WEBVTT - Stuck between Truss and a hard place 0:00:00.240 --> 0:00:01.680 Dave. So we've had quite a lot of events and 0:00:01.720 --> 0:00:04.360 dinners this week. It's been like a social week for 0:00:05.040 --> 0:00:08.280 the podcast. And how many people ask you why is 0:00:08.360 --> 0:00:10.520 going on with the Bank of England and the government? 0:00:10.560 --> 0:00:12.280 I mean they all, I mean everyone's got their hair 0:00:12.320 --> 0:00:16.800 on fire. Basically if everything's melting down, it's historic moves 0:00:16.800 --> 0:00:19.200 in the gult market at the end of the government, 0:00:19.239 --> 0:00:22.120 what's going on? And the British stiff upper lip keep 0:00:22.200 --> 0:00:26.079 calm and carrying on. I usually just say it's like 0:00:26.120 --> 0:00:28.640 it's really without the good weather, don't worry, you'll get 0:00:28.640 --> 0:00:31.600 through it, and the good food, it's not so bad. 0:00:31.760 --> 0:00:33.760 But now I say, well, come on my podcast or 0:00:33.800 --> 0:00:36.559 listen and then come on actually and talk about it 0:00:36.600 --> 0:00:39.840 and subscribe. And actually, massive shout out to the person 0:00:40.040 --> 0:00:42.640 on the left at my dinner on Sunday who got 0:00:42.640 --> 0:00:46.640 his phone out and subscribed. We love love more people 0:00:46.680 --> 0:00:49.839 like that. Yeah, everyone we meet sign up to in 0:00:49.880 --> 0:00:53.200 the City listening rate as well and rates with five stars. 0:00:53.400 --> 0:00:55.240 We got so many points from our producer just now, 0:00:55.920 --> 0:01:06.160 it's just she's funny. I'm Franci Laqua and I'm David Merritt, 0:01:06.280 --> 0:01:08.959 and this is in the City Bloomberg's podcast connecting you 0:01:09.000 --> 0:01:11.000 to the stories and the voices at the heart of 0:01:11.000 --> 0:01:13.640 the City of London, and this week we spoke with 0:01:13.760 --> 0:01:16.280 Howard Davies. He is the chairman of the board of 0:01:16.319 --> 0:01:19.240 Directors of nat West Group. Previously he was Director of 0:01:19.240 --> 0:01:21.240 the London School of Economics, the Chairman of the UK 0:01:21.319 --> 0:01:25.200 Financial Services Authority, and Deputy Governor of the Bank of England, 0:01:25.280 --> 0:01:29.240 amongst other roles. Sir Howard, thank you so much for 0:01:29.319 --> 0:01:30.680 joining us. When you look at the Bank of England, 0:01:30.720 --> 0:01:33.520 when you look at guilt and market mayhem, what exactly 0:01:33.640 --> 0:01:36.319 is going on? Well, the bank is in a difficult spot. 0:01:36.680 --> 0:01:40.000 I think that's clear because we're in a slightly strange 0:01:40.120 --> 0:01:44.319 hiatus period where you've had a government announcement of a 0:01:44.480 --> 0:01:48.240 direction of fiscal policy, but you haven't had the details. 0:01:48.360 --> 0:01:50.920 And then you've got in the background people like the 0:01:50.960 --> 0:01:54.680 Institute of Fiscal Studies yesterday producing their Green budget saying 0:01:54.680 --> 0:01:58.080 there's a gap of sixty billion pounds. So people are 0:01:58.120 --> 0:02:00.280 focusing on that gap and saying how's that going to 0:02:00.320 --> 0:02:03.880 be filled? And in the meantime that's creating an environment 0:02:04.560 --> 0:02:09.400 in which the volatility of sterling assets has been very 0:02:09.480 --> 0:02:12.360 unusually high and the Bank of England is having to 0:02:12.400 --> 0:02:14.600 try to manage that through now the Bank of England 0:02:14.639 --> 0:02:17.920 can't fill the sixty billion hole, but it can for 0:02:17.960 --> 0:02:24.160 financial stability purposes try to manage the extreme volatility and 0:02:24.200 --> 0:02:28.760 try to prevent it cascading over into real markets and 0:02:28.760 --> 0:02:32.520 the security of people's pensions. And that's what they're trying 0:02:32.520 --> 0:02:36.519 to do. But I mean it's an imperfect operation because 0:02:36.840 --> 0:02:39.760 of the unusual circumstances. The messaging of the Bank of 0:02:39.800 --> 0:02:43.119 England has not been optimal, hasn't it. I mean we've 0:02:43.160 --> 0:02:48.040 gone from quantitative easing too tightening to easing back again 0:02:48.040 --> 0:02:52.440 and we're calling it quantitative confusion. I mean, is it 0:02:52.480 --> 0:02:54.440 is it their fault or is it just the situation 0:02:54.440 --> 0:02:57.840 they find themselves in. Well, my own view would be 0:02:57.880 --> 0:03:03.320 that it isn't fundamentally their fault because as I've explained them, 0:03:03.360 --> 0:03:06.000 you know, they're in an unusual period. No one would 0:03:06.040 --> 0:03:09.320 write this script if if you were at a at 0:03:09.360 --> 0:03:11.960 a central bank, and so I think one has to 0:03:12.000 --> 0:03:14.840 have some sympathy with them trying to react to a 0:03:14.960 --> 0:03:19.000 very very fast changing environment. And so i'm personally but 0:03:19.040 --> 0:03:21.040 then this is maybe because you know, you can take 0:03:21.080 --> 0:03:22.720 the man out of the central bank, You can't take 0:03:22.760 --> 0:03:25.520 the central bank out of the man. So I'm, you know, 0:03:25.600 --> 0:03:29.960 congenitally more sympathetic to the Bank of England. But it 0:03:30.200 --> 0:03:32.920 is the case that they were a bit slow to 0:03:33.000 --> 0:03:35.520 Titan and that hasn't helped I think, And I that 0:03:35.600 --> 0:03:38.080 was a few I took eight year or so ago. 0:03:38.600 --> 0:03:42.080 And it is true also that the Bank of england 0:03:42.320 --> 0:03:46.400 current shape is a bit confusingly engineered, I think for 0:03:46.440 --> 0:03:49.520 people outside to understand. So is there a credibility problem 0:03:49.600 --> 0:03:52.280 for the Bank of England today or is it just 0:03:52.600 --> 0:03:55.000 the bank saying I don't want to get dragged into 0:03:55.000 --> 0:03:59.240 this political mess. I don't think there's a fundamental credibility 0:03:59.240 --> 0:04:03.400 problem in my view. I think that people appreciate the 0:04:03.640 --> 0:04:07.960 power of the central bank, but they also appreciate that 0:04:08.040 --> 0:04:12.520 the central bank cannot create a fiscal policy. That's for 0:04:12.600 --> 0:04:17.479 the government. So it can act to try to calm 0:04:17.839 --> 0:04:21.839 markets while they wait for a fiscal policy. But that's 0:04:21.880 --> 0:04:25.280 a chicky posture to be in. But I fundamentally don't 0:04:25.320 --> 0:04:28.159 think it's a problem of the ultimate bredibility. Sounds like 0:04:28.200 --> 0:04:30.359 you're saying, has someone who's been there and been in 0:04:30.360 --> 0:04:33.599 the room that there's a structural problem with the Bankonglian 0:04:33.720 --> 0:04:35.799 and you know, let's trust to talked about the mandate, 0:04:35.960 --> 0:04:39.040 that's one question. But we've got these two different committees. 0:04:39.040 --> 0:04:40.640 Do you think there needs to be an overhaul? And 0:04:40.680 --> 0:04:43.640 all this confusion and the upheaving the market shows that 0:04:43.680 --> 0:04:45.920 actually it's time to have a rethink of how fundamentally 0:04:45.960 --> 0:04:48.839 how the Bank of England operates. Well, the logic of 0:04:49.240 --> 0:04:52.080 what was done, and this this was all done by 0:04:52.680 --> 0:04:56.160 George Osborne, so it's not not list Trust, it's not 0:04:56.200 --> 0:04:59.440 the Bank of England itself. The logic was pretty clear 0:05:00.080 --> 0:05:01.840 that you made the Bank of England once again the 0:05:01.880 --> 0:05:05.160 banking regulator, and you gave it an overall financial stability 0:05:05.160 --> 0:05:08.839 objective which people said was not clear enough in the 0:05:08.920 --> 0:05:12.080 last global financial crisis. So this structure is a response 0:05:12.120 --> 0:05:15.719 to the global financial crisis. Okay, And until now people 0:05:15.760 --> 0:05:18.880 have said, well that's that's fine. You know that sort 0:05:18.920 --> 0:05:21.440 of has has worked, and you know we haven't had 0:05:21.440 --> 0:05:25.360 another anymore, right, I mean historic moves in the guilt market. Yeah, 0:05:25.440 --> 0:05:28.400 but then this, this is a very unusual set of 0:05:28.400 --> 