mark carney letter to treasury committee

8/12/2019 Mark Carney letter to Treasury Committee

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MarkCarneyGovernor

Andrew Tyrie MP

Chairman of the Treasury CommitteeHouseof Commons, Committee Office

7 Millbank

LondonSW1P3JA

During the evidence session on 15January Iwas asked to write to the Committee with further informationon two topics: the PRA's work on the Remuneration Code; and UK banks' exposures to China.

REMUNERATION

The Committee requested a timetable for the PRA's response to the Parliamentary Commission on

Banking Standards' (PCBS') recommendations on claw back and other aspects of the Remuneration

Code. In short, the PRA plans to issue two consultation papers on remuneration during 2014: A consultation on amend ing the existing Remuneration Code to require firms to apply claw back to

vested variable remuneration (planned by March); and

A consultat ion on the implementation of a revised Remuneration Code in light of the PCBS' wider

recommendations on remuneration (planned by August, aligned with proposals on the Senior Persons

and Certification regimes)

Furtherdetail on both consultations is set out below.

Consultationon claw back

Th e current Remuneration Code requires firms to cancel or reduce deferred variable remuneration (i.e.

bonuses that have been awarded but not yet paid out) in cases of misconduct, poor performance orfailures of risk management. The PRA's expectations around firms' use of m lus were clarified in aSupervisory Statement 1 published in October 2013.The current Remuneration Code does not, however, require firms to recoup bonuses that have already

beenpaid out (claw back). The PCBS recommended that provisions for claw back should be

strengthened and, accordingly, the PRA intends to begin the statutory consultation on proposals in early

March.After a two month consultation period the PRA Board expects to be in a position to make rules in

time for firms to include claw back provisions in remuneration policiesfor the 2014/15 financial year.

www.bankofenBland.co.uk/pra/Documents /publ icat ions /pQl icy/2013/apDofmalusss2-13 pdf

30 January 2014


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Consultation on the remaining PCBS recommendations on remuneration

ThePCBS also made a number of other recommendations in relation to the Remuneration Code. These

includedextending the deferral period for variable remuneration; paying a greater proportion of bonuses in

instruments that could be bai led- in;and new powers for the PRA to intervene on remuneration where afirm has received direct taxpayer support.

Given the number of overlaps and dependencies between these issues and the scope and substance of

theSenior Persons and Certification regimes, the PRA intends to consult on the remaining PCBS

recommendationsat the same time as it consults on implementing the new legislation dealing with

accountabilityand standards for bank employees. This will include consulting on the extension of deferral

periodsbeyond the current minimum of three to five years to improve alignment between reward and the

maturity of risk.

ThePRA is co-ordinating with the Financial Conduct Authority (FCA) on the timing of the consultation

around the Senior Persons regime. We plan to publish the consultations together by August but Ishall ofcourseask the PRA to provide you with an update once a more specific date is agreed. We expect that

the consultations will run for three months, enabling the PRA Board to implement the necessary rules by

theend of 2014.Finally, you asked whether the Bank currently has any concerns about the PCBS' recommendat ions

aroundremuneration. Ican confi rm that, at present, we are confident that most of the recommendationscanbe put into practice. The one exception, as you may be aware, is the recommendation on recouping

bothvariable remuneration and pension rights from senior persons where a bank is in receipt of direct tax

payer support. The provisions of both European human rights legislation and the UK Pensions Act mean

thescope for taking action in respect of pension rights will require very careful legal analysis.

UKBANKS'EXPOSURESTO CHINA

Iwas also asked for my views on the scale of UK banks' exposures to China, a question prompted by arecent paper by Dong He and Robert McCauley at the Bank of International Settlements B IS )2 . Dong andMcCauleynoted that UK banks had, in aggregate, the largest exposures to China of any country's banking

system.

As Isaid during the hearing, this came as no surprise to me given the UK's position as a global financialcentre, and the increasingly important role that China plays in the global economy. Indeed, the extent of

the banking linkages between the UK and China was discussed in an article published in the Bank's most

recent Quarterly Bulletin3

, in which the scale of UK banks' claims on mainland China was also noted

The claims of UK-owned banks on China totalled 184bn in Q22013 (see chart 1 in the annex to thisletter). These exposures have increased by around 2.5 times since the end of 2009, albeit from arelatively low base, compared to a1.5 times increase across all of the banks that report their exposures totheBIS (Chart 2).

Despite this growth, claims on China are still only the fifth-largest component of UK-banks' external

exposures (Chart 3). Chinese exposures remain much smaller than UK banks' exposures to the United

States, and are also less than exposures to a number of smaller economies.

2 "Transmitting global liquidi ty to East Asia: policy rates, bond yields, currencies and dollar cred it", by Dong He and Robert N McCauley, BIS

WorkingPapers 431 http://www.bis.orE/publ/work431.pdf

3 "Bringing down the Great Wall? Global implications of capital account liberalisation in China", by John Hooley,Bank of England Quarterly

Bulletin, 2013Q4 www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/obl304prereleasechina.pdf


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China's financial system is still closed relative to other economies. But there are increasing signs of

relaxation of capital controls and greater use of the Chinese currency abroad. If this continues then

foreign banks - including UK banks - could reasonably be expected to increase their holdings of theassets of China - the world's second largest economy.

I should note that the Bank monitors potential risks that could arise from UK banks' overseas activitiesvery closely. To do so, it works with other central banks and supervisors , including those in China. Ourforthcomingstress testing work can be used to account for idiosyncratic risks to which firms are exposed,

includingconcentrations of risk in a particular region or country.

I trust that these responses are helpful to the Committee.


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Annex

Chart1: Claims on China ofmajor banking

systems,2013Q2Chart2: UK-owned and allBIS reportingbanks' claims on China

ra

lands

tralia

.1> fA e

ir Z

US$billions- 200

- 180

- 160

- 140

- 120

- 100

- 80

- 60

- 40

- 20

0

Percentagechangeonprevious year

-Al lreporting countries r 120

2006 2007 2008 2009 2010 2011 2012 2013

Sources: Bank of International Settlements (BIS)

consolidateddatabase and Bank calculations.

Sources: Bank of International Settlements(BIS)

consolidateddatabase and Bank calculations.

Chart3: External claims of UK-owned banks

bycountry, 2013 Q2

Chart4: Share of foreign-ownedbanks'total

claimson China,2013Q2 vs2008Q1US$billions

1,200

1,000

- 800

- 600

400

200

a s053

11 o -aaa

50

3CQ

Per centof all BISreporting banks'

externalclaimsonChina

Mar-08 Jun-13

L Lj h 1sin

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