Treasury Committee

Tuesday 14th July 2026

(began 2 weeks, 1 day ago)

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09:45
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None Portrait Speaker 2
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Well, um. Um if you'd asked me this question a week ago, I'd probably have given you a slightly different answer. I'd have said a week ago. Look, actually, things, if you go back to the hearing we had on monetary policy a few weeks ago, I think I would have said, look, I think things are. Panning out at. That stage, probably at the lower end of the three scenarios that we had painted in the MPR. But I would have added the very strong caveat to that, that it seems to me that the situation remained unstable.

The, and the sort of the ceasefire was fragile. Suddenly that's come to pass, obviously. Um, I think where I am now for the moment is that obviously that, as I say, that instability has come to pass. Um, I don't think I don't certainly feel qualified to judge how long this is going to go on for in terms of this resumption of hostilities and how it's going to end. But it underlines that this is a this is going to get to be an unstable process for the foreseeable future.

Now energy prices have come down. As of a week ago, they were sitting a bit above where they were before the before the crisis. They're now somewhat further above, but they're still obviously crude prices. Crude oil prices are, you know, are well down on their peak. Um, we are also seeing, I think, continued fairly soft evidence on the pass through into UK prices. But we'll get another inflation number next week. The one however other caveat I would add, which I don't think gets enough coverage, is that although crude oil prices have come down, the prices of of refined products have not come down as much.

So we're talking about things like gasoline and diesel at this point, which of course are the end end products. So those are the things that matter in terms of the end products. And 1 or 2 of the reasons for that in the global context are that, um. As a story around China and obviously a story around Russia, China, um, has substantially reduced its imports of crude over the last month, couple of months. That's been interpreted, therefore, as a sort of softening of the market and a sort of reduced demand story.

But they've also, as far as we can tell, reduced their exports of refined products substantially.
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None Portrait Speaker 2
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Well, I mean, we obviously talk a lot to people in the industry and we obviously talk a lot to our counterparts in the Gulf area. I spent a lot of time talking to my counterparts. I think the story there is um. Take oil and gas separately. On the oil front, there hasn't been as much physical damage to the infrastructure. The supply, production infrastructure, obviously, the, the blockage, the blockages in the Gulf are another matter. Um, so I think the message we get from the Gulf states is that if they can ship the stuff out, then they will they will resume production very rapidly and they have reduced, or at least up until last week, they had resumed production rapidly.

They are also have got. Quite big plans which they're already executing for building new pipelines to get around the Strait of Hormuz to to get it to ports which are south of the Strait. But that will obviously take some time to do on gas. Um, I think the story, certainly story we get from from the Qataris, who are the people who obviously in that market are I mean, they're quite precise, I think they say about 80. I think they say about, if I remember rightly, about 83% of the of the of the supply is intact.

Uh, the 17% that was hit by the Iranians in the attack some months ago now will take longer to, to bring back they, they again, to have got quite big plans for increasing their overall output of gas. But that, again, they're talking about sort of 2029, 2030, I think for that. So I say they're clearly very determined to get supply back onto the market. But obviously what we're seeing in the Strait now is going to impact that.
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None Portrait Speaker 1
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I suppose I mean.
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None Portrait Speaker 2
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Well let me say.
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None Portrait Speaker 2
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Well, I think look, I think that the. The overall message I would give is that I think the big issue is, is growth in the economy. So I think we can do all we can do all we can. On financial stability. I and we'll come on to this. No doubt. I do actually think there are. There are signs of a very resilient financial system. We describe them in the, uh, in the Financial Stability Report and in two respects.

One is, you know, I think I think, for instance, you know, the core banking system is resilient. And I'm sure we'll come on to discuss that. But also, when you look at debt levels in the economy, if you look at debt levels in both the household sector and the corporate sector, I mean, they are not stretched actually at the moment. So that's a that gives us an underlying picture of resilience. What I think is much more challenging is that we you know, we've had low growth in the economy.