0:05:32.680 circumstances and now I'm personally reluctant to conclude that that 0:05:32.720 --> 0:05:35.760 means the structure is shot. We love changing structures in 0:05:35.760 --> 0:05:39.039 this country, you know, we just love it. We did it. 0:05:39.480 --> 0:05:42.719 Very few people actually change their regulatory structure after the 0:05:42.720 --> 0:05:47.440 global financial crisis, even though many countries had equal meltdowns, 0:05:48.000 --> 0:05:50.400 but they left the structure the same. We just love 0:05:50.680 --> 0:05:54.440 moving the deck chairs, reorganizing institutions. And so I'm very 0:05:54.480 --> 0:05:58.800 reluctant to say that because of this highly, highly unusual situation, 0:05:59.040 --> 0:06:01.040 you know that that should be used as a reason 0:06:01.040 --> 0:06:02.400 to change the structure of the Bank of England. That 0:06:02.440 --> 0:06:04.920 strikes me as being an order logic. But so how 0:06:05.120 --> 0:06:07.400 is this a power struggle then between the government and 0:06:07.440 --> 0:06:09.760 the Bank of England And are we going to see 0:06:09.839 --> 0:06:13.320 just two weeks of possible mayhem volatility in the markets 0:06:13.640 --> 0:06:15.919 until we know what the fiscal plans of the new government. 0:06:16.200 --> 0:06:18.800 I don't see it as a power struggle between the 0:06:18.839 --> 0:06:24.760 two because they each have their own responsibilities. The problem 0:06:24.960 --> 0:06:28.719 is that one of them, you know, there's a gap 0:06:29.600 --> 0:06:33.320 and there isn't a fiscal framework. But at the moment 0:06:33.360 --> 0:06:36.200 there we don't know exactly what it is because we've 0:06:36.240 --> 0:06:40.839 got a declaration of intent, but we have clearly a gap. 0:06:41.520 --> 0:06:43.919 Government doesn't deny that there is clearly a gap, and 0:06:43.920 --> 0:06:46.800 then other people are coming in with helpful ideas about 0:06:46.839 --> 0:06:48.680 how it might be filled, but nobody knows what they are. 0:06:48.839 --> 0:06:51.080 So in the meantime, the Bank of England is having 0:06:51.120 --> 0:06:55.360 to sort of block and tackle dealing with the symptoms 0:06:55.400 --> 0:06:59.040 of uncertainty. But I don't I don't see that's a 0:06:59.720 --> 0:07:03.080 power struggling. If you're on the on the MPC now, 0:07:03.520 --> 0:07:05.880 and you mentioned before that there were possibly a little 0:07:05.960 --> 0:07:08.880 late to raise rates, I mean, how high would you 0:07:09.040 --> 0:07:13.760 be recommending rates need to go to stabilize situation? Well, 0:07:13.800 --> 0:07:17.160 I wouldn't. I mean about the The MPC does not, 0:07:17.920 --> 0:07:20.000 which I was a member of briefly, But the MPC 0:07:20.200 --> 0:07:24.280 does not make that kind of forecast for the longer term. 0:07:24.320 --> 0:07:27.480 I mean, I think that on the short term, I 0:07:27.520 --> 0:07:32.480 would be recommending a pretty large jump, you know, at 0:07:32.560 --> 0:07:35.040 least a seventy five b jump, because I think the 0:07:35.080 --> 0:07:38.520 perception is that we're a bit behind the game and 0:07:38.560 --> 0:07:42.920 that inflation is becoming too embedded. The inflation forecasts other 0:07:42.960 --> 0:07:44.960 people are coming out with suggest that we are going 0:07:44.960 --> 0:07:48.640 to have embedded inflation for longer than other people. So 0:07:48.720 --> 0:07:50.680 I'd be wanting to bang up As for how far 0:07:50.840 --> 0:07:53.800 you get, I think you have to watch the reaction 0:07:53.840 --> 0:07:56.720 market reaction to that if you get the pension funds. 