Welcome to the Treasury Committee on Tuesday 20 January 2026. We are delighted today to have one of our regular sessions with members of the Financial Policy Committee about the Bank of England and its Financial Stability Reports. I am delighted to welcome Andrew Bailey, the Governor, and Sir Dave Ramsden, the deputy governor for markets and banking. They are joined by Liz Oakes and Jonathan Hall, who are external members of the FPC. Welcome to you all. I am going to ask Yuan Yang MP to kick off.

The important thing is to put into context how we arrived at the 14% to 13% change. We come at this from two directions: one is top-down and the other is bottom-up. This is the top-down judgment, of course. The bottom-up is actually the one that the PRA lead on, which is to formulate the capital requirements piece by piece. But we aim to keep the two consistent, because otherwise that would be somewhat challenging. Since we did the last assessment, two things had changed in the bottom-up that add up to 1%, and it is actually about 0.5% each. First, we calculate the benefits of the better risk assessments in Basel 3.1, when it comes in, to be worth about 0.5% off the buffer that we maintain in what we call Pillar 2A, which is the thing that is there to account for the things that we do not measure very well. We think the benefit there is about 0.5%. Secondly, another piece of the buffer structure is what we call the systemic buffer for the globally systemic institutions. When we did the last assessment there had been an assumption that that buffer would increase by about 0.5%. That was really saying that the UK banks would become more systemically significant over the period ahead. The systemic buffer calculation under Basel is actually a relative calculation—your banks relative to other people’s banks, as it were—and the answer is that the UK banks have not actually become relatively more systemically significant. So again there was 0.5% put in which really was not justified by what has actually happened. Put those two together and the bottom-up is about 1% lower. To align those two things—bearing in mind they are both, in a sense, a measure of risk assessment with slightly different angles—when we looked across the piece from the top down we therefore felt comfortable bringing it down to 13%. Now, 13% is towards the lower end of the range that we think for the top-down; we put a range of about 12% to 16%. The other thing I would say—Dave referred to this in a speech he made last week—is that there is an important element in here for the benefits that we think the resolution regime gives. Assuming for a moment that we did not have the resolution regime, we think that would have to be reflected in more continuous bank capital, worth about 5%. So when we did the previous 14% we actually said that without the resolution regime it would be 19%. Coming on to John Vickers’ point, the resolution regime is also important because—as we have said many times in this Committee—that is the way we really believe we have got rid of “Too big to fail” and the dependence on public money. There is a genuine difference of view here with John Vickers and David Aikman; I don’t think they fully believe in the resolution regime and they are obviously entitled to that view, but that is not our view.

Yes, can I just reinforce the point about the resolution regime, because overseeing the Bank’s role as the UK’s Resolution Authority is one of my executive responsibilities. It was first put in legislation about 10 years ago, and we have actually applied that resolution regime through the regular resolution assessment framework engagement that we have with the systemically important banks. It is through that process, as well as obviously through the legislation introducing bail-inable debt, the MREL regime, that we have given ourselves assurance that the resolution regime is credible and effective. In addition, as Andrew says, John Vickers and David Aikman are entitled to their judgment; they don’t think the resolution regime has been tested. But I would argue that it was tested, not with a G-SIB, but when we resolved Silicon Valley Bank UK in 2023 there was no risk to public money through that. John Glen is nodding at that.

It was very efficient.

Yes, and the contrast there with the £137 billion of public money that had to be used during the global financial crisis is very distinct. All that gives us confidence, particularly as I have various responsibilities as an FPC member, but that resolution judgment is a critical one. I would say it is a big difference between us, because they highlight that there is less fiscal space for the Government. This is not about fiscal space because we have a resolution regime to substitute for that fiscal space that was used up during the global financial crisis.

That is very clear.

I have been on the committee for eight years now. We did the last capital review five years ago and this five-year frequency is sensible; I was fully supportive of that on its own merits when we decided we would look at it again last summer. As the FPC, and because I am a PRC member, our primary objective is always financial stability. Then we have a secondary objective on the bottom-up PRA, PRC; we think about it in terms of a secondary growth and competitiveness objective. But I am always putting financial stability first, and it was through that lens that I approached and contributed to the capital review.

If I could just add, there is a bit of a philosophical point here. If you have the industry in, it will assert very strongly that you will get more growth by having less capital. I don’t think John Vickers and David Aikman will mind me saying I think they would take the reverse view: that more capital is a sign of strength that will support growth. My view is certainly that you do not get growth without financial stability, but we should not be seeking to have more capital than is consistent with financial stability. That is an important philosophical issue that runs right through this debate.

In my speech last week, I stressed that there is a trade-off here and a balance to be struck, but I felt comfortable with the decisions we made. As I said in the letter I wrote to you on the detail, which followed up on an exchange with Dame Harriettt—when I was at the Committee back in December—what will actually happen will depend on the balance between demand and supply of lending. We don’t get any sense that there are any constraints out there in terms of the supply; that it is supply that is holding back lending does not come back from our various surveys. Whether there is an impact on the real economy that would then bring it back into the Monetary Policy Committee space will be a question of how banks respond behaviourally.

It is a judgment, but I don’t see any sense that it is a significant issue, no. In the latest FSR we go to some lengths to highlight that SMEs have had issues with getting capital for nearly 100 years at the macro level across the economy, and we quote the Macmillan Report from the 1930s. For high-growth firms there are issues with going from start-up to scale-up. I was answering the question on the macro level because that was in a kind of MPC context, but certainly in terms of what can be done at the micro level for particular segments of the economy, for particular firms that you want to really contribute to growth—high-growth firms—there are a whole series of issues; I am not saying there are not.

They could well do.

To your points, Dave, I just acknowledge that absolutely there was a very efficient resolution and a seamless operation in 2023 on that. The received wisdom I get from people in the City and banks is that we had a system set up after the last crisis and to some extent we have not reset in the world that we now operate in—the Governor alluded to this—and that the industry would possibly want to go further. Could one of you explain how you see that step versus what is happening in the EU and the US, and how we look in terms of global competitiveness? Are we actually addressing the world as it is now, or rather holding on to a regime that was set up 10 or 12 years ago on the basis that this now must not change, otherwise we will get into the risks that we had in 2007-08? For many in the banking sector it feels like there has not been that shift, and that the binding requirements to work through from that 14% to 13%—that presumably the PRA is responsible for—has not happened yet. So how would you address the concerns that exist in the banking industry?

Funnily enough, the PRA has published the Basel 3.1 documentation this morning.

That is timely.

You are seeing it tomorrow, so you can—

But to the bigger point I am making?

A couple of points. Implicit in your opening point about the industry is a view that, “Okay, we had a global financial crisis, you had to respond to it, but that is all over and done with; move on.” I would push back on that to a degree, because of course the underlying issues never go away, which is the question, “What is the right level of capital for this level of activity?” The second thing, which we devoted a lot of space to in the publication, is this question about how you compare levels of capital—the EU and the US being the good cases in point. The industry frequently asserts that we have a higher capital ratio; we don’t think we do. We have published far more of the entrails of the calculations in this report, and I am happy for the industry to publish its views and push back if they wish to. I have not seen anything yet, but no doubt they are working on it. I would say that the devil is in the detail in doing this stuff. If you take the example of the US, a lot of the important detail and the difference between us and the US in approach is that the US actually has a very different approach to risk weighting than we do. There is a thing called the Collins Amendment, which is done in Congress, which sets a floor on risk weights which is higher, and you have to take that into account to essentially calculate like for like risk weights, which we have done in this calculation. I have always cautioned to the industry that if you do simple headline numbers you don’t capture the detail, and you have to do that. But as I say, we are happy to receive whatever feedback comes.

I can give you an example of devil in the detail, coming back again to the resolution regime. I would say that we have evolved our approach, and actually the focus of my speech last week was about the fact that we have tried to be responsive to changes in the risks as we see them, particularly affecting mid-tier banks—banks that are growing. We made a number of changes last year to the thresholds at which the requirement for MREL kicks in for that bail-inable debt that protects the public purse. When we originally set the regime it was £15 billion to £25 billion and we have moved it up to £25 billion to £40 billion. Within the way that we then apply it case by case, we have actually looked at some banks who had transfer strategies—that is, they had to raise some bail-inable debt—and we have said that they can actually come out of the MREL regime altogether because their business models look relatively simple. We announced that just before Christmas; I will not name the particular banks and building society that moved out of MREL. But more generally we engaged very strongly with the mid-tier population. You will remember from when you were Economic Secretary that that is a group that is very keen to engage, both with the Treasury and with the Bank of England. Their response to our changes was that they certainly felt that they had been engaged with; I would not go as far as to say it was unanimously positive, but they recognised that we were balancing. We sometimes get challenged that our thresholds are still lower than in the EU.

