Belfast Telegraph

Thursday 18 September 2014

MPs to grill Bank over credit crisis

The House of Commons' powerful Treasury Committee will quiz the Governor of the Bank of England and the heads of the Financial Services Authority this month about the causes of the credit crunch and the way they have handled the crisis.

The committee will question Mervyn King, the Bank of England's Governor, and the deputy governor for financial stability, Sir John Gieve, on 20 September. Likely subjects for questions will include the Bank of England's emergency credit facility, the role of the credit rating agencies, and the stability of the financial system.

"We will ask how the emergency facility is being used, what the Bank's view of liquidity is, how we got into this position, and what reassurances the Bank can provide as to the stability of the entire system," Michael Fallon, the senior Conservative member on the committee, said.

Sir Callum McCarthy, chairman of the FSA, and Hector Sants, the regulator's new chief executive, will appear before the committee in October for a scheduled meeting, and the committee will take the opportunity to ask them about the FSA's supervisory role in the crisis.

Financial markets are gripped by a credit crunch which started with defaults by US mortgage holders and reverberated globally because hundreds of billions of dollars of the loans had been parcelled up and sold around the world. Banks are unwilling to lend to each other and have been left with huge debts on theirbalance sheets which they would once have sold on. They are also having to bail out investment funds that borrowed in thenow-moribund short-termdebt markets.

The Bank of England and the FSA have remained tight-lipped during the crisis. The Bank has not clarified why its standby credit facility was being used and the FSA has refused to discuss specific financial structures such as collateralised debt obligations and structured investment vehicles, which have been at the heart of the recent turmoil.

Barclays has used the Bank's credit facility twice in the past two weeks, borrowing £314m and then £1.6bn. Barclays said both times were due to technical glitches, but markets remain concerned about Barclays' leading role in structuring credit vehicles that are suffering inthe turmoil.

Committee members may also seek to clarify where responsibility lies between the Bank of England and the FSA if a major financial institution faces collapse, and ask about the Bank's refusal to pump money into the system, unlike central banks in Europe and the US.

Barclays' president, Bob Diamond, has called on the Bank of England to intervene to support short-term money markets.

The views of the Bank and the FSA on credit rating agencies will be closely watched. The agencies gave top ratings to structured credit products containing US sub-prime mortgages. The European Commission is investigating whether Standard & Poor's and Moody's, the two biggest agencies, had conflicts of interest in rating bonds for banks.

The session with the Bank of England is ostensibly to review the August inflation report, the first time the committee has done so, because Parliament is in recess when it comes out. The decision to hold the session was made before the market turmoil, and it now gives the committee the opportunity to question the Bank's bosses.

The Treasury Committee oversees the spending of the Treasury, HM Revenue & Customs and other public bodies, including the Bank of England and the FSA. Under its chairman, John McFall, the committee has broadened its interest in financial services and markets by quizzing industry figures on subjects including credit card debt and small business banking.

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