0:07:57.240 --> 0:07:59.920 So the idea of the Bank of England removes the 0:08:00.000 --> 0:08:03.320 axed up on Friday, does it think the bank that 0:08:03.360 --> 0:08:05.760 they're ready for it? Would they take a gamble and 0:08:05.880 --> 0:08:09.200 saying well, actually we don't know what happens, but we 0:08:09.280 --> 0:08:11.720 need to do it. Anyway you were talking about, you know, 0:08:11.920 --> 0:08:14.000 the backstop of the backstop which means that they could 0:08:14.000 --> 0:08:15.960 fund themselves. I don't know whether they go to shadow 0:08:16.000 --> 0:08:20.920 banking instead. As to whether they Bank of England thinks 0:08:20.960 --> 0:08:23.640 that they're ready, I mean, I think it was inherent 0:08:23.720 --> 0:08:28.640 in Andrew Bailey's statements last night in Washington that he 0:08:28.760 --> 0:08:30.880 doesn't think that they are yet ready, but he thinks 0:08:30.920 --> 0:08:32.920 they could be by the end of the week. Because 0:08:33.000 --> 0:08:35.520 what he said was you've got to get disorganized and 0:08:35.600 --> 0:08:39.920 you have to ensure that your liquidity problems are resolved 0:08:40.080 --> 0:08:42.960 in this window that we've given you to come along 0:08:43.600 --> 0:08:46.320 and get this liquidity problem solved. So I think, no, 0:08:46.440 --> 0:08:48.160 he doesn't think it's solved yet, but yes, he thinks 0:08:48.200 --> 0:08:50.559 it could be solved by the end of the week. 0:08:51.640 --> 0:08:54.920 You know, I would always say that if they need 0:08:54.960 --> 0:08:57.160 to do something else, they'll do something else, because they 0:08:57.200 --> 0:08:59.760 won't just say, oh, well we tried that policy, it 0:08:59.840 --> 0:09:02.960 did work. There's now the markets internal again that we're 0:09:03.000 --> 0:09:05.000 just going to sit back and say I told you so. 0:09:05.120 --> 0:09:07.440 That's not the way a central bank would operate. But 0:09:07.640 --> 0:09:10.720 this particular facility, which was targeted at a particular problem 0:09:10.720 --> 0:09:13.480 in the LDI market, I believe it's going to end 0:09:13.480 --> 0:09:16.080 on Friday. There are other things they've done, of course, however, 0:09:16.120 --> 0:09:18.520 which could carry over and still help the market. But 0:09:18.559 --> 0:09:20.680 we're not really seeing the full impact, are we of 0:09:20.720 --> 0:09:24.280 what's happened to these funds. You know, they're having to 0:09:24.280 --> 0:09:27.360 to raise to sell assets. That's going to ripple through 0:09:28.120 --> 0:09:30.480 markets in sort of unexpected ways, isn't it. And I 0:09:30.520 --> 0:09:34.360 think the scale of the shift in markets is has 0:09:34.400 --> 0:09:36.600 been unprecedented. I mean, what is the what is the 0:09:36.640 --> 0:09:39.520 fallout going to be? Yes? Well, first of all, I 0:09:39.559 --> 0:09:41.920 think it's important to note that this isn't a solvency 0:09:41.920 --> 0:09:46.199 crisis for pension funds. It's a liquidity crisis. Second thing 0:09:46.240 --> 0:09:49.720 to notice that the facility has not been massively used, 0:09:50.600 --> 0:09:55.520 which does suggest that this was you know, focused on 0:09:55.440 --> 0:09:57.720 on a smallish number of it's not as bad as 0:09:58.080 --> 0:10:00.959 it doesn't look to us to be as bad as 0:10:01.000 --> 0:10:04.079 it as it is being presented, but it has produced 0:10:05.240 --> 0:10:10.319 significant market moves. Um now my own view, but as 0:10:10.480 --> 0:10:14.040 I can't prove this is that to some extent those 0:10:14.080 --> 0:10:18.360 market moves are really reflecting a longer term uncertainty about 0:10:18.400 --> 0:10:21.720 the fiscal position and just the amount of funding that 0:10:21.720 --> 0:10:24.360 there's going to be from the government in that market. 0:10:24.800 --> 0:10:27.680 And it's not surprising that the guilt market should react 0:10:27.720 --> 0:10:29.480 to the fact that it looks as if the government's 0:10:29.480 --> 0:10:32.920 going to be pumping out guilts on a much larger 0:10:32.960 --> 0:10:36.360 scale than before. And so you know the price has adjusted. 