That is what I was going to ask.

But the banking union has a very significant pre-funded bailout fund. The single resolution mechanism has around £70 billion. We have the FSCS with £1.5 billion. In the US it is very different: you can be much more confident that a bank will be taken over because the banking sector is so big. It also has a much more significant deposit protection scheme. So we are balancing off, including against risk to the public purse.

Thank you for a very helpful exchange.

Governor, there have obviously been lots of developments over the last few days with Greenland, including the prospect of a potential invasion, further trade disruption and trade wars. How concerned are you about what is going on there and, more generally, US political risk and its risks to the financial stability of our economy?

As I am sure you know, in the Financial Stability Report we highlighted that the risks to financial stability increased across last year. I do think that geopolitical tensions, and particularly trade issues, are an important part of that. That does not mean to say that I want to say that any particular issue is a trigger, but the level of geopolitical uncertainty and geopolitical issues is obviously a big consideration because they can have financial stability consequences. But let me put that into a bit of context in two respects. First, having said that, growth in the world economy last year was a lot more stable than we thought it would be. We were probably having this conversation every year, but if you think back almost a year ago to last spring, say, growth and the stability of the world economy turned out to be rather better than we thought it would be. Secondly—a rather similar point—we worry considerably about how markets can react to these things, and market reactions have actually been more muted than we feared and expected. But the final thing I will say, overriding that, is that having made both those points I take neither of them as a source of any assurance going forwards; we have to remain very alert to these things.

Related to US political risk, along with various other Central Bank governors you obviously signed a letter in connection with the criminal proceedings against the governor of the Federal Reserve. Would you like to outline what your concerns are about the criminal prosecution against the governor?

It was a series of subpoenas. Yes, let me be very clear that of course it is not for me, or any Central Bank governor in any other country, to intervene in a domestic US issue. However, the US and particularly the dollar is a different case for the following reason: there are substantial externalities and potential spillovers from things that go on in the US and, I would say, particularly from a threat to the independence of the Federal Reserve. The Federal Reserve is obviously the Central Bank for the largest economy in the world, but it is also particularly the Central Bank for the world’s reserve currency. If you think back in time, probably the two most famous comments ever made about the dollar were both made in the ‛60s and ‛70s. One was made by Giscard d’Estaing when he described the reserve currency status as, “The exorbitant privilege,” and the other is the famous comment made by John Connally when he was US Treasury Secretary in 1971, “It’s our currency and your problem.” But the point is that there is very substantial scope for spillover, and it goes back to the point I was making in response to your first question about financial markets. It is therefore a concern to the rest of us, and I think we have to highlight that point. It is pretty unprecedented for other Central Bank governors to do this, but it is a point that we have to make in this situation. But as I say, we have to be careful what we do. Jay Powell is actually a close colleague and a friend of mine and I will say, as I have said before in public, that he is in my view a man of the utmost integrity.

While the focus at the minute is obviously on political developments with the US, there remain material concerns about China taking action against Taiwan: a blockade, an invasion or something else. Is the FPC satisfied that it has a firm grip on the risks in connection with such possibilities?

We spend a lot of time on those issues. It is no secret that the UK has two large banks that are, by history, heavily committed in those markets. We obviously have a very open economy, which is again a deep history in this country and in many ways a good thing, so we spend a lot of time on these issues, and yes, that is obviously a very important part of our consideration in the work that we do.

If I can just add, compared with previous eras—particularly thinking back to the global financial crisis—the interaction between financial stability risks and fiscal positions is much more front and centre. It comes back to the discussion of fiscal space: in the context of bank capital it is not an issue, but in the context of the core markets—where the kind of spillovers that Andrew is talking about would manifest—We are in an era of volatility. Even with financial stability risks increasing last year, markets were on balance relatively orderly. After Liberation Day, for example, it was those core treasury markets where we saw real disruption, and that spilled over into our gilt market. To Andrew’s point again, when you look at this year so far, the pricing in those core markets for US Treasuries, UK gilts, and Euro area bonds is actually very little changed compared with where it was last year in terms of yields and so on. There is not much evidence of volatility, but that does not in any way stop us keeping an acutely close eye. Actually, the one exception—for other reasons—is the Japanese Government bond market, which we highlighted in the FSR, where a combination of a new political setting plus traditional Japanese fiscal position means JGB yields have actually doubled over the last year at the 10-year maturity: they have gone from something like 117 basis points to 2.35.[1] So there is always something new to keep an eye on. That also impacts on us, as we saw at times last year. What is happening in the Japanese market can impact back on us as well, as we saw with the role of hedge funds.

There are just two further points I would make, and this is, in a sense, what may help to explain why markets have probably been less volatile than you might expect. First, in terms of trading geopolitical risk, traditionally there are two things you can do: you can go long the dollar and you can go long gold. But of course, if the problem is coming out of the US, going long dollar is not the obvious thing to do. In fact, if anything, what we are seeing is quite a lot of hedging of what had previously been long dollar positions going on—in other words, going the other way. That leaves gold, and we are seeing that in the gold market because of course gold is essentially a sort of agnostic asset in terms of nationality; but it cuts off some geopolitical trading opportunities by not having the dollar there as the option. Secondly, one of the challenges the markets have is they see these announcements being made and then they say, “But does it follow through to action, or are there restraining forces in there?” I am not saying I am a believer in this sort of taco trade notion, but what they see is, “Did the tariffs actually follow through to some of the more extreme things that were being said or not?” They are trying to make judgments on that all the time.

That is obviously what happened after Liberation Day: the US authorities reconsidered, and as a result the market volatility that we saw, and what was worried about globally, calmed down.

Mr Bailey, in response to Mr Grady’s question about the prosecutions in the US, you referred to the importance of the independence of the Fed. I just wondered whether you perceived, recognised or felt any similar threats to the Bank of England’s own independence, and whether you have a strategy to mitigate them?

Obviously our independence is very important, and actually just as important in our context. I am very pleased to say I don’t see the same threats to the independence of the Bank of England, but obviously it is something— By the way, can I just say, our accountability to you is an important part of the independence of the Bank of England. The fact that we do our job but we also have robust accountability and robust democratic procedures is a very important part of this, so thank you. But no, from where I sit I am pleased to say our system looks rather different.

Just to follow on that, obviously the threat to the independence in the US came about as a result of political change, and you said you feel quite secure in the UK right now. Over a five or 10-year horizon do you feel it looks secure, or has that started to become questionable?

He won’t be here then.

I am not sure I am going to enter into speculation on what might happen in domestic politics.

I am not talking about specific parties, just that in general there has been a mood change across Europe and across the western world. Lots of institutions are breaking down. Do you see that as a potential threat to the Bank?

I made some remarks last week, which we published, and I did make points about so-called populism. I said I thought that there were three things in the economic policy world that I associate it with, and the third one was what I call encouraging a decline in trust in institutions. Not just us—that is a much more general point. By the way, I deliberately said both domestic and international institutions because it applies to the international world as well. That is something that we have to take very seriously. We have to do our job and we have to be seen to be doing our job well, and we have to explain ourselves transparently. But I do see that is part of what has grown up in that world, and yes, we have to take it seriously and, I hope, present a serious rebuttal of that point.

It is worth emphasising the importance, as Andrew just has, that we are almost doubling down on transparency and accountability, trying to get more material out there. Look at how much we published in the capital review, something I was discussing with you back in December—the focus on our balance sheet and on what we are doing with the asset purchase facility, trying to be more and more transparent but also accountable. By being transparent, it gives people more information to then come back and ask us questions. One thing we can do in response to what is going on is to continue to be as accountable as we can and get information out there to explain not just what we are doing but why we are doing it.

I am going to move on to talk of an AI bubble. I do not think you use that term in your stability report. You talk about concerns over materially stretched valuations and you compare that to the dotcom bubble. Can you explain to the Committee what you mean by materially stretched, and how do you calculate that? How do you come to that conclusion?

There are a number of ways that you can seek to calculate particularly the risk premium in equity markets. One that we use is something called the cyclically adjusted price-to-earnings—CAPE—ratios. If you look at that, it tells you the UK is at about the tenth percentage point in the distribution, or one end of the distribution, if you like. The US is nearer to the fifth percentage, so they are more stretched. A comparison with the dotcom period is an obvious one to make; I would say that you have seen some similarity in valuation moves. There is a difference in that far more of the industry we are talking about here—tech and AI—has earnings attached to it at the moment than was the case in the dotcom bubble, where there were a lot of companies being valued way before any earnings were coming along, and that did not end well for quite a lot of them. But the key point that then follows is that there is now obviously quite a big dependency built into those valuations on the continuing stream of earnings; that AI will produce a robust, solid and continuous stream of earnings, and that, of course, will come down to what productivity impact it makes. It is in the nature of things, of course, that it is unlikely that all the companies will be winners: that would be unusual in any competition situation. But that is not the key to it really; the key is that in aggregate they continue to produce those earnings. What I would say, and this is more a point about the US really because this is obviously most evident in the US: if you look at the S&P 500, something like nearly 50% of the index is in this world now. First, the dependence on those valuations and therefore that stream of earnings: there is a very substantial wealth effect built into the US economy that is supporting growth in that economy, and obviously if there were any reversal of that then that would be significant. It is a much bigger wealth effect than you currently have in the UK economy. It is not the same, but again, going back to the point I was making earlier about spillover, we can get spillover from the US.