Now for best part of probably 16 or 17 years actually. So it's not. So this is not a story about any one government. By the way, this is a general story. It's not a it's not a political story in that sense, but it is a story about UK growth. Um, you know, I've made a number of speeches recently on this subject. I think it's important because it's the critical structural issue. And you know, as far as I will, um, in a sense go into.

The fiscal policy, which is not far. What I have said is, look, it is interesting that if we did a simple, naive sort of counterfactual and said, imagine that we'd had the, the growth rate for the last 17 years that we had for the preceding period, which was, you know, a potential and actual growth rate of around 2.5% a year. So we've been around one and a half for the last 17. So imagine, you know, you add that 1% back in, you've got the same shocks.

So you've got, you have exactly the same fiscal policy for every government not changing fiscal policy. You've got the same shocks of Covid, Brexit, Ukraine, Gulf, they all happen. Where would we be?Naively, where would we be today?On, on, on the public sector debt level, it would be about I think that number was about ten percentage points lower. Now, therefore, you're not you haven't you haven't sort of solved all problems. But I would I would argue, I think you would it would be a very different debate.
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None Portrait Speaker 2
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My overall view on this is we will not get growth if we don't have financial stability. I mean, I think we can point to episodes in history which support that view. So financial stability and monetary stability are key underpinnings of growth. Does that mean, however, that every one of our rules in financial regulation is perfectly formed?No, I mean, it doesn't. Would that ever be the case?No. Um, because the world always moves on.

So do do we support a process of review. I do think that where I do differ from some, some, some of the, the arguments that are put is let's take the banking system, which is important. You know, the key to actually the banking system supporting the economy is to have a system that is earning, you know, earning returns which cover it more than cover its cost of capital, which means that they can they can invest their returns to support lending into the economy. That is the best system we can have.

I think I think after a long period of rebuilding capital in the banking system, post the financial crisis, we actually are now in that situation. They earn more than they return on capital. And you can see that in the market numbers. You can see it in the price to book ratios. Therefore, you know, they, they, you know, it seems to me they have a, you know, a choice they can make as to whether they reinvest earnings into their own business or they or they pay them back to shareholders.

And that's a choice that should be made in the market. We were not in that position before. The reason I pushed back is that some of the debates I find and you read the debate, it's as if we've got this sort of fixed amount of bank capital, and therefore we must sort of lighten regulation to allow it to sort of be spread around further. And it isn't fixed. It isn't fixed at all. I mean, I'd say a healthy banking system will earn its returns and they can be reinvested into the economy.
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None Portrait Speaker 3
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So Kevin Warsh and I went through our confirmation hearing together and to join the fed. And we sat next to each other for years during the global financial crisis. So he has been battle tested in financial stability. And he's very aware of and sensitive to those issues. So I I'm obviously no one can can guarantee that there will not be a financial crisis. But he is aware of and very sensitive to those issues. Obviously, there's a lot of change in financial regulation in the U.S.

and a new proposal related to the Basel three endgame, which I think is providing much more effective regulation. And and I think it's very important not to confuse effective regulation with deregulation. It's, um, we want to make sure that regulations are effective, that they reach the financial stability goals, but also that banks can intermediate that they can actually do lending. They can do what they're supposed to do in the economy. And I think that's the key motivation for what's going on at the fed.

Now in thinking about financial regulation. And I think from the more macro perspective, Kevin is going to be very much aware of those issues, is not going to want to do anything that is going to expose the time that he has at the fed to a financial crisis. But of course, sometimes events overtake what one wants. And certainly when I was at the at the fed, I had studied a lot about the 1930s. Ben Bernanke said a lot about the 1930s.