0:10:36.400 --> 0:10:39.640 What you know, that happened rather suddenly, which is a 0:10:39.640 --> 0:10:42.040 bit of a puzzle. But then I'm afraid you know, 0:10:42.120 --> 0:10:46.720 that's the way markets to the market is in an 0:10:46.800 --> 0:10:49.440 in an appropriate way, you think, for where we're going 0:10:49.480 --> 0:10:51.199 to be as an economy in the coming year. It's 0:10:51.240 --> 0:10:54.800 done it rather suddenly. But I think it's quite hard 0:10:54.960 --> 0:11:00.720 to say that the gum five year guilts at four 0:11:00.880 --> 0:11:05.240 point seven or whatever is an unreasonable price given the 0:11:05.280 --> 0:11:07.680 scale of the funding that the government is going to 0:11:07.720 --> 0:11:10.880 be pushing through. That market. I mean, I can understand that. 0:11:11.400 --> 0:11:14.280 So how are you seeing any signs of distress amongst 0:11:14.400 --> 0:11:18.600 your your customers be individuals or bank or company? Very small? 0:11:19.120 --> 0:11:22.080 I mean sometimes people surprised, and indeed internally, you know, 0:11:22.120 --> 0:11:23.760 when I get the briefing saying no, no, no no, no, 0:11:24.200 --> 0:11:26.600 I say, you shure, you know, I don't want to 0:11:26.600 --> 0:11:29.600 go out there and say but no that the answer 0:11:29.720 --> 0:11:34.240 is that it is. It is early days, and but 0:11:34.360 --> 0:11:37.800 in the mortgage market, not much sound distress. But as 0:11:37.800 --> 0:11:40.480 we might come on to explain, that's because most people 0:11:40.480 --> 0:11:43.280 are on fixed rates. Hasn't happened changed from from the 0:11:43.360 --> 0:11:46.400 last time, which is a significant disclosi. I just switched 0:11:46.400 --> 0:11:49.120 my networt mortgage. I'm afraid my five was coming to 0:11:49.160 --> 0:11:51.760 an end to the Halifax, which was oftening, But I 0:11:51.800 --> 0:11:53.280 did it. I did it, so how it's going to 0:11:53.360 --> 0:11:59.560 what I did a month ago? But you know it 0:11:59.720 --> 0:12:01.600 is I feel like I've dodged a bullet, right, and 0:12:01.640 --> 0:12:04.520 a lot of people haven't. Well, that's what I mean. 0:12:04.800 --> 0:12:07.840 At the moment of our mortgages are fixed rate eight 0:12:07.840 --> 0:12:14.000 percent standard variable that our average the average residual maturity 0:12:14.200 --> 0:12:17.040 of these mortgages is two years and nine months. Therefore 0:12:17.120 --> 0:12:19.679 you can work that out. I can't instantly in my head, 0:12:19.720 --> 0:12:21.320 but I mean, you know, roughly a third of them 0:12:21.320 --> 0:12:23.679 are going to be coming up, So the incidence of 0:12:23.720 --> 0:12:27.240 this distress in mortgages is going to be very uneven. 0:12:27.679 --> 0:12:29.720 So one of the things I don't think anyone really 0:12:30.280 --> 0:12:33.200 thought a particularly is what happens in a fixed rate 0:12:33.280 --> 0:12:37.240 mortgage environment when there's a sudden change in rates. You're 0:12:37.240 --> 0:12:40.000 also saying out of was it two weeks ago that 0:12:40.040 --> 0:12:42.440 a lot of the banks had to pull some mortgages 0:12:42.559 --> 0:12:45.480 or some of the banks you didn't pull mortgages? Is 0:12:45.480 --> 0:12:48.440 that because you stress tested to a higher level. I 0:12:48.480 --> 0:12:51.839 don't completely know that. We do stress to a pretty 0:12:51.920 --> 0:12:53.680 high level. Actually, it's a sort of six or seven 0:12:53.679 --> 0:12:56.160 percent is what we do when we when we lend 0:12:56.160 --> 0:12:58.680 to people, we say, well, supposing the rights for six 0:12:58.840 --> 0:13:01.679 could you still afford this? Uh? And so our loan 0:13:01.760 --> 0:13:05.600 to valuation rate is usually about you know, most of 0:13:05.679 --> 0:13:07.880 an average, it's something like in the fifties, actually our 0:13:07.920 --> 0:13:11.000 leaned to valuation rate UM and very very very few 0:13:11.000 --> 0:13:14.760 mortgages would be issued more than seventy. And I don't 0:13:14.760 --> 0:13:16.760 want to imply that that's not gonna be a problem 0:13:16.760 --> 0:13:18.760 for people because some people will face a big increase 0:13:18.760 --> 0:13:21.880 in their mortgage costs. We would say that they could 0:13:21.960 --> 0:13:25.000 quite afford it, but they may have to adjust to 0:13:25.040 --> 0:13:27.240 other parts of their spending in a way that they 0:13:27.240 --> 0:13:29.360 don't want to do. I mean, I had I had 0:13:29.440 --> 0:13:32.080 a neighbor that you know, came over for a cup 0:13:32.080 --> 0:13:35.360 of coffee, former