I saw a JP Morgan report a few months ago that speculated about the cost of AI infrastructure—obviously you have to physically build things and there are energy costs associated with it as well—versus the potential revenues from AI. It was saying that a company such as Apple might have to charge $300 a month for an iPhone to ever hope to make its money back over a reasonable timescale. Is that the sort of thing that the Bank would look at and say, “Well, that does not seem realistic”? And is that why people are talking about a bubble?

No, we do look at that actually, because there are several issues in there. One issue is what the economic life of this infrastructure is and how confident we can be that we know what that economic life is. One thing we can all observe—I see it in our own investment—is that the economic life of this stuff is shortening. As AI moves very rapidly, what is the expected life of the supporting infrastructure? That is one point, and there is another point allied to that. As you said, there is a vast amount of investment in data processing power. I don’t know how likely it is that there will be some further innovation that will say, “No, actually we have innovated around the need for all that data processing power,” which in economic terms would then of course lead to a very different valuation of it. So it is fair to say there is a lot of uncertainty around that. It is understandable why, in the current circumstances, this investment has to happen, but there is a lot of uncertainty around its economic life and value, certainly.

Do we think that some sort of correction is inevitable over the medium run, even if it does not happen, say, this year?

The point I wanted to make is that what we tried to bring out in this particular Financial Stability Report is, looking forward, as you said, there is a huge amount of investment: £3 trillion, £5 trillion; these are absolutely huge numbers, and the estimate is that potentially half of that has to be funded via debt issuance. So we are moving from a situation where AI has been self-funded, equity-funded, earnings-funded; this huge infrastructure spend is going to be 50% funded by the debt markets. What that means is that if there is a potential correction—as the Governor was saying, the moment there is a correction there is obviously a wealth effect and there are financial conditions tightening. But if you were to overlay £2.5 trillion of debt related to those earnings, then if there was to be a correction at that point there would be a much broader impact into the debt financing markets as well. So you have these two scenarios. Obviously we are not timing a calling of any potential correction, and at the moment earnings are coming in extremely strong so the valuations are being maintained. If there were to be a correction now it would be focused in the equity markets, but if there were to be in the future when there is significant debt, then that would have a much broader impact.

Ms Oakes, do you have anything to add?

I concur with Jon’s remarks, particularly around the debt market side of it. The other thing is just the question of how it expands and what sectors of the market are impacted. We see huge productivity gains in particular areas—like healthcare, for example—potentially, but it is far too early to say directionally where this is going to land, and therefore which sectors of the economy would be most impacted by any structural shifts or any particularly swift corrections.

Ms Oakes, on your point there you said you are actually seeing productivity gains coming in as you are seeing the earnings coming in as well, as Mr Hall said. Do you have to differentiate between this and the dotcom bubble where, of course, the earnings were not coming in?

Yes, it is structurally very different. At this early point it is difficult to determine precisely where those productivity gains are going to be spread across the economy, but there are definitely sectors that are seeing specific uplift. Healthcare is one that is very clear, but it is not easy to determine right now which are going to be successful and which are not. Clearly the other sector, the tech sector, is having material impacts on productivity in terms of just code writing, code development and so on.

Just returning to the US for a second, we talked about political instability in the US and how things like that leading to issues around tariffs and trade could potentially pose a risk to us. On the aspect of public debt rising that we see in the US, how do you assess that risk to the UK? For instance, is there a possibility of a US public debt crisis that might have a spillover effect on us?

I will start with the general points, that in most major economies there has been quite an expansion in the stock of public debt including, by the way, in the UK, as you will be aware. And so public debt ratios have increased. That is also true in the US, and the US public debt ratios are higher. The risks around that go back to a point I was making earlier. One reason why the US can sustain that, of course, is because of the externality—because of the dollar’s position: so there is global demand for dollar assets, this is “The exorbitant privilege.” But there is a lateral limit to that, and what is much harder to judge is exactly where that limit is. That limit will be affected, of course, as I was saying earlier, obviously by the attitudes of investors around the world to holding dollar assets. So far, we have seen more in the way of hedging dollar positions than actually outright, “We don’t want dollars,” but that is the risk: starting from a higher level, and with the projections based on US fiscal policy projections taking it higher. So the US can sustain more of that because of its external position, but there are limits. I will finish by saying, this is very much part of the debate about global imbalances. The part of the debate that gets much more attention, obviously, is particularly the issue with China and its external surplus, its trade surplus, and its very substantial domestic investment position which supports that export surplus. But the other side of that is the US position, which is supporting a deficit, a good deal of which is attached to the position of US fiscal policy.

It comes back to what Andrew was saying about the exorbitant privilege and safe assets. Typically, when you have these episodes of kind of risk-off safe haven assets such as the dollar, gold, and in the past—because of the size of the market—US Treasuries, you have those kinds of well-established correlations. What has been interesting over the last year, and this was talked about a lot at previous hearings of this Committee, is that we have seen some of those correlations being challenged more and breaking down. So US Treasury yields have not necessarily fallen when there have been these risk-off periods, and the dollar has not necessarily appreciated. The one asset that has done very well throughout this period is gold; I think the IMF did an update yesterday. The US debt to GDP ratio, the gross debt to GDP ratio, is estimated by the IMF to rise to 143%. That is probably significantly higher than ours, although ours is also significantly high. But they are also running significant deficits, so there is a huge financing need for both that existing debt and the additions to it through the US Treasury market. We often talk to you about the gilt market. Andrew talked about spillovers. Increasingly we are seeing that US yields might rise, and we are seeing the consequence in our yields rising, so it is right to focus on these. It is not just a US issue at all; in the report we talk about Japan, China and France. On this Committee and at the Bank we are very conscious of the UK’s fiscal position, but there is an awful lot of sovereign debt in developed economies in the world and it is increasing.

Is there a world in which reduction in demand for US Government debt could be helpful because it might increase the demand for UK Government debt and therefore shore up the price of gilts?

I would not see it working like that, given our relative reserve currency statuses. It would more suggest worries around the US, which would then have negative consequences. One thing to stress, though, is that so far, when you talk to people in the markets, particularly asset managers, investors, most were probably overweight US assets this time last year, including Treasuries, and it comes back to things like the AI boom, the US’s resilience and all of that. They may have looked again at that portfolio and moved back to something that is more balanced, and some other jurisdictions would have benefited at the margin. So that kind of correction or adjustment is okay. But going back to what Andrew was saying about the Fed, an undermining in the sense of the US for whatever reason would not be good at all for the global financial system or global economy.

Going back to the correlation point, if you think about it as a UK investor, if you are investing in US assets—maybe you think that tech stocks are still good value—then when the dollar was inversely correlated to the risky assets, that provided a hedge. That meant that if you were a UK investor investing in US tech stocks, for example, then the currency would reduce the volatility and the riskiness of that position. And so the correlation shift we have seen that has gone from negative to, let us say, zero at the moment, maybe even positive, means that the riskiness of all those trades has gone up. The overweight was a natural response to the fact that the currency risk was a hedge, and so the reduction in that overweight is just a natural response to the fact that the riskiness of everyone’s positions went up. That is a sort of headwind to the US going forward, unless that inverse correlation reasserts itself. But that is very different from complete de-dollarisation or a loss of reserve currency; it is more of a technical issue.

Sterling was the world’s reserve currency for decades, of course, after the UK stopped being the world’s dominant economic power. Would you see a similar scenario for the US in terms of the reserve currency?

From a financial stability perspective, what is really important is whether there is a gradual shift or a really abrupt shift. What we have seen in terms of reserve currency over the years is that, since the ‘70s, it has just gradually been declining in terms of the amount of transactions that are happening in dollars. That has not caused any financial instability but if there was to be a very sudden event, let us say related to Fed independence or some other sort of geopolitical event, then obviously that could cause financial instability. Of course, we are not calling for that, we are not predicting that at the moment, but it is certainly a point to be aware of.