I don't think any of us thought we would be in a 30s like crisis. But having studied that period, that was very helpful. And I think Kevin, as well as others who have been through that period, will make sure that we're best prepared and we'll be able to respond to try to minimize the damage. If there is some sort of shock that causes a crisis.
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None Portrait Speaker 1
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Mr. Benjamin.
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None Portrait Speaker 5
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There's one aspect.
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None Portrait Speaker 1
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In your organisation.
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None Portrait Speaker 2
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Well, I think.
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None Portrait Speaker 2
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Yeah. Can I make two points. I mean, I think it's part it comes back to this question of growth. So if. And I do subscribe to this view that, you know. Because I do think technology. I made this point about lower growth over the last sort of 17 years. I do think technology is part of this because I think in the long run, technology is one of the drivers of growth. I think we probably globally been somewhat between sort of technology cycles.

So we had the internet cycle, um, internet ICT cycle. I think the next cycle is likely to be at some combination of AI and robotics. So I think there's question about, uh, you know, grid capacity and data center capacity is, is relevant here in terms of supporting growth. The other point I'd make actually, and this is the point, I have to be honest, I'm not, you know, not being an expert in this field. I haven't appreciated until going around the country and talking to people who are closer to this, that there is also a question of what's called access to clean power supply.

Now clean. I'm using clean in a slightly different context to the environmental point here. It's actually the quality of the power supply. Um, in other words, the sort of the sort of having a sort of very high quality and very continuous power supply. Some people have made the point to me, and I think this is on their own at the moment. Renewables don't don't on their own. Give that quality, that clean power supply. They can be part of a big part of it, but they don't they don't completely solve that problem.

You need a base load of, of other power to, to make sure you've got that clean power supply. Um, so again, I think in thinking of, and that's true for data centres. So I think thinking about that, then I think there does need to be thinking about how you ensure that we've got that mix of power supply.
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None Portrait Speaker 2
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Terms of decisions.
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None Portrait Speaker 2
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Yes. I'm happy to do that. Um. Just to put. Into context, I mean, I think the announcements we've made on, on the leverage ratio are, in my view, really about sort. Of cleaning up some of the issues around the leverage ratio. There was a particular issue where we'd made some changes back in 2019, which I think had created an anomaly, which was particularly affecting the large domestic banks. That's important because they are the people who make, you know, the highest proportion of loans into the UK economy.

And it had left them facing a higher leverage requirement than was was, I think, justified. So I think cleaning that point up was important. Um, we have also, I think, increased the buffer usability in the, in the leverage ratio, which I think also is important because it's exactly consistent with how we operate the risk weighted ratio now. The one thing I would say is, of course, the risk weighted regime and the leverage regime are not additive. They're parallel. Yeah that's important.

So yeah, we've made some changes to the risk weighted regime when we were here. And we talked about them in December. These are changes in the sort of the parallel regime. Now the question though, is this. So I think those things for me, those things were all sensible things to do. The challenge we've got, this is why, you know, there's some important words in the in the announcement, which I'll come to is that we've got an issue with leverage in another context, which is leverage in financial markets.

Um, we've talked about this, I think at previous hearings in the context of particularly of government debt markets, what we've seen in the last in the period since the last hearing and in recent months, is also a growth in leverage in equity market leverage. So in hedge fund leverage in equity markets, also in leverage in exchange traded funds. So there's a there's a further growth in that world now that's it's all leverage, but it's a different context for leverage. But these two things are connected in the sense that the banking system is the ultimate sort of provider of liquidity.

And therefore, there are exposures between these parts of the system. So I think the question that for me, the question that we rightly debated at length in the in the committee was, is the better way if we think we need to do something in that market leverage regime, is it better to do it in the banking world or in the market world?Is it better to tackle this market leverage?Question in the market sort of regulation world, if you like, or in the banking regulation world?Now, my own view, it's a personal view.

I think it's better to do it in the market world, but we've got to land that because we've put out some ideas, got mixed responses. I'm not surprised, but you'll see the final thing I'll say, you'll see that we've included some language, which actually means we're going to do a bit of further work before we finalize these changes, which is exactly to this point. And it's particularly to say, do we think these changes might actually increase the market leverage risk?Um and frankly, the additional question will be if so, but it's a question we've already got.

What are we going to do about it in the market leverage world. Or do we do something in the banking leverage world?So I think the sensible changes to make those in their own right, but we have got this outstanding question about what we do about market leverage.
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None Portrait Speaker 1
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Mr. Blythe.
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None Portrait Speaker 4
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So.
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None Portrait Speaker 8
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Um, I mean, I think the, the aim of the change to the leverage ratio framework to fix this idiosyncrasy, that was the result of an increase in the countercyclical buffer. In 2019. There was an offset in the risk weighted stack of capital. There was an increase in the countercyclical leverage buffer. There was not an offset in the leverage stack. So that was a discrepancy. And that disproportionately affected the domestic systemically important banks. So I think there was unanimity on the committee that that was something to fix.

And that was that's what's been achieved by this package. There's also a broad view that we want to be getting the overall balance of the risk weighted capital requirements and the leverage capital requirements. Uh, correct. The, the, the other view is that in addition to fixing the discrepancy for the d-sibs, the domestic, which makes a lot of sense and will support lending into the UK economy, there's also a slight reduction in leverage ratio requirements for some other institutions, and that could potentially lead to further provision of leverage into into markets.

So that's the the question about cost and benefit to the governor's point. I agree that there are mechanisms within the the markets in particular, um haircuts or margining on repo that would actually be, I think, very effective for um providing. Stability in markets that can be in some ways arbitrarily levered. If you have no haircut on a, on a repo transaction and you know, the leverage ratio won't fix that if you have, um, essentially no haircuts on a repo, that's, that's arbitrary leverage. So that's the, that was the balance in my view of the view.
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None Portrait Speaker 3
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Yes. Thank you. Um, so we had an excellent discussion that I think got us to a very good, a very good outcome. Exactly. As the Governor and Stephen have said, key motivation was to sort of make the, the leverage ratio more effective and make sure that it's doing what we want it to do, which is to prevent excess leverage in the banking system. But I, I also believe that this is not the right tool to try to deal with market leverage.

Things like haircuts or potentially centrally cleared, um, cleared transactions are the best way to, to try to, to try to deal with that. And so, um, I think that what we were doing is trying to make sure that we had a lot of things that could be released in a crisis. Getting back to the previous question, that's a very effective way to try to make sure that banks can continue to intermediate during a crisis and provide, both support in the crisis and more rapid recovery. And, and so and a 20 basis point change in leverage ratio does not seem to be material to me in changing the ability of banks to either provide leverage more broadly.

Well, just within the domestic economy or more more broadly. And we have much better targeted instruments. So making the capital stack much more in the capital stack releasable, that also is something that is very helpful in achieving not only the financial. Well, you know, we obviously have our main objective being financial stability, but also in providing support for a secondary objective on credit provision and, and growth, because that's something that will allow the banks potentially to reduce the so-called management buffer that they hold above and beyond the required minima.

Now, of course, they're always going to hold something beyond that. They shouldn't be running right at the edge. But when there's a lack of predictability, when there's a lack of clarity about what is releasable, how much it has to be rebuilt, how that's going to operate, that leads them to hold a bigger buffer against that. And, and I think the, the approach that we've taken will help to reduce that. So make the, the leverage ratio more effective without in any way affecting the financial, from my perspective, affecting financial stability and not addressing the, the market risk issues, which we'll do through separate means.
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None Portrait Speaker 2
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Well, I, I would disagree that the US has taken bolder measures. I don't think they have actually, um, I mean, the latest package they've announced is to implement Basel 3.1, which obviously we're doing as well. Number of comparisons. We've actually in the latest numbers compared the leverage ratio comparisons. They'll actually higher for, for international banks. Um, so I would, I would disagree on that point that the US has done, has done bolder things. Actually I'd say the same about the euro area.