Air Force nurse, a force of nature, 0:13:35.840 --> 0:13:38.200 and she remarked, you know, she remembers when interest rates 0:13:38.200 --> 0:13:43.679 were like a twelve. Well, if you know, if the 0:13:43.800 --> 0:13:46.520 if the bank raises rates very sharply over a consenting 0:13:46.520 --> 0:13:50.240 period of time, clearly the stress that we would impose 0:13:50.320 --> 0:13:54.760 would be larger, and the consequences would be that the 0:13:54.880 --> 0:13:58.200 mortgage availability would reduce. I mean, for any individual, you know, 0:13:58.280 --> 0:14:01.920 you would be ending less than you would have done before. 0:14:01.960 --> 0:14:04.040 And that's abound to have an effect on the on 0:14:04.080 --> 0:14:06.280 the house price market. But is that a real possibility 0:14:06.400 --> 0:14:09.640 or at some point the market implied also that the 0:14:09.679 --> 0:14:12.360 interest rates would come down and this has huge application 0:14:12.360 --> 0:14:14.560 for more regin people spending well. I think the central 0:14:14.600 --> 0:14:16.600 forecasts that we would look at at the moment would 0:14:16.600 --> 0:14:18.360 be that you know, you will see a peak of 0:14:18.520 --> 0:14:21.120 rates and quite sure precisely how high it will be, 0:14:21.400 --> 0:14:24.640 but that eventually, you know, the energy prices will fall 0:14:24.680 --> 0:14:27.920 out of the calculation, because unless energy prices going on 0:14:27.960 --> 0:14:30.000 and on and on, the big spike will gradually fall 0:14:30.040 --> 0:14:32.680 out of the inflation rate. So I don't see at 0:14:32.720 --> 0:14:37.080 the moment anybody forecasting double digits interest rates. But I mean, 0:14:37.280 --> 0:14:39.520 it's it's logically true that if they did, then we 0:14:39.520 --> 0:14:41.400 would be stress testing at a higher level. That I 0:14:41.440 --> 0:14:44.240 don't see that at the moment. So what Okay, so 0:14:44.560 --> 0:14:47.160 rates go to five six pc or so, maybe peek 0:14:47.200 --> 0:14:49.800 at some point around there, But what is the impact then? 0:14:49.800 --> 0:14:52.560 You you mentioned the spending. Yes, maybe there's not so 0:14:52.600 --> 0:14:55.800 many defaults because people can cope with their mortgages, but 0:14:55.840 --> 0:14:57.920 they knock on effect the economy. I mean, what sort 0:14:57.920 --> 0:15:01.960 of recession are we about to side the world? I mean, 0:15:02.360 --> 0:15:05.400 you know, I've been taking the view that we must 0:15:05.400 --> 0:15:09.200 be careful to talk ourselves into a super gloomy posture 0:15:09.640 --> 0:15:13.640 because consumer spending has been holding up to be confidence 0:15:13.680 --> 0:15:17.240 has fallen, but there's still a lot of discretionary spending 0:15:17.280 --> 0:15:22.600 going on. And the big impact for us looking at 0:15:22.600 --> 0:15:26.120 the past on default rates and real distress has been 0:15:26.200 --> 0:15:30.840 unemployment and it's when unemployment rises that you get these 0:15:31.040 --> 0:15:33.840 particular problems because people do assume and you need we 0:15:33.880 --> 0:15:37.560 assume that you you've still got your income. And so 0:15:37.720 --> 0:15:41.400 I think the biggestsue is whether this recession does deliver 0:15:42.040 --> 0:15:44.760 a significant increase in unemployment. Not much sign of that 0:15:44.920 --> 0:15:47.120 at the moment. So people are are dropping off the 0:15:47.200 --> 0:15:49.600 labor for us, well, that's true. They will of course 0:15:49.640 --> 0:15:52.400 find it more difficult to get mortgages and if they 0:15:52.440 --> 0:15:54.200 need to in the future, because you know, once they've 0:15:54.240 --> 0:15:57.280 lost their their main source of income and the long 0:15:57.360 --> 0:16:01.040 term sick is extremely worrying for the overall economy point 0:16:01.040 --> 0:16:02.560 of view. So it depends. If you're asking me just 0:16:02.600 --> 0:16:04.640 about the overall economy, I would say yes, yes, yes, 0:16:04.680 --> 0:16:07.000 it looks a bit gloomy. If you're asking me about 0:16:07.080 --> 0:16:11.960 