Just to pick up on Jon’s point, if you go back to the 1970s, the dollar’s share of global official reserves was about 80%. Today it is something like 57%. But the point I am making is that there is more to being the reserve currency than just how much the currency is traded. An increasing part of the status now is actually providing what I call the world’s safe asset, in other words, US Treasuries, which are used extensively by markets for collateral and security. If you ask the question, “What is the alternative to the dollar?”, there are two things I will say. First is that the Chinese currency is not fully convertible, so in its current state it is not going to be an effective competitor in that sense. The second thing is about the euro—I don’t think the euro area will mind me saying this—and it comes back to the point about safe asset. The euro area does not have a safe asset in the same sense because they have never agreed to have a pooled government debt instrument. So in the euro area the nearest you get is, say, a German Government bond; it is not actually a euro area government bond, in that sense.

Mr Coghlan?

I am glad to be so popular today. Ms Oakes, talking about the scenario the Governor is outlining, could we be looking at a basket of currencies potentially being reserves? If so, could sterling be more widely used as a reserve currency, and could that actually benefit UK debt yields?

There were various attempts to do that.

That was to Ms Oakes, actually. We can always bring you in, Governor. We were just talking about transparency and openness, about bringing in the independent members.

I would probably look at it from a slightly different perspective, which is that the world has changed since the 1970s but we have also introduced sanctions on a number of large economies. They will seek to trade with each other and with other countries globally, and so if the US dollar was fundamentally being used as the underpinning for much of that trade in the 1970s, that has shifted. As sanctions have increased and the world has become more complex in terms of that international trade, many countries have looked to diversify. We will probably absolutely see a basket of currencies, but it will potentially include more currencies in Asia than just the Chinese currency. I understand that that is a rational response for many of those countries to what they see as a shift in stance and policy from the West as to their trading intentions. So I think it is a natural thing that is occurring around the globe.

Would you see the change in the behaviour of the US dollar that Mr Hall outlines as perhaps the biggest, or most concerning, indicator that we are shifting away from the US as a reserve currency, in terms of the dollar is acting less as a safe haven asset in times of crisis?

I am not sure I would see it as a concern in the same way that my colleagues have outlined. It is the question of whether it happens very quickly—a sharp correction—or whether it is just a gradual shift. Gradual shifts have historically happened over time and we have not seen any major financial stability issues as a result.

Governor, you recently raised concerns about the level of hedge fund borrowing in the UK gilt markets and a small number of hedge funds. Could you just briefly outline your concerns, and how much concern should we have in this area?

It is not just the gilt market, by the way—this is true of pretty much all major government bond markets. There has been a huge change in, frankly, the structure and nature of intermediation in government bond markets in the last five to 10 years. They are now dominated by non-bank institutions, and hedge funds are a very big part of that. The structure of the market we tend to see these days is therefore a market where, as you say, a relatively small number of hedge funds are taking very big positions in what I call the cash market; so they have the gilts, as it were. The asset management industry, which is a bit different, is tending to want to take positions in futures. But I will be quite frank: this market development has enabled a lot more debt issuance; it is a structure that is supporting a lot bigger markets, in that sense. That is not a UK point specifically, but all Governments are therefore benefiting from the ability to issue more debt. The question we have to face is, is that a robust structure from the point of view of financial stability? In terms of the liquidity of this market, it is still supported by the banking system and ultimately, of course, by us in terms of our provision of reserves and ultimately the banking system, particularly through the so-called prime brokerage activities of banks, because banks are funding this stuff. The two things I would highlight are, first, the hedge funds—that there is a maturity mismatch. They are funding these big stocks of gilts through the repo markets and the gilts have a longer maturity than the repos, so there is a risk built into that; there is a maturity mismatch. Secondly, is the degree of so-called initial margining that takes place to protect against movements in prices. A lot of this activity across the world is done on very low margins. The risk that then creates is you get very pro-cyclical margining because when you get a shock in the system the margins go up, and because they don’t start with the stock, they are going up more suddenly and they are going up more when things happen. We saw some of that going on last week. As Jonathan said, because these activities are now very connected between markets—it is often the same funds that are in different markets—you have to watch out for what I call spillovers between markets, and we saw a bit of that going on last week as well.

Andrew is referring to episodes where volatility risk turns into disorderly markets. In normal times the role of hedge funds, all these other non-bank financial institutions and their connections back to the Bank, are a feature of the market, not a bug. These are critical to market functioning. Our worries— We had the incidents back in 2022 when we had to deal with particular leveraged LDI funds. But it is not the leverage so much as what it means for liquidity, as Andrew was emphasising, particularly if you are getting towards more crisis situations, because you tend to find all these features can exacerbate the original moves. You get jumps to illiquidity as a result of banks calling in the contracts and hedge funds having to therefore potentially de-lever. That was the key insight from last year’s system-wide exploratory scenario. The fact is that banks told us that they would pull back from providing the liquidity in the stress situation. In the world now compared to the world that we had when we conducted that first SWES, where hedge funds have built up much more indebted positions in those repo markets, it is a vulnerability. This is one of the key drivers for us publishing a discussion paper on gilt repo resilience last year. Again, I referred to this in my speech last week: we are having a very healthy but intense engagement with the industry and trade bodies on these issues. We look at this issue, which in good times is a feature, but given the increase in financial stability risks, given the world we are living in, the status quo is not an option. So we have made some proposals and this will be of ongoing interest for you as a Committee.

On the potential crisis risk, do you see the collapse of First Brands and Tricolor in the US as isolated, or could there be wider systemic problems for US companies?

That is a slightly different point, because that is about private assets rather than about leverage in government bond markets and hedge funds. The private asset world has grown very rapidly and, by the way, is continuing to grow. It has quite a few features to it. By private assets I say credit and equity here. There is leverage in there. There is opacity because it is not public in the same way. There is reliance on rating agencies, and we have seen that before. So we have had these two cases in the US: First Brands and Tricolor. As I have said before, it raises the question, are these two things idiosyncratic, or are they giving us a broader message? I think I used the phrase, canary in the coal mine. We have done a lot of work and the PRA has done a lot of work, both in the insurance world and the banking world, on these markets but it is why we need to do more work and why we have announced the system-wide exploratory scenario. The reaction to raising these comments, and I am obviously not the only person who has said it, is that you get a lot back saying, “No, no, no, no, they are idiosyncratic and here is why: here are the particular features of these things.” I don’t think that fully answers the question because it is all very well saying that there are particular features of those things, but the question is, are those features matched across other parts of the market or not? That is what we need to explore.

We saw factoring was a big issue in the case of Greensill: buying other people’s debt and invoices and settling them. That is not really regulated; do you think there is a need for regulation?

This obviously begs questions about things like auditing standards, as it always does. I don’t think regulation has to be the only answer to this question. It begs questions about if you have what looks like irregularities, obviously we are not that kind of—

Yes, the whole business model for Greensill.

How was this being given audits?

Liz Oakes, do you have any thoughts on this?

I probably share concerns with many people around the quality of invoicing and invoicing systems. A lot of it, unfortunately, comes back to things like identity management systems for companies as well as individuals. We have seen that it is a target for fraud just because you can. We should be putting better controls and better standards around the use of invoicing. Actually, e-invoicing is mandatory in many countries around the world, so this is not something we are going to be stepping away from.

What about the issue of people selling on customer invoices and making that their money-making model? Do you think there are any risks there? Greensill was an egregious case but there have now been two examples in the US.

Like any other system, there are risks associated with it and we have to put controls around it. But at the end of the day it is a very valuable method for financing for many companies, and without it we would struggle. It has been particularly constructive for supply chain management.

I have a question for Ms Oakes and Mr Hall. Looking from the outside in, when it comes to private markets and NBFIs and all the rest of it, do you feel that the Bank has enough information and knowledge to correctly assess the financial stability risks arising from private markets?

That is a super-interesting question that starts from the premise that the private markets are not regulated by the Bank.

Yes, of course, so it is not from a financial stability point.

Starting from that point, it is a moment in time when we need to really look at whether we have access to enough data, and whether we understand how the complexities of the system have evolved. This is a market that has grown exponentially since the last financial crisis, so this is a good moment in time to figure out what are the interconnectedness features, and how the complexity layers on to the rest of the banking market. At a high level we understand how this works, but having said that, there is the complexity of people’s behaviour. The behaviours, incentives and rewards in this market are different to the way the banking market has evolved, so by definition it would be very difficult for us to foresee how those market participants might interact with the banking market, based on our understanding of how the banking market operates. It is a really interesting moment to look at that in more detail. I would not expect the Bank or any of the regulatory authorities to have that in-depth knowledge from an outside standpoint. It is just not something that they have had the resources, the time or the focus to deal with up to this point.

While you would not expect them at the moment to have that understanding, do you think that we need to set about getting that type of understanding within the regulatory world of the Bank, the FCA and so on?