I think they've done anything, anything bolder than we have. Let me make two points. Um I think, I think I just the first one is just to reinforce what Randy said, which is we know that banks maintain what they so-called management buffers above our requirements. As Randy rightly said, there are reasons for doing that, which will be about how they run their businesses. Um, and, and that's, that's understandable. But I think what we've done is will enable them to have more confidence to, to reduce those buffers.

And certainly, you know, that's our aim. But second point, we've actually, we actually included a diagram in the publication we made. We would like to see the buffer structure simplified. So we're talking about bold things to do. It is too complicated at the moment. Um we would like frankly a single buffer and a single releasable buffer. The reason I think releasability is important is that the thing that I think banks always worry about, if we don't release buffers, and if we say to them, look, you know, it's okay to go into buffers, we won't get upset.

Um, they always come back and say, well, will you, you know, um, so the stronger the stronger. They always say, look, the stronger thing is if you're prepared when, when conditions change to take the buffer away, except that there'll be a rebuilding process at some point further down the line. That's a stronger message. So we'd like to see that and we'd like to see it simplified. So there's only one of them to do that. We need international agreement.

The buffers are buffers are a product of of the international structure the Basel structure. Essentially we are. And Sam Woods, when he was obviously with us, made, you know, made speeches on this subject. We've been leaders in advocating that, um, we will keep working to get an international consensus to tackle the buffers. We're not quite there at the moment, but I think that's the that's the bold thing that should be done. And to say we're strong supporters of doing it when.
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None Portrait Speaker 7
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That is an active.
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None Portrait Speaker 2
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Yes.
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None Portrait Speaker 7
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That happens.
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None Portrait Speaker 2
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Yeah.
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None Portrait Speaker 2
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Yes.
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None Portrait Speaker 7
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And.
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None Portrait Speaker 2
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I'm sorry. You know.
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None Portrait Speaker 2
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Um.
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None Portrait Speaker 1
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Thank you very much.
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None Portrait Speaker 7
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To work in progress.
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None Portrait Speaker 3
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No comment.
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None Portrait Speaker 1
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On that. Sorry.
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None Portrait Speaker 2
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Well, let me come back to what I said at the beginning. Um, I do not I mean, I do push back at this, what I sometimes call sort of lump of capital argument that goes on, which is this idea that they've got a fixed amount of capital. And if only we'd lighten the regulatory regimes, they could sort of lend more out, support the economy, and everything would be good. Um, because there isn't a lump of capital. I mean, the fact is they earn their earnings, they then have decision to take about how much of their earnings, you, they distribute to their shareholders and how much they retain to grow the business.

And obviously that's a process that they, you know, have to go through with their shareholders. Now, I recognise we went through a period up until only about 2 or 3 years ago after the financial crisis, where they were not earning their cost of capital, and it was very hard to go to the shareholders and say, you should leave this money in the business because it's a good thing, because the shareholders say, well, no, it's actually not a good thing because you're not earning the cost of capital. I can take it somewhere else and find somebody who is.

But that's not true anymore. They are more than earning their cost of capital. And the best illustration of that is, is the price to book ratios there. Now, I think on average about 1.7, whereas they were below one. So one is the sort of is is obviously the point where they're at cost of capital. So they're not in that position. So, you know, they can I think they are resilient. That's why we talked about stress tests.

They pass stress tests. They can make choices now. And the choice they can make is to support lending into the economy with those earnings. And that's what to my mind, they should be doing. And a resilient system will support that and it will support the economy.
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None Portrait Speaker 1
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That's very helpful.
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None Portrait Speaker 2
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I think can I say, I think there's two things here that we can. And they need to they're both related to AI, but they they need to be sort of kept separate. So on frontier, we're talking about cyber very. Specifically. And. To use a sort of sports analogy for a moment, frontier AI will strengthen the defense and the offense. So if the defense. If you're asked if you're the banks firms, you can put frontier AI to to work to strengthen it because it will find the flaws that have been buried in there for a long time sometimes.

And you can fix them. Unfortunately, if the offense gets hold of it, they will do the same thing to attack you. And obviously the whole thing at the moment is, is can we make sure that the defense gets such strengthened, you know, effectively before the offense?And that's getting much more challenging. The second thing, which I think you're referring to, is equally important. But this is how banks use AI. So we're not talking about cyber here.

We're talking about how they use it and the risks that come with that. That's equally important. And I think, you know, your report was very helpful and very good in this respect. We are very actively engaged on that subject too. I think the one. Banks, I think my my sense is banks are we're all using AI a lot more. I mean, that's a truism, but banks are using it a lot more where I think it's still more talk than actuality is, is things like genetic trading systems, having setting up your own agents.

Um, and I think that's right, because I think there are some very big questions still to be answered about how that world actually would work. For instance. I mean, the one thing I'm not a lawyer, but, you know, the thing that strikes me is if you have an agentic trader trading system. As a bank. And going back to the going back to frontier AI for a moment, I mean, what frontier AI demonstrates is that the recursive learning capacity of these systems means that they actually develop their own abilities.

And, you know, as my colleague Sarah Brennan has said, but she we get we don't invent this. We get this from from the firms who are developing it. They learn to cheat and they learn to lie. I'm sad to say. Where do they learn that from?Well, you know, it's partly inherent in them and partly because they're trained on a data of past experiences and they cover things up. Now, if you've established an agent, you've got to be very clear where the legal liability rests in all of this.

So I think, you know, there are things that will, you know, need to be resolved before that world really develops.
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None Portrait Speaker 2
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Well, there are two ways. Uh, cyber tends to manifest itself. One is those who want to disrupt, uh, systems. And then often, often there's a blackmail effectively, and then the other is stealing, stealing information. Um, those are the two things that can go on. Um, and as Nat was saying, I mean, what, what we're finding or what is being found is that. You know. Laws that have existed in very core pieces of software in the world.

And this, by the way, I mean, the financial systems are just a subset of this. Obviously, it goes across the whole, the whole, the whole shooting match, as it were, uh, that have often been there for a very long time, can be discovered by these systems and can be discovered quite quickly. Now. I mean, I don't think I think the people who know much more about this than I do, I think at the moment. Go back to the football analogy for a moment.

It requires a lot for an offensive party to set this stuff up to do this. It's not you don't, by the way, go home and get mythos, plug it in and off you go. It's rather more than that. But let me I mean, this is the second issue that we've got. Um, as I said, we're on this. We're now on this vertical exponential curve. They say so that these models have a shelf life of only about 2 or 3 months now actually.

And then they're replaced by something even more powerful. Um, I know that, you know, if you talk to the firms, the developing firms, they say there are going to be open, open source versions of these, these things coming on onto access, which will mean that it's much harder to restrict access to them. And then let's be honest, you know, where. Are other regimes in terms of developing their own. And obviously China is the big case there. Uh, that they may be some months behind, but they're not that far behind.
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None Portrait Speaker 1
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Are we doing nothing?
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None Portrait Speaker 1
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Mr.. Benjamin.
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None Portrait Speaker 12
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Mr. Benjamin.
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None Portrait Speaker 1
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Christine.
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None Portrait Speaker 10
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I wouldn't say they're physically impossible, but we're very cognizant of their risk, both power cooling that we've mentioned before, planning, um, actually being able to actually get approval to build data centers, all these things are risks to a positive earnings story. And I think from a financial stability question, there are two, two elements that particularly concerning and on the radar. One is that the funding for a lot of ER expansion is now going forward in debt form, rather than equity form or from cash flow, so that you can see from some of the data, the growth in 2026 has been extreme and obviously debt.

Um, if there's a popping of the bubble can have a lot more impactful downside. And the second is there's, there's a lot more leverage, which we mentioned before, but leverage on the long side in equities. And that's both institutional and retail. And that's both. Both of those are can be concerning. So institutionally a lot of levered funds, hedge funds have been taking long positions in equities, often funded either in derivative form or funded by prime brokerage. And then on the retail side, a lot of levered ETFs.

So this means if there's a fall in equity prices, then that can lead to a negative spiral. So I think from a financial stability point of view, market volatility is not per se a a financial stability concern. But when it can be amplified rather than contained, then it does. And I think that's those risks are growing on the AI side.
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None Portrait Speaker 4
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Well, I mean, as you say, even if there was a if there was a bursting of a bubble, which is primarily not located in the UK, the market effect is so large now that it clearly would wash over. So I think that's right. And of course, we run a stress exercise which which looked just at this question and it did reduce UK growth. Um now exactly how the effects would run through. You would expect obviously some adjustments in UK macroeconomic policy, which is another way of saying, you know you might expect some adjustment in interest rates to reflect that.

So how you play it through you'd have to decide. But yes, it would wash over. On the UK growth side. Um, I mean let me I just want let me start by adding two points to what Steven was saying, because I think there's two other issues here on how can this sort of how can this go wrong?Um, one is history would tell us with these big general purpose technology innovations that it takes longer for them to come through into productivity and growth than people think.

Now, this 1st May be a lot quicker because the, as we were saying earlier, the pace of change in AI is clearly accelerated a lot. But, you know, I mean, you go back to something like Edison inventing electricity. It took a lot longer. You go back to ICT, the famous, Bob Solow comment, you know, he could see computers everywhere except in the productivity series. And that's really one way of saying it takes time for these things to come through. The second thing is everybody is currently priced to win.

Um, everybody sort of doesn't win in history. If you can remember that the first company that actually got the biggest share of, uh, of, of internet browsing, it wasn't Google, it was Netscape. You know, all.
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None Portrait Speaker 2
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You like
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Right.
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Um receive.
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Haircuts.
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Yeah.
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None Portrait Speaker 14
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So we're.
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Gamekeeper.
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None Portrait Speaker 4
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Well, I mean I think the issue there is. I mean there's two parts to this one. It's all about pension funds. But there's two parts to this one. Um I mean we have seen what I would call because of the profile of the population. We've seen what I call a maturing of the particularly defined benefit pension funds. In other words, you know, the age profile of them is coming to a point where they're not going to be natural buyers of longer dated government debt, which is why the DMO is.

Has reduced the duration of its issuance, because that that natural source of demand, which actually was a very good thing. It was sustaining longer maturities and longer duration. In UK government debt market is naturally falling away. You can't you can't do anything. And that's a structural point. You can't sort of somehow replace that. Um it's a function of the population to a greater extent. So that's the first point. And the second point is one.

Obviously we've also discussed a number of times in the past, which is and you know, Glenn and I did a lot of work in the past on this. Um, is of course, we also want to see a. Greater share of pension fund investment going into the real economy. So we are, you know, again, there's a number of big moving parts to this story. Um, it has obviously resulted. The UK is not alone in this respect in a greater share of, of, of the purchases being done by what are more price sensitive investors in the hedge fund world?I mean, the other thing I would say, of course, also is that there's um the UK of course also has a, for a long time has had a current account deficit, which means that there is a greater reliance overall.

It's not, not a, you can't narrow it down to one market, but there is a greater reliance on overseas investors in that sense.
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None Portrait Speaker 4
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Well, I think.
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I mean, two points. It underlines the points I made early on. I think one of the chair's questions, which is on the question the chair asked me about the about UK politics, and I said, look, I'm not going to comment on UK politics, but the point I did make was that, you know, I think the fiscal framework and the fiscal rules, and again, it's not a point particularly about this government. It's been true for true in previous cases are an important underpinning of that.

So I think you can see that in the response to the gilt market in response to the gilt markets, the last budget actually, which was which was favourable because there was a commitment to, in a sense, stabilising the debt ratio. So that's the first point. The the fiscal the fiscal rules are important in that sense. Now, the OBR, as you probably know, has published its. I think it's very helpful, but not entirely. Um, reassuring. Structural fiscal outlooks, which is the long term fiscal outlook, which obviously does point to a situation which is going to mean there are more pressures.

And I think we've got, I think, at least three structural headwinds we're going against, um, one. And again, they're not unique to the UK by any means. One is, as I said, the ageing population, which I don't think gets enough consideration in this respect and is going to go on because obviously that's baked in, as it were, to its analogy. Two obviously another subject that's much in the news, the obviously the defence dividend, the post-Cold war defence dividend is over and is turned around.

And the third one we discussed earlier is climate change. Now, if you think about all of those, I think I always say, I think if we had one of those at any given moment in time, we would be saying, well, we've got this. We've got this big issue to deal. We've actually got three of them.
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None Portrait Speaker 10
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Yeah, I mean, I've been really pleasantly impressed by the amount of the the amount of engagement. And to Randy's point, most of the well, the large majority of capital providers and ultimate well, the asset managers and the capital providers are international. So this is really has to be done on a on a voluntary basis. And the fact that there's a lot of willingness to I think a lot of willingness participants is actually a testament to the credibility of the previous Suez and the credibility of the the bank staff in carrying this out.

So I've spoken to a number of people in the US in particular, who are pretty interested in what what we're doing. The question about do people understand the interlinkages between private credit and other markets?I think it's still an open question. I think people, all everybody in that market wants to understand those interlinkages. Um, I think this exercise is doing a very good job of asking the questions. Are you sure?I think some of the empirical evidence we saw with some of the bankruptcies, uh, you know, first brands, etc..

Trickler, um, and other events. That have kind of resulted in, shall we say, unexpected losses that some of the banks is sort of re, um, re raising that question that perhaps people don't understand those linkages, um as well as they could. And it's not, it's not entirely straightforward. I do think this, this, this swears is a very important exercise to think about the interlinkages between obviously the ultimate capital providers, the asset managers, loans they may get from banks, the ultimate corporates, their their relationships with banks, etc..

Uh, mapping that out is very useful.
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None Portrait Speaker 4
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Well.
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None Portrait Speaker 4
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Well, I mean, so let me put my other hat on. I'll I'll speak as chair of the Global Financial Stability Board for a moment. I mean, it's interesting when you look at the agenda of the FSB over, I don't know, the last five years, it has shifted substantially towards the to the non-bank world, into this world. This world. We're now talking about, um, much of our work is now in this, in this, in this world. And to your point, I was you were asking about data.

Um, look, I think one of the big issues we've got to solve still, and we've got a, you know, a working group in the FSB, which I chair actually, which is seeking to do this, is to get cross border data sharing on this on this whole market, market risk issue, because it's not as good as it needs to be. Because if you go back to the questions about hedge funds in, in the gilt market and the leverage, it's the same tends to be the same big macro funds that are also leveraged in other government debt markets.

And you will therefore get the risk of, you know, of knock ons across this. If we go back to what we were discussing about with Stephen, about Margining, you know, we saw last year some of the some of the moments when we got the bigger movements in the gilt market was when we were getting margining requests coming in other markets, because we were talking here about initial margining when we talk about sort of zero Margining, the problem with that system is that if you if you have no sort of constant margining level, the margining from the models, from the risk models becomes more pro-cyclical.

Because when volatility does come into the market, they start demanding margin is demanded. But that's pro-cyclical. And we saw some signs last year, particularly during the tariff volatility of knock ons between markets going on. So the international issue is very important in this respect.
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None Portrait Speaker 7
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Yes.
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None Portrait Speaker 9
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I mean.
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None Portrait Speaker 15
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Much, Trevor McDonald.
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None Portrait Speaker 15
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Okay. Thank you.
This debate has concluded
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