specifically about the bank, our customers, financial distress, financial stability 0:16:12.400 --> 0:16:15.600 at the moment, you know, businesses tend to be tending 0:16:15.640 --> 0:16:19.800 to repay. We don't have we don't have huge provisions 0:16:19.880 --> 0:16:22.080 for for bad debts. We don't seem to need that 0:16:22.120 --> 0:16:23.840 at the moment. There's still, of course, quite a lot 0:16:23.840 --> 0:16:27.920 of government guaranteed borrowing out there because of COVID so 0:16:28.000 --> 0:16:30.840 that's one reason why it is. But at the moment, 0:16:30.880 --> 0:16:33.240 the banks, I would say, and I don't think market 0:16:34.240 --> 0:16:39.000 leg markets still tight. As COVID meant that households also 0:16:39.040 --> 0:16:41.920 built in cash buffers, yes they did. I mean, you know, 0:16:41.960 --> 0:16:44.280 on average, or the average is slightly silly number, but 0:16:44.360 --> 0:16:47.640 on average, our customers had about five thousand pounds more 0:16:48.000 --> 0:16:50.760 at the end of the COVID period in deposits than 0:16:50.800 --> 0:16:53.720 they had before because their income for the most part 0:16:53.800 --> 0:16:58.400 remains remained the same and their expenditure felt now they're 0:16:58.440 --> 0:17:02.000 they're reducing that and if you go to any airport 0:17:02.040 --> 0:17:05.679 you'll see what they're doing sort of, you know, they 0:17:05.800 --> 0:17:10.720 travel expendure just going up and still still at a 0:17:10.800 --> 0:17:13.800 very high level. So people are running down those balances, 0:17:14.000 --> 0:17:16.720 but they still we still have more deposits than we 0:17:16.760 --> 0:17:19.440 would usually have at this stage of the cycle. Can 0:17:19.480 --> 0:17:21.800 I ask you about small businesses that West does a 0:17:21.840 --> 0:17:25.040 huge amount in terms of entrepreneurs in this country, and 0:17:25.640 --> 0:17:28.200 you know, the Prime Minister and the chance to talk 0:17:28.240 --> 0:17:31.719 about growth, growth, growth, The whole mantra of this government 0:17:31.720 --> 0:17:35.359 is around encouraging growth. What are small businesses doing in 0:17:35.359 --> 0:17:38.320 this environment? Are is this? Is this a country now 0:17:38.320 --> 0:17:40.960 that people want to start businesses where entrepreneurs want to 0:17:41.560 --> 0:17:44.720 build for the future, or is this environment or this 0:17:44.800 --> 0:17:47.120 uncertainty in high interest rates, is that really putting them off. 0:17:47.840 --> 0:17:50.320 I think it's bound to have an impact, but it's 0:17:50.400 --> 0:17:53.840 not catastrophic at this point. You know, we have some 0:17:53.920 --> 0:17:56.640 targets for the number of new businesses which we want 0:17:56.680 --> 0:17:58.840 to lend to. We did have to suspend that in 0:17:58.960 --> 0:18:02.320 COVID because the new new business formation fell during the 0:18:02.359 --> 0:18:06.080 COVID period, but it's picked back up again, so it's 0:18:06.119 --> 0:18:09.160 not bad. But if you ask me, do high interest 0:18:09.240 --> 0:18:11.040 rates and a recession have an impact, well, of course 0:18:11.080 --> 0:18:14.679 they do. What do you think about this characterization of 0:18:14.720 --> 0:18:17.920 anyone who disagrees with the Chancellor as being the anti 0:18:17.960 --> 0:18:24.080 growth coalition? Yeah? Well I've been trying to join, but 0:18:25.080 --> 0:18:27.320 I can't find the website at the moment, but I'm 0:18:27.359 --> 0:18:29.480 sure there will be one barely soon. You'll get an 0:18:29.520 --> 0:18:32.880 invitation after this podcast. I mean, this is you know, 0:18:33.440 --> 0:18:35.920 the politics, and you know, I'm not sure how much 0:18:36.359 --> 0:18:40.359 wisdom I can add to that, because you know, I 0:18:40.359 --> 0:18:43.320 think it mixes up quite a lot of different tendencies. 