Mark Carney

Governor

Andrew Tyrie MP Chairman of the Treasury Committee House of Commons, Committee Office 7 Millbank London SW1P3JA

30 January 2014

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

REMUNERATION
The Committee requested a timetable for the PRA's response to the Parliamentary Commission on Banking Standards' (PCBS') recommendations on claw back and other aspects of the Remuneration Code. In short, the PRA plans to issue two consultation papers on remuneration during 2014: A consultation on amending the existing Remuneration Code to require firms to apply claw back to vested variable remuneration (planned by March); and A consultation on the implementation of a revised Remuneration Code in light of the PCBS' wider recommendations on remuneration (planned by August, aligned with proposals on the Senior Persons and Certification regimes)

Further detail on both consultations is set out below. Consultation on claw back The current Remuneration Code requires firms to cancel or reduce deferred variable remuneration (i.e. bonuses that have been awarded but not yet paid out) in cases of misconduct, poor performance or failures of risk management. The PRA's expectations around firms' use of malus were clarified in a Supervisory Statement published in October 2013.
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The current Remuneration Code does not, however, require firms to recoup bonuses that have already been paid out (claw back). The PCBS recommended that provisions for claw back should be strengthened and, accordingly, the PRA intends to begin the statutory consultation on proposals in early March. After a two month consultation period the PRA Board expects to be in a position to make rules in time for firms to include claw back provisions in remuneration policies f o r t h e 2014/15 financial year.

www.bankofenBland.co.uk/pra/Documents/publications /pQlicy /2013/apDofmalusss2-13 .pdf

Consultation on the remaining PCBS recommendations on remuneration The PCBS also made a number of other recommendations in relation to the Remuneration Code. These included extending the deferral period for variable remuneration; paying a greater proportion of bonuses in instruments that could be bailed-in; and new powers for the PRA to intervene on remuneration where a firm has received direct taxpayer support. Given the number of overlaps and dependencies between these issues and the scope and substance of the Senior Persons and Certification regimes, the PRA intends to consult on the remaining PCBS recommendations at the same time as it consults on implementing the new legislation dealing with accountability and standards for bank employees. This will include consulting on the extension of deferral periods beyond the current minimum of three to five years to improve alignment between reward and the maturity of risk. The PRA is co-ordinating with the Financial Conduct Authority (FCA) on the timing of the consultation around the Senior Persons regime. We plan to publish the consultations together by August but I shall of course ask the PRA to provide you with an update once a more specific date is agreed. We expect that the consultations will run for three months, enabling the PRA Board to implement the necessary rules by the end of 2014. Finally, you asked whether the Bank currently has any concerns about the PCBS' recommendations around remuneration. I can confirm that, at present, we are confident that most of the recommendations can be put into practice. The one exception, as you may be aware, is the recommendation on recouping both variable remuneration and pension rights from senior persons where a bank is in receipt of direct tax payer support. The provisions of both European human rights legislation and the UK Pensions Act mean the scope for taking action in respect of pension rights will require very careful legal analysis.

UK BANKS' EXPