bank go about assessing this which has become a lot more unpredictable and there's a fairly short supply of true experts probably in this field. So how does the bank assess this risk?
Certainly what I have witnessed on an independent member of the committee, so actually relying on a lot of diverse feedback from multiple different sources within the bank structure. The international division for example reports back on measures that are happening, things that are happening that they see through their chain of conversations and inputs. There's also from where I'm standing a range of different segments of the bank that are looking at particular impacts at different moments in time. And I think that each of those areas fundamentally, while it's geopolitical, it also has a different angle or lens to it. Whether it's about the energy sector, whether it's about, you know, so different horizontals within the market. And we then look at it through a lens of whether it's impacting the insurance markets, the financial markets, you know, where are those channels of transmission actually starting to materialize.
If I could, sorry to interrupt, thank you. Could I just add to what Liz O'Keeffe has said. Liz has talked about the political threats and so on. There is another side to this which is as you know we operate within a quite complex series of global institutions. And right at this moment what we can't see and what we don't know is whether those institutions are going to continue to be robust in the light of all these various geopolitical tensions that Liz has mentioned. So that's another thread in this that's quite an important one.
That is a very important thread. I think my colleague Mr. Glen will pick up on some of those themes in a moment. And with this ever more complicated background, how does the bank keep under review whether it's assessing these risks in the right way or whether there are better ways of assessing these risks?
Well, as Liz has said we have a range of sources of advice within the bank that we take. We also as we are external members of the committee of course we all have our own sources of intel if I can put it like that which is one of the things we bring to the committee. And so our job is really to be constantly, if I can put it like this, this might seem a bit sort of obscure but our job is to be looking at what's going on in the tail of the distribution of probabilities. And that's the job of the whole committee but as external members we feel that's very particularly our role to say well hang on a minute have you thought about that thing over there or that other thing over there. So frankly at a moment of great complexity like this there aren't quick simple answers that say well this is how it's going to pan out. I think our job is to make sure that we've got our heads around the range of possibilities.
And then a final question which is completely unrelated to international matters. The FPC has an outstanding recommendation that the pensions regulator should have the remit take into account financial stability considerations on a continuing basis. Has this been acted on? I ask a question for the Governor.
Well, we can't act on, I mean afraid so it is a recommendation to others. So the situation is, and this goes back to the previous government, when we originally made the recommendation the previous government said that they agreed with it but it requires that then to be put into the objectives of the pensions regulator which is not something we can do. And it hasn't been acted on. So that's why it is an outstanding recommendation in that sense.
Thank you Governor. Would you be able to shed any light on why this hasn't been acted on?
I can't speculate myself as to why this is the case. As I say we have had a, and by the way look I would also say that we've had a lot of cooperation. We've worked very closely with the pensions regulator particularly in addressing the obviously these are the issues that came out of the liability driven investment issue of a couple of years ago and well just under, yeah just over a couple of years now. And so to give you an example, I mean now the sort of the buffers that these funds maintain have been increased. We worked very closely also with the overseas regulators because it had a particular relevance, many of these funds are in Luxembourg and Ireland. So there's no shortage of cooperation on that front. What I would say is that this we felt that it was important to embed the objective so it was agreement but it hasn't happened.
Thank you Governor. Thank you Chair. Reflecting on Dame Colette's remarks about focusing on the different ends of the probability curve, want to come on to public sector borrowing and how you have assessed the risk of public sector borrowing on financial stability.
I'm just thinking about how to respond to that without getting into the areas that the Governor said at the beginning we were not going to. Okay. I'm sorry if that sounds really disrespectful to this. I understand, I'm sure you all understand the sort of box we're in because of the timing of this hearing. So I'm really sorry to have to say that this, but I think there's not a lot we can say without getting into that rather difficult area.
You're going to disagree with me now, that's good, let me off it. I'll get off primary you group think you see this is good.