Yes, because given that it is about 50% of the market, there has to come a point at which we have to at least understand what we are looking at, so that we can make a decision on whether we need to do anything about it.

We spent a lot of time at the beginning of this session talking about banks and the regulation of banks, but a big change over the last couple of decades has been the growth of these private markets. Given that they are 50% of the market, do you see this as being a task of some urgency?

We will never know until something actually happens. We always look back in hindsight and say, “We should have done that earlier,” but it is a very complex area to tackle; I don’t think it is something that you can rush into and come out with an answer in a very short space of time. Ultimately, there is a reason that it has been able to grow, given that we don’t regulate it in the same way. From an economic standpoint it actually underpins lending into the vast majority of the economy at this point, so it comes with pluses and minuses. We need to figure it out, but also I don’t want to contain that exuberance, at least today.

There has been a sustained effort from the Bank to focus on this, and substantial progress has been made. We have been working on this for two and a half years focusing on the areas that we regulate—for example, banks and insurance companies. First, we have put out information about reinsurance risks and how that relates to pension buyouts; the PRA has been very focused on that with the insurance companies themselves. Secondly, on the banking side, there has been a lot of work looking at the different ways that banks give leverage to the private markets at multiple levels, from the general partner all the way down to the underlying company itself, which is highly leveraged. Not only have we done that analysis and really understood it, but it was incorporated in the stress tests that we ran last year, specifically asking about private market stress. The good thing about stress tests is that, not only do we get to look at the issue, but we can also really tell the industry, “This is something you need to be very focused on, and we are on.” Thirdly and finally, the next stage involves the SWES. We do not regulate the SWES firms, but this is an area where we can engage with them directly. It is complementary to the work we are doing with banks and insurance, and I am very excited about what we can learn through the SWES. After having done that with those firms we will know more than we know now, but in terms of the timeline and the focus, it has been appropriate, and there has been quite a lot of progress over the last two and a half years.

Just very briefly, I know that the Financial Stability Report was pretty chunky this time round, but I would recommend the whole of section 6, which covered all the work that we are doing in this space, and on the resilience of market-based finance. It comes back to the fact that we are a relatively small, open economy with a huge financial sector with ever-increasing interconnections. It is probably fair to say that through the Financial Stability Board—not just under Andrew’s chairmanship but also when Mark Carney was chair—we have always driven the NBFI agenda, this focus on market-based finance, because we are particularly exposed. During the 2022 LDI crisis, we saw the challenge from a small part of the NBFI sector linking back into core markets; as Jon has just set out, there is a very comprehensive agenda that includes the system-wide exploratory scenario, which is a real milestone. It is every two years and has two stages. It allows you to interact with non-bank financial institutions that we would not normally interact with, and they see the incentive of doing it with us because they want to show that they are resilient, but they also want to understand what the rest of the system looks like, which they learn from us being the convener and the co-ordinator. As you have heard, we are also monitoring the markets and how these NBFIs are interacting with the markets every day, so I don’t want you to get any sense that we are waiting and sitting on our hands. We are on top of this issue.

The broad message, which has been pretty much consistent over the last 18 months or so, is that there are vulnerabilities, maybe market vulnerabilities, and credit spreads, for example. Very tight equity assets, as we have talked about, are stretched. Against that, if you look at the UK domestic economy in aggregate, households and corporates are in pretty good shape, with relatively low debt that they are definitely able to service. Obviously, there is the counter that this is the aggregate position; if you go down into the weeds, some corporates are more exposed than others, and those are likely to be leveraged, so there is this theme that the leverage risk goes from the markets to the corporates. When private markets and the corporates themselves are leveraged, they effectively have to roll over their debt, so you question whether they will be able to roll over that debt maturity wall. At the moment the markets are open, and interest rates have been gently lowering, so they have been able to roll over that debt. But if you get market stress and spreads either widening or the market shutting in terms of maturity of debt rollover, then obviously they will become vulnerable. That is why we use that language; they are vulnerable to changes in the debt credit cycle.

I don’t think so. We have been through a situation where interest rates rose significantly over a two-year period. At that point, the question was whether they could sustain their business model with a higher interest rate payment. That is one thing we have come through. Then we have had a couple of spells when markets—for IPOs, for example—have shut down; the risk was that they might shut down for debt. But actually, pretty consistently debt markets have remained open. The worry would be that if there is a shock that shuts the market then they are exposed, but we don’t see anything specifically at the moment that concerns us.

Turning to households, the savings ratio has remained elevated. We have covered this a little in other meetings around the MPC, but do we think this is a result of some shock shock stickiness? We have had covid, we have had Ukraine, we have had other things. People generally have low expectations of their wages going up, but high expectations that their bills—energy, mortgages, rent and so on—will continue to go up. Is that what you think is behind it? What do you think about the impact of this savings ratio on financial stability?

Let us take it in reverse. Obviously, if households build up savings that increases their resilience. From the point of view of financial stability, that is not a negative. On the question of why, that is a question we have looked at a lot, particularly in the monetary policy context, and continue to do so. First, one thing that comes back from our surveys is that households are responding to what I might call a generalised uncertainty. I would distinguish that from other points in history when we have had very specific concerns about job security. At the moment, the answers we get are more to do with generalised uncertainty, which might be consistent with the geopolitical-type uncertainty that is around. That is one thing. Secondly, we have raised the official interest rate substantially since the period when it was near zero, and that has also had some effect on households’ decisions on savings—in other words, the returns they can earn. Those are the two arguments we get. The only thing I would add to this—it is an obvious point, but it is worth saying—is that we are looking at the average across the economy. There are, of course, quite large sections of the population that are not in a position where they are able to increase their savings. If you look at, for instance, those in the rental sector who tend to have lower incomes, you do not find the same story.

Of course, as you say, it is a good thing for financial stability in general if people’s debt levels are low and they increase their savings. But in terms of growth, if businesses are not borrowing to invest and consumers are not spending, will that potentially be a drag on growth?

Yes, that is true; you just alluded to it, actually. Going back to the points we were discussing around the Government debt market, we have seen Government debt increase over the last 15 years in terms of overall debt ratios. The UK is not unusual in this respect. But in the private sector—I am talking about both households and companies—indebtedness has not increased by anything like the same amount. If anything, their debt positions have actually become easier. This is relevant in the monetary policy and financial stability context because when we increased interest rates from basically nothing to 5%, obviously there were concerns about affordability. But because of household and corporate debt levels, that issue has not arisen. We have seen debt servicing levels remain, by historical standards, quite muted.

If I could just add the point that you can look at the more structural savings investment position, and then the more cyclical one. Structurally, if there are more savings taking place, then there is more funding available for investment. This comes back to some wider agendas, the reforms we made to Solvency UK, and other reforms to try to get those large stocks of assets held by pension funds and life insurance back into the productive economy and put to use. We are engaging with the industries and tracking them to see if those reforms are bearing fruit. But then there is the cyclical point, which is also relevant. Given the current heightened uncertainty, household savings are higher but it is, as Andrew says, very diverse across the population. Those higher up in the income distribution are saving more, but those at the bottom are really not saving at all. Quite often, they are having to live and work from day to day. In the latest data we are seeing that the saving ratio is coming off again, which the MPC forecast. Over time, we think that will be one of the things in the central forecast that supports our forecast of gradual growth. However, the last time we published forecasting scenarios in November, we also put out a downside scenario where the savings ratio does not come back. That might be because of worries about the labour market or other reasons for precautionary saving. In that case, the current level of demand would be lower. That would give us a downside risk as to whether we are going to hit the inflation target in the medium term. So there is a structural point about the role of savings, and a more cyclical point.

Could I take forward the conversation around what you see as necessary to get more investment in high-growth firms? That is a universal imperative in the economy, on which the Chancellor has given some instruction. You obviously have to reconcile the stability imperative around that enablement, and the whole Solvency UK, Solvency II thing, which basically reclassified the sorts of safe assets in which insurance companies can invest in, is understood. But we still seem to have a long way to go in this regard; if you look at the headline data, DC firms have about 5% invested in private equity, which is the source of patient capital. How do you see this problem being resolved? There is a massive difference compared to what we see in the US, even if we are reasonably positioned against Europe.

It is important because we have a relatively low investment rate in the economy, and have done for a long time. As you and I have discussed many times in the past when you were in government, I think there are issues in the pension system. It is interesting that broadly, the policy of this Government towards the reform of the pension system is pretty similar—with one or two differences on specific points—to the policy of the previous Government, in terms of what needs to be done. You are absolutely right to point to this question about the behaviour of pension funds. One of the problems is that the system is too fragmented.

It takes time to consolidate.