0:18:43.320 --> 0:18:47.199 I mean, there are clearly obstacles to growth in the 0:18:47.280 --> 0:18:51.840 planning system and all of that. And you know we 0:18:51.840 --> 0:18:55.240 we would benefit as a bank if some of those 0:18:55.280 --> 0:18:57.959 were eased because there'd been more lending opportunities for us 0:18:58.000 --> 0:19:01.520 and all of that. But you know, the rhetoric is 0:19:01.640 --> 0:19:04.560 politics and that sort of broader sort of financial rules. 0:19:04.560 --> 0:19:06.680 And you say as about I mean, there's a there's 0:19:06.680 --> 0:19:09.080 a big effort to try to deregulate and maybe you know, 0:19:09.119 --> 0:19:11.399 sitting where we are in the City of London trying 0:19:11.440 --> 0:19:14.720 to give the city a boost, do you think this 0:19:14.800 --> 0:19:17.280 government's instincts are right on that? And are you in 0:19:17.359 --> 0:19:20.440 conversations at all with the city minister, with the Chancellor 0:19:20.600 --> 0:19:23.920 about how we can make the city you know yet 0:19:23.920 --> 0:19:28.240 again the financial couple of Europe or increase that position. Yes, 0:19:28.440 --> 0:19:31.200 the answer is yes on that specific question. Are the 0:19:31.240 --> 0:19:36.200 discussions going on the government plans are a package sort 0:19:36.200 --> 0:19:38.679 of big bang two point zero as they tend to 0:19:38.720 --> 0:19:41.840 call it. And you know, people are being asked, not 0:19:41.920 --> 0:19:43.720 just us, but a lot of other people about asked 0:19:43.720 --> 0:19:46.960 for their ideas. And undoubtedly there are some ideas around, 0:19:47.000 --> 0:19:50.200 I mean, the most obvious being a reform of solvency too, 0:19:51.119 --> 0:19:53.439 though the Bank of England, you know, will have to 0:19:53.440 --> 0:19:57.199 be brought along with that. That's the rights, that's the 0:19:57.280 --> 0:20:01.159 right approach. Well, I think solvncy too, Yes, because I 0:20:01.200 --> 0:20:05.080 do think that Solvency two has had some unintended consequences 0:20:05.119 --> 0:20:08.679 in making it harder for the long term investments for 0:20:08.680 --> 0:20:11.280 a long term life insurance companies and pension funds to 0:20:11.440 --> 0:20:14.360 invest in long term infrastructure projects. I would say, incidentally 0:20:14.359 --> 0:20:16.960 that it's under reform in the EU as well, because 0:20:17.720 --> 0:20:20.480 this argument is is accepted. The question is just how 0:20:20.480 --> 0:20:23.000 far you go the matching adjustment? How far you know 0:20:23.080 --> 0:20:26.600 you are prepared to allow people to engage to invest 0:20:26.680 --> 0:20:29.399 in very long term projects which perhaps don't produce a 0:20:29.440 --> 0:20:31.600 return for a short foin for quite a few years, 0:20:31.640 --> 0:20:34.920 but eventually might So there's some technically issues there, but yes, 0:20:34.960 --> 0:20:38.520 I think I think that's worth doing myself. Then there 0:20:38.520 --> 0:20:41.080 are other things like well, we we would argue that 0:20:41.160 --> 0:20:45.560 ring fencing is a redundant imposition on on banks and 0:20:45.600 --> 0:20:48.720 it's quite costly for people like us, And the government 0:20:48.760 --> 0:20:52.399 has produced a report which they still haven't implemented on 0:20:52.760 --> 0:20:55.640 making some improvements to that regime. And that's another area 0:20:55.680 --> 0:20:58.280 which I think something could be could be done in. 0:20:58.640 --> 0:21:01.360 But what about banker bonuses does it attract I mean 0:21:01.560 --> 0:21:04.000 unclear whether they'll go ahead with this the regulation, but 0:21:04.040 --> 0:21:06.680 does it really attract talents? I remember you saying years 0:21:06.720 --> 0:21:10.320 ago that there was a top percentage of you know, 0:21:10.520 --> 0:21:14.320 top bank earners in London, but because of Briggs and 0:21:14.320 --> 0:21:17.880 the clearinghouses, that was that danger of going to Europe. Yes, 0:21:17.960 --> 0:21:20.879 I mean it's um, I think from about the bankers 0:21:20.920 --> 0:21:23.199 bonus thing, isn't It's not something that I was aware 0:21:23.560 --> 0:21:26.320 anyone was particularly lobbying for it. Certainly it's never come 0:21:26.400 --> 0:21:29.440 up in the beatings of the chairs of British banks UM, 0:21:29.520 --> 0:21:32.760