This is a point not unique to the UK by any means because actually when you look at, and we've said this in the financial stability report, when you look at sovereign indebtedness, actually what we've seen in many countries is an increase in public debt. Now there are I think a number of very substantial what I call structural headwinds in the current world. And I think three of them I would pick out. One is the UK like many, well like actually all other industrialized countries has got an aging population. And that has an impact on a whole raft of public policy issues and it does have I think an impact on the on
Aspects of public debt, so that's number one. The second one I would observe, I don't think it's controversial at all to say this, is that I think the post-Cold War dividend in terms of defense spending, you know, sadly is not there as it was for reasons I think we all know. Thirdly, I'm not wishing again to embrace any controversy from sort of changes in other countries and recognizing that this is very much not all, this should not be a full burden on the public sector. So there is obviously the cost of climate change that gets it now. I say that because I think all of those three things are very big structural headwinds that we face before you get on to any of, I'm not going to comment on the politics of this. I think those are important points which have to be managed. And I think frankly if we had any one of those three at any one time we would have a substantial issue on our hands and we've actually got at least three of them at the moment. And so I think, I'm hoping this doesn't fall into your trap, I would say that I think when you think about public indebtedness we have to think therefore about how we sort of structure it going forwards thinking about the impact of these structural factors. I would also say that I think some of the long-run projections of public indebtedness do rather simplistically assume that it's just going to sort of, they sort of get the ruler out and extend. I think clearly very big decisions are going to have to be taken about it because of course if you take that sort of ruler-like approach then you will get huge levels of public indebtedness a long way out into the future. But that seems to me to be making very big assumptions about what public policies are going to be. So I would put it into that. I don't think that gets us into monetary policy and I say I think we're very careful about not wishing to comment on fiscal policy but I think recognizing these headwinds is important. It's not controversial I think in that sense.
So to follow up on that, you're right in understanding that you don't think that public sector borrowing is just heading in one straight line direction and therefore your assessment of the impact on financial stability is more subtle and more iterative?
I think yes in response to that. First of all, I mean look, we always operate as the Bank on the basis that we take stated government policies. Given the Chair has been very clear on oppositional fiscal policy and that's the basis on which we operate. I would as said, I think there are structural headwinds that fiscal policy makers in all countries are having to deal with. The second thing I would make, and this is a financial stability point, and Nat may want to come in on this because it's why we did the system-wide exploratory scenario. What we have seen is very big changes in the way financial markets are trading and position taking in government debt. So there is much more hedge fund activity in government debt, much bigger positions are being taken. And because of the size of these positions and the potential that if there is a very big shock they may get suddenly unwound, suddenly the world changes, we're very focused on the fact and why we did what we think is a sort of world-leading exercise here to say at what point does financial stability become compromised by these changes in activity in government debt markets.
One of the ways in which pressures on sovereign debt can feed into financial stability is that it can cause volatility in financial markets, in markets that are core to the economy, and that volatility can then be amplified as the Governor said by existing vulnerabilities in market-based finance, in large leveraged positions for example. And those amplification effects is what we wanted to test in calm times to understand how the ecosystem would behave and would respond to those shocks and had the potential to amplify them. And that is why we run this exercise to test those particular effects. And it was very insightful, very instructive both for us and for the market participants because we found things that we didn't know before. And we also found that some markets were more resilient than they were before. The gilt market has improved, has strengthened its resilience. But we also found that for example the gilt repo markets may run into some capacity constraints and the sterling corporate bond markets may hit some forms of liquidity. All those learnings, it's very important that all the participants in that exercise factor them in in their internal risk management so that should those shocks happen they're prepared to manage them and to deal with them. And the only thing I would add is in this exercise one of the pioneering features was the flow test aspect of it which is we did not assume the behaviors of players in those core markets. We actually asked them and we checked the extent to which the assumption of certain market players were consistent with the reaction functions of their counterparties. And we reconciled, you know, while actually you assume something that will not happen, we told them. And that is the type of things that helped them sort of improve their own preparations and risk management for when if those shocks do happen.
Okay, thank you. I wanted to perhaps come back to Liz O'Keeffe or Dame Colette around the relationship between growth and financial stability. We heard from the Governor about different categories of where there might be changes and opportunities to pursue growth in a balance and alongside financial stability. Were there any more changes that you anticipate from the remit?
I think even before the remit actually, because I've just joined the committee in the last six months, one of the things just before the election wasn't it, literally just as the election happened, one of the things I've observed is actually as an external member being able to ask those questions around consultation with market participants around how the consultation is conducted and what do we ask them and do we ask them the right questions and are we actually asking what is the cost of the regulations, the cost of the change and also the complexity of the change. Because sometimes when we introduce changes that perhaps within the bank are perceived to be quite straightforward, within a financial institution and its ecosystem might not be quite as straightforward. So that's certainly been one area where I think it's valuable to continue probing all the time as to how are we thinking, are we thinking as market participants would think around the changes that we're proposing to make. I think the other side of it is around what the Governor referred to earlier around strong and simple. I'm very much an advocate of reducing complexity where possible so to encourage new market participants or to encourage existing market participants to expand competition in a particular product set or a particular area of the market, they have to understand how complex it is to participate and what's involved in getting into that particular area of the market. And I think that's actually quite difficult as an outside observer if you have to navigate what are the rules involved whether it's the PRA, the FCA or the raft of different regulatory authorities we have. And that's just in the financial markets. I think when you look, my background has been in payment systems, when you look at things like open banking and open data and open finance, quite often there's a convergence between other regulated sectors of the broader industry and market. And so it's actually very difficult to navigate what are the rules required perhaps in the telecom sector at the same time as the financial sector and what's the crossover. And so that level of complexity and compliance overlay that exists now in order to participate in the market is complex if you're based in the UK. I think if you're also then looking at new entrants or foreign direct investment from other participants who would seek to come to the UK and compete or to expand into the UK, that's really complicated. So those are the kinds of areas where I think it's valuable to continue to probe and to ask those questions. They're not easy things to change I'm sure you'll appreciate. And I certainly see that the work that's been going on which I think Sam Woods referred to when he came to speak recently, Parliament was around simplifying some of those data requirements, data reporting. And the Governor referred to data reporting earlier. Data reporting is probably the tip of the iceberg.