Yes, and in consequence smaller pension funds obviously have dis-economies of scale. One of the consequences of dis-economies of scale is that it is more difficult to manage risk; risky assets take more management and more assessment, so there is a tendency to want to hold low-risk assets, such as gilts. As you said, that is probably dragging back the level of investment in risky assets, when we need it to go that way. I know the Government have proposals, and consolidation in that world is one of the features; you just alluded to it and I would agree with you. I say to many Ministers that reforming the pension system in this way involves a lot of heavy lifting, but it has got to be done. It may not pay off instantly but it really needs doing, because it is a problem in this country.

I acknowledge that anyone sensible can see that you cannot consolidate things overnight, but is there anything more that can be done that has not been done to accelerate this? Some of the figures are quite stark in terms of the different profile of investment in these high-growth firms, and that is material to confidence in the economy.

There are more things that can be done; a number of things have already been done. If I remember rightly, we were involved in creating the TLAF, the long-term asset character class.[2] The British Business Bank is now playing a much bigger role than it did in the past, which is a good thing, and there is a role for co-financing here between the public and private sectors. We are involved and working in the context of overall Government initiatives, for instance in looking at instruments which can create assets where the security is on intellectual property; that is an important part of things such as AI. We should never stop looking at areas where we can innovate to improve this, alongside doing what I call the fundamental heavy lifting.

Given that we are talking about the FPC, I would add that when the FPC were set the updated remit back at the end of 2024, we were asked to come back and look across the piece of what was happening on the growth front in terms of our policies and interactions. What we have tried to do in this Financial Stability Report is shine a light particularly on these high-growth firms and the challenges they face. Obviously our primary responsibility is for the stability of the system, but it comes back to something that was discussed earlier; we are not just saying, “That is our job.” We can’t stop there; we can shine a light on the remaining obstacles. You have mentioned some really striking differences. The UK has the third largest venture capital market in the world, and a growing venture debt market, but UK venture capital investment represents 0.7% of GDP—10% less than the US. Those are really striking stylised facts. We have talked about how complex the system is, but the funding ecosystem for funders and founders is really complex to navigate. How can that be helped? As Andrew says, can HGFs—high-growth firms—secure lending using intellectual property as collateral? These are particular obstacles that the FPC has identified to the supply of debt and equity finance. We don’t necessarily hold the levers, but by shining a light on these things we are going with the grain of what the Government are doing and what the system should want to do to improve things.

Maybe those are long-term changes to take.

I would add that I had the pleasure last week of going on an agency visit up North, where I met with people who are engaged in this sector. It was very much a reiteration of what Sir Dave has said. It is the hard yards; first, in identifying how to help smaller organisations as they start. One of the issues highlighted was signposting. In the past people would maybe go along to a high street bank looking for funding for their startup or their small business. Nowadays, that is not how it works. The role of brokers was highlighted, the role of people who understand how these businesses function, and the constraints that they might perceive, but also where the options for funding are and the agility with which some people can make decisions. There was a contrast between a bank that is doing funding for slightly larger companies versus one that is actively engaging with startup and scaling companies. The answers lie in having people who can do due diligence on the lending and who understand how the financing of the business has been set up so far, whether it is debt versus equity; they seem to be very skewed in one direction. I also met with the National Wealth Fund and people working with the British Business Bank and the Enterprise Funds; there was huge support in the room for that activity, but also that we need to scale it up. They don’t have access to enough funding, but they are often perceived as being the prime in any funding event. People have confidence to invest when they see that the Government is there and have done the due diligence. A lot of funding organisations don’t have that capacity.

Basically, you have all referred to the aggregation of pension funds, new financial instruments that look at things such as intellectual capital as something that you can invest against, and improving market awareness.

Signposting is definitelyimportant. Small businesses and founders don’t know where they can get access to funding. What we heard back was that they spend a lot of time going to see five or six or seven banks—

Yes, and that was never going to be fruitful in the first place.

They are never going to find the right place to get the right fund.

So are the Government doing enough to create information flows to possible new opportunities for funding?

I honestly don’t know the answer to that. I came away with—

I am not trying to be difficult.

It’s something I need to investigate myself.

In our National Wealth Fund report we highlighted that it needs to grow.

Just on access to funding, of course part of the problem is the supply of finance, but to what extent is it a problem that the investment ecosystem is not there? The clustering effect you have in Silicon Valley is not in the UK, and the infrastructure is not, either. Maybe it is not so much about the supply of finance; if attractive investments are not there in the first place, surely it is no wonder that companies go off to Silicon Valley.

As we were saying earlier, there are signs of progress. I will come back to the British Business Bank, which has really changed its approach for the better. But one of the striking numbers that gets quoted a lot is the very low level of pension fund investment in venture capital. Mr Glen is right: that is only going to happen if you have a whole infrastructure that enables it to happen, including instrument structures, and it is not happening in this country yet. If you asked me about areas that need to be worked on, that would be one. It is well known, it is not a great revelation, but that is a particular area on which we should be focused.

I have a quick question on pension regulation. We are now coming up to the three-year anniversary of the FPC recommending that The Pensions Regulator should include financial stability considerations in the way it supervises the industry. Thus far, this has not happened, and it is not implementing the recommendation. Could you give me a commentary on where we are on that, and whether any consumers are at risk as a result?

I draw a distinction between what is happening in practice and the form, but both are important. In practice we are working very closely with The Pensions Regulator, and I want to be very clear that it is working well and we have a good relationship. I see no issue with the regulator; it does not disagree in any sense with the objective and what is going on. On the ground, it is happening. You are right about the recommendation. Frankly, what we need to have this thing finished is for the Government to implement it into The Pension Regulator’s operating framework. That requires some legislative intervention, which has not happened yet, but that is a question for the Government, not for us. That is why we leave the recommendation in place, and that is why you observe that three years has gone by, because we think that the only thing that would close it formally is for it to happen. Meanwhile I just want to emphasise that on the ground, the things that need to happen are happening.

Just to give you an example, which links back to what we were discussing earlier, since we had these bouts of gilt market volatility three years ago, LDI funds have fared really well. That is a practical example of the outcome of our close engagement with The Pensions Regulator that has developed resilience metrics and a tool for assessing resilience to the different interest rate shocks that we reported in last July’s FSR. You are seeing the benefits of that engagement on the ground. As Andrew says, there is a legislative overlay, but we are not letting that stand in the way of getting on and dealing with the issues.

I wanted to ask first about climate risk and the Bank’s capacity; secondly, I have some questions about firms. The FT reported last year that several senior staff members had resigned from the Bank saying that they had not been empowered to take climate risk seriously as part of mainstream supervision. They also cited that staff hours on climate risk had been cut by a third; they feared that the Bank’s technical capacity in this area had fallen behind that of the private sector, and that nature was a particular blind spot. I wonder whether you believe those reports are accurate, and what assessment you make of the Bank’s current level of technical expertise in this area.

Climate risk remains in the remit that we are given; it is in the remit letter, so we remain focused on it. But the discussion we have had this morning illustrates just how many other risks we have on our plate, and how, frankly, some have come up the league table in the intervening period. Obviously we have to balance our resources against the risks we have to cover, but we have not ignored climate risk. I would have to say, relatively speaking, that other risks have come along; if you go back a few years, we were probably able to devote more to it relative to other risks, whereas we are having to balance our resources more now. But we have not ignored it. We do not, in any sense, resile from it.

On a positive note, I have certainly engaged recently with the climate team within the Bank. One of the questions we were looking at was what the impact of a sharp correction would be on the UK economy. I had lengthy conversations with the team around what that would mean for equity markets in the UK, because quite rightly the team is often focused on the gilt market and the Bank’s view of the world. I said that, “Given that we have an equity market that is comprised of lots of organisations that are exposed in the oil and gas sector, for example, what would that look like in the UK equity market?” They went away and did the analysis and came back with really interesting, fascinating statistics and data. So for me it is an ongoing thing and it continues, although it might not necessarily get highlighted in all our reports because, as Mr Bailey said, so much else is going on.

If I can just add to what Liz and Andrew have said, section 7 of the report relates to structural changes in the UK financial system; there is a whole section in that on climate-related risks. That is less than we would have had when I started my term at the Bank of England back in 2017 because other risks have had to be foregrounded given the shocks we have had to deal with, both global and domestic. But my deputy governor colleague, Sarah Breeden, gave a speech recently where she said that there is increasing evidence that climate-related risks are starting to materialise in the time horizons that we look at. Mark Carney used to talk about the tragedy of the horizon—that it was never close enough; but it is now coming into our timeframes. We remain incredibly focused on this. We have decent capacity within the Bank that can focus on climate-specific risks, and they have engaged with Liz recently; they may not be as front and centre as when we are talking about the gilt market or gilt repo, just because of what has happened in the last few years, but that does not mean that we are downgrading it. It is just a relative point.

Do you acknowledge that in the latest remit letters from the current Chancellor an additional focus has been put on climate and nature compared to the previous remit letter in 2023? How has the Bank responded to that additional focus?

We will remain focused on the financial stability risks from climate change, and as Dave says, we will be doing work in that area. We are not ignoring it.

But has the Bank responded to that additional focus in the remit?

What is different? What has changed?

We have several pages of analysis that shows that alongside everything else, we are doing a very—

If I may intervene, there is an additional focus on this point in the remit letter from the new Chancellor, so my question is, how has the Bank responded to that additional focus?

If I could interject, having had this conversation with the team, it was a question of going through, measuring or looking at structuring the problem. How do we monitor it, and what do we come out with afterwards? We are in the monitoring and analysis phase, so it has been about moving on from the initial identification of all these risks and what happens next, to looking at very specific targeted questions. For me it has continued, it has evolved, it is changing, but that does not necessarily mean that there is any less of a focus on it. Q177 Luke Murphy: On that point, in your questionnaire in response to this Committee, you talked about the importance of the Climate Biennial Exploratory Scenario that was held in 2021. I cannot help but notice that the word biennial is used; we are now in 2026. I wondered whether the Bank had a plan to renew that scenario.

Can I come in on that? We are a public body. Although we get most of our funding from the financial system, either through the PRA levy or the bank levy, we have to allocate our resources. We have talked to you today about the two system-wide exploratory scenarios, which are globally groundbreaking. We have always run climate-related scenarios, and we are still part of the Network for Greening the Financial System where a lot of the scenario work is now done. We have reported our latest analysis here. We don’t do a quantified assessment of the remit to check whether we have done enough; we are held to account by you and the Government. If you read what we have done, you can see if it meets the requirements. But as I have stressed, we are now saying that these risks are within our horizon, so there is no chance of us doing any less monitoring; they will now start to impact on markets in our horizon, whether through the insurance gap or other key concerns that we currently have about climate change related risks. All I can do is give you the assurance that we are very focused on this and we remain accountable for what we are doing. Q178 Luke Murphy: Just on the specific point of the Climate Biennial Exploratory Scenario, CBES, though, is the intention not to do that because you think it will not renew that particular scenario?

As Dave has said, we will come back to it, but we have had to prioritise other exploratory scenarios in the meantime because of the nature of the risks that have come up. As we were saying earlier, the one we are doing now is private assets.

Just very quickly, moving on to firms; in 2024, Sarah Breeden told us that firms have done a lot to mitigate the risks of climate change, but that there was still a huge amount to do. Could you set out what progress you think firms made in 2025 in mitigating the risks of climate change and what more they have to do?

We should mention that obviously, there is a bit of an elephant in this room as well. Domestically, firms continue to do the things that they have been doing and they are working consistently with Government policy. The elephant is that—wearing my other hat as chair of the Financial Stability Board—internationally this is a much more challenging and difficult environment in which to operate. As you know, there is one major jurisdiction that is not prepared to engage on this subject, and that has had an effect; firms have to think very hard now about how they operate in that world.

On the specifics—admittedly it is on page 138 of the Financial Stability Report—

Every page is important.

It sets out the Bank and PRA’s recent data collection, showing the presence of climate risks in major UK banks; current wholesale and residential real estate exposures could lead to financial losses. It also talks about the importance of the fact that around half of banks’ high loan to value mortgage lending is to properties in EPC bands D or below, which comes back to the losses banks could face on those kinds of exposures. The term “business as usual” is always used, but nothing about climate risk is business as usual, because it is an existential threat and it is coming closer. In terms of the way we now approach it, we have moved on from the exploratory scenarios; we are mainstreaming the work domestically. Once we have done the private credit exploratory scenario, those big one-off set pieces then get mainstreamed. Just because I am describing it as mainstreaming, that does not mean it is any less important; it just has to be prioritised alongside everything else in a world where, as we have said, the financial stability risks are increasing.

Governor, I seem to recall that 2026 was the year in which the Bank was to make a go or no-go decision on the Britcoin. Could you update us on that?

Any decision is for the Government, not for us, to make. That was the way it was set out—that it would come to Parliament; that was always the agreement.

So if Parliament decided it would go tomorrow then it would go?

In this particular area, the world has moved on to a considerable degree. Let me set out the two things that are moving. I preface this by saying—as I have said before—that the most important thing in this world is that we get the benefits of digital technology into the payment system, into the money system. The question is, first, how do we do it? Do we do it by creating a new form of digital Central Bank money? Secondly, what role are so-called stablecoins going to play in that world? Thirdly, can it be achieved by incorporating digital technology into the commercial bank money system and commercial bank payment systems? Those are the choices, broadly speaking. We continue to work on the Central Bank issue, but we are also working on the other two. Frankly, the area I have been very keen to move forward in is with the commercial banks, because most of the stock of money for payments purposes is held in all our bank accounts.

I am going to move on to that. Can I just ask—

We are now bringing that one relatively alongside because the decision to some degree is going to be which one of the two we prioritise.

I am going to ask some questions about the commercial banks and other stablecoins and so on. But specifically on the Britcoin—the Bank of England digital currency on which you did a consultation—you presumably spent a lot of money. How much has been spent so far on the development of that system?

If I can come in, Dame Harriett, we have completed the design phase. We were always very clear, when we consulted on digital moneys, that it was the possibility of a Central Bank digital currency alongside the alternative.

You were also doing a lot of background work on implementation, which was due in 2026. That is why I am asking for your update.

I just want to be very clear; I understand where you are going, but there is an implication that if we don’t do Central Bank digital currency we have wasted a load of spending. That would not be the case, because the benefits in terms of understanding the technology applied would go into whatever we do.

I am not saying that; I am just trying to get the facts.

It would be helpful if you wrote to us about the money that has been spent.

I am prepared to do that; okay.

We don’t need an actual figure now.

At the moment, I am very keen that the commercial banks working with us determine what can be done in that world, because we have to come back to the question, do we need to create a new form of Central Bank money to achieve what we want to achieve? That is the question.

So if the Government decided tomorrow—because it is 2026 now—that they did want to go down that route—

Then we would move forwards.

Would you be ready to do it?

Yes.

You would. Okay.

We would move forward to the next stage.

You will write to tell us how much you have put into that.

We would be ready to go to the next stage, which would be taking it forward in terms of design and trialling.

So how long would that take if the Government gave you the green light, say, before Easter, in the next quarter?

We have talked before about the real-time gross settlement system, which is our biggest ever tech build; it has just been reviewed by the National Audit Office and I will be appearing in front of the Public Accounts Committee in March. It took eight years and was a big wholesale build—hundreds of millions of pounds spent and millions of tech hours. I am not going to give you a timeframe but I suspect that, depending on what the design and all the feasibilities studies show, this would be a comparable exercise if not bigger.

What I am hearing is that you are focusing more at the moment on working with the private sector in terms of how this technology can be used in our payment systems. Would that be a correct interpretation of what you said?

I want to see what can be done in that world, what they can do, and that work is moving forwards.

In the US, there has clearly been a shift under the current Administration in terms of their embrace of this technology. I wonder whether you are happy with the way in which stablecoins are being regulated in the US at the moment.

We are actually still waiting to see what is going to happen in the US. Just to be clear, the US has passed one piece of legislation; a second piece of legislation is required which is, I think, currently jammed in Congress. They then have to go to the point of regulatory proposals, consultations and rule making. We are already at that stage. People keep saying that we are behind the US, but we are actually in front of the US in that respect. Obviously, therefore, we have to see what they do on that front. On the substance of it, there are more dollar stablecoins around at the moment than there are sterling stablecoins. The US has developed it without this regulatory framework. I think some aspects of the current practice in the US are going to come under a lot of scrutiny, but we will see whether the legislation in the US changes that. To give you an example, which I think is important. As I understand it, with the major dollar stablecoins at the moment, there is not necessarily an option for the holder to exit into what I call fiat money—into a bank account. That is through a payment system with a guaranteed nominal rate of exit, where a dollar here is going to be a dollar there, where you go through a crypto exchange and get the proceeds. If that does not exist, I don’t think that is consistent with the definition of money. These sorts of questions are going to have to be settled, because one of the absolutely core features of money is the assured nominal value. If I am going to pay you a pound, you want to know that a pound in your bank account is the same as a pound in my bank account.

Will the outcome of the Bank of England’s consultation on stablecoins resolve this with clarity?

Ours is for sterling stablecoins. Yes, it will.

I note that in your consultation you have described some issuers who are considered, “Systemic at launch.” Can you give me an example of who would be considered systemic?

If a very big player came into the market, I think we would take the view that the business plan they had was so substantial that they were intending to be systemic from launch.

But there are not any at the moment?

Not at the moment, no.

I believe that the Bank of England is custodian of a lot of the gold that belongs to Venezuela.

Yes.

Can you update us on what is going on there?

Yes, I can—with a bit of history, if you don’t mind. If you go back about seven, eight or nine years, the UK Government de-recognised the Maduro regime in Venezuela and recognised something called the Guiadó regime at that point.

This is before your time, so that is why you are having to explain it.

Yes. Some time afterwards—a year or two—the Maduro regime sought to sell the gold reserves that we hold for them, and of course we had to point out to them that, as the UK Government did not recognise them as the Government of Venezuela, we could not act upon that instruction. That led to the start of litigation, which has essentially always been run by the Government because the issue is over the recognition of Venezuela by the UK Government. Now, the position has moved on a bit over the years because, as I understand it, I don’t think the UK Government currently recognise any regime. I think Mr Guiadó has left the country, so he is not recognised, and Maduro obviously was not recognised from that point onwards. The matter has been in the courts ever since, but the case is stayed at the moment. Neither the Maduro regime nor the Guiadó regime, nor their representatives or lawyers are taking it forward, so the gold remains with us.

How much gold is there in your vaults from Venezuela?

I cannot give you a current value, I am afraid. I have to be a bit careful on commercial confidentiality here as well.

Share what you can with us.

We can share with you the information that has been shared with the courts; obviously all our customer banking relationships are deeply confidential and we rely on that, but this one is in the courts so we can share it with you.

We can take that offline and look at that.

The matter is essentially stalled.

I have the same question about Iran. Do you have any Iranian gold in your vaults?

No, we do not hold any Iranian gold.

The FPC was consulted as part of the decision-making process and obviously our view on that is solely related to financial stability overall. My concern at the time was more whether the markets could deal with or absorb the levels the MPC was proposing. I am very happy with how that has been resolved; I don’t think it exacerbates financial instability. It appears to have gone off without incident or any structural shift. From my perspective, I am very happy with how it has been managed and handled.

Yes, my concern was whether it would cause any discontinuity in the market or disruption in the market, and how it would be perceived more than anything else, because actually either pathway would have been manageable. I think it has worked out well.

We were briefed on the issue. The question for us was as to whether there was any financial stability reason for us to make a recommendation; at the time there was not, so it was very much an MPC decision. In my personal view it was a good decision and it has worked out very well. The market has been very stable and it was absorbed. For us there is a very specific question; are there financial stability risks here? In terms of the proposals the answer was quite clearly no. It was not our decision to make.

It was briefed.

The FPC could have a view that there was a financial stability reason to make a certain decision; the view was that there was not such a reason; therefore it was purely the MPC’s decision. We were briefed on it and we were aware of it and I think it was a good decision, but it certainly was not our decision.

Just following up on that, it is interesting that the Government chose not to tax the banks’ profits on QT in the Budget. I would speculate that one of the reasons might be lobbying by the banks about the risk to financial stability and the impact on reserves. But I saw that in 2024, the top four UK banks paid over £40 billion in dividends and share buybacks—that is probably up to four times more than the level of tax we were talking about. Would it be fair to say that there is unlikely to be a risk to financial stability if the Government chose to tax the banks on windfall profits from QT?

I don’t have a strong view on that.

Can I challenge this? I do disagree on this point. Banks have to earn their cost of capital, and as part of the valuation of banks they have to pay returns to their shareholders. We are now more than 15 years on from the financial crisis and we have got the UK banking system back to the point where it does earn its cost of capital. It has only recently got to that point, actually; it has been a long haul. You can see that reflected in the market valuations. The market valuations of UK banks are now above unity with their book value—not much above but they are above—which is where they should be. That is how they can raise capital if they need to. Now, a large part of earning their cost of capital is their net interest margin; that is the big driver of bank earnings. If we were not to pay interest on reserves, that would be affected.

I was not talking about not paying interest on reserves.

On the reserves that they hold with us.

Yes, so I was not asking about that.

Frankly, they would have to take other measures to earn their cost of capital. That is a long way of saying that it would affect customers in terms of the cost of borrowing or the amount paid on saving. My aim is always that our balance sheet is essentially neutral in this respect. We have bank rates on both sides of our balance sheet so that when we pay interest on reserves we are also increasingly funding those reserves that have been funded through repo operations that have the same interest rate. That is neutral from the Bank of England’s point of view and neutral from the public balance sheet point of view. But I would just emphasise this point, because it gets misunderstood; when you say, “There’s £40 billion for grabs there,” no: it would have a big consequence if we were not paying interest on reserves.

I would add that reserves with us are the ultimate liquid asset. We have carried out regular surveys that I have discussed with you, most recently in December, and we have had some exchanges about whether we should augment those surveys. Our regular surveys show that the banks, for liquidity management purposes, have a desire to hold a significant number of reserves with us—many, many more than before the global financial crisis because that was a huge learning point; there were not enough reserves in the system. As Andrew says, if we stopped remunerating those reserves or some proportion of them, they would shrink and that would create a financial stability risk.

I am sorry, but with respect, a reduction in a dividend payment would have no impact on reserves. I understand your point that it would impact their share prices, but share prices have rocketed in recent years, and bank customers are also taxpayers.

Hang on; let us go back to the point I was making earlier. When you say share prices have rocketed, that is part of getting the banking system back to the point where its market value and its book value are essentially the same. I do understand that the cash numbers involved in this world are big, and UK bank share prices have risen, but that has got them back to having a market value of about 1.2 at the moment. For a long time, their market values were trading below their book values, and in the long term that is not a sustainable position. So we have seen that adjustment. I would just re-emphasise the very important point that Dave makes. We were having this discussion earlier about supporting liquidity in the gilt market; it is these reserves that support that.

One of the things we enjoy when you come in front of us is having the independent members of the FPC. With the MPC, the independent members are able to go and speak quite freely outside MPC meetings; I wonder if I could ask you both, as members of the FPC, if you would like more freedom to speak outside the formal environments of the FPC meetings. We were talking about transparency earlier, and Sir Dave was saying how transparent and open the Bank is, so it is an obvious question.

The way the MPC and the FPC operate are very different. The MPC is very much a group of people who have independent viewpoints and academic viewpoints around monetary policy. The FPC is much more collaborative and consensus building. We investigate topics; we come from different angles and we all have very different perspectives, but we tend to coalesce around the right answer. We bring a lot of different viewpoints together.

You don’t feel curtailed in any way?

I don’t feel curtailed at all, but also the topics are very complex, interjoined and interconnected, so sometimes we see different layers and levels of complexity. I would say that even Jon and I have very different perspectives, different backgrounds and different understandings of topics; we come from different segments and sectors of the market. I am not envious of the MPC members who publish externally, and the level of scrutiny that brings to their particular viewpoint. I actually enjoy being able to go out and talk to people in the marketplace, where they know I am not necessarily going to publish what they have just said. That gives you an ability to absorb quite complex topics, including those that are at an early stage. Some things that we discuss and discover go on for a number of years before they crystallise into something we can work on.

I also am very happy with the way the FPC is structured and set up; it is quite deliberate. One thing that is quite clear is that in the MPC you pretty much have the same question and almost the same answer month after month. People bring their own perspective, but there is an element in which people have camps such as hawks and doves, for example, and you are just coming back to the same arguments, whereas on the FPC, we discuss an incredibly diverse set of issues. I might find that on one topic I disagree with Liz, and on another one we agree; instead of opposing camps, there is very much truth-seeking and consensus building, and in my opinion, it is an extremely constructive process. I certainly do not feel that my view is in any way held back from being incorporated within the decision-making process. [Interruption] Maybe it should be more. We do give speeches, although not as many as the MPC. I gave one recently on the balance between growth and financial stability. I encourage people to read it if they have time and energy; at the very least it would help them sleep. But the FPC allows you to give speeches on topics that you are focused on and interested in, rather than on the one issue that the committee is interested in. My experience at the FPC has been very constructive and I hope that we have got to the right answers.

You reach the end of your term this August, is that right?

Yes, sadly; I will miss it.

Thank you very much for that. We have had a very interesting session, which is almost impossible to summarise, but some very important points have been made about the international situation, and how we can get lending to small businesses, and of course, the important issue of household savings and challenges to them, which is obviously critical to us and our constituents. I thank our witnesses all very much indeed for your time. The transcript of this session will be available on the website, uncorrected, in the next couple of days. I want to thank our colleagues at Hansard for that, and our colleagues at Bow Tie for broadcasting. [1] The Bank of England has clarified that the JGB yields have risen to 2.35%. [2] The Bank of England has clarified that Mr Bailey meant LTAF, not TLAF