So you talked about the telecoms overlay and the relationship between those kind of regulations and how might other sectors experience the same challenge of overlay. Are there any other sectors that might face that challenge?
Certainly with things like open data, it's just the regulation of data, so people's personal data. So the fact that you've got multiple regulators. For me open banking was a very clear example where you actually had the data regulator responsible for one aspect of people allowing open access to their personal information and transactions for example that they conducted, other banking information, whilst at the same time you have a financial regulator obviously responsible for regulating what happens with financial data. But quite often it's very challenging for a financial regulator, for example the FCA, to look at the business model of an entity that perhaps they've created an app for you to improve your fitness or improve your diet or something and it happens to take the data from the last food that you purchased and the receipt data is examined etc. It's the crossover there between financial regulation and people's personal information or medical information is quite unique and quite complex for the FCA to try and navigate that and figure out how that works I believe is quite challenging.
And does the responsibility for doing that lie with the FCA on the basis of the change in the remit letters or does it lie elsewhere in your opinion?
Historically as a result of EU legislation it resided with the FCA. There is an element of it that resides with the data regulation but it's typically the business model analysis is with, it's these crossover areas that are one of the challenges.
Do you think it's the complexity and it's not that we've deliberately set out to make it complex, it's just the nature of when you open up the floodgates and you say okay we're going to do open data, it's fantastic, you see all this innovation with wonderful new companies coming in and saying oh look if I have that data actually I can do something really new, quite groundbreaking with it, but we haven't figured out exactly who should be regulating it?
Can I just add one short supplementary on that specific issue on the open data, open banking thing. Is it not the case though that there is a massive imbalance of power in the industry between incumbent banks who are very reluctant to actually open up and lots of new players are very keen to gain access to that. And surely that's the heart of it and we've got to get a grip of that.
I think I see both sides of the argument probably because historically we didn't expect banks to do anything with the data. In fact we gave them a fiduciary responsibility to protect the data and certainly personally I don't want my bank sharing what I do every day and I'm pretty sure that the vast majority of the population probably doesn't either. But then when you ask people okay but would you like this app that tells you about your fitness and what you're eating and so in order to get to that I need to do X, Y and Z, I think sometimes we're on that path of discovery and figuring out okay so how far can we go with this. And there are some boundaries that are very very clear, for example with medical information. If you went to a pharmacist and purchased medication you certainly wouldn't want your bank to be selling that data to an insurance company that would then determine that you had a terminal illness for example. So there are a lot of things we're actually thinking through the logic of the customer experience, the data experience, what does that actually mean and where are the risks and liabilities is something that is almost being done as a test and learn process as we evolve this environment. And so there is an element of how fast can you go and it's not an area where you can go fast and break things because some of this data once it's out in the wild you cannot contain it again.
Thank you. Huge opportunities and huge threats. I'm slightly jumping back to the discussion that Mr. Benjamin had just then on stress tests and on gilt market volatility. I just saw that yesterday you'd opened a new lending facility for non-bank financial institutions, so insurance companies, pension funds and the like, in times of a severe gilt market dysfunction. I was wondering how much of a first this is for the bank to start having lending facilities to non-bank financial institutions and what risk you saw from making that first step. And secondly it'd be great to just get a bit of the background on where the idea for this would come from and the origins of the need for the new facility.
So I think this is indeed a first and it's a great new tool that we have in our toolkit. And it is the first time that we equip ourselves, so this would be, we're not open for applications for this new tool, and it means this would be a way for us to have the ability to lend to pension funds, insurers and LDI funds if we decided that there was a severe dysfunction in the gilt market that justified us taking liquidity directly to that corner of the financial sector in order to avoid asset sales for example. So this is a great additional tool to have in our toolbox and it's for situations when we think there are dysfunctions that are so severe that only we can restore functioning of those markets. So it's great to have that tool in our toolkit. It is a tool for us to decide when to activate and that is how it would be used should that be required. But it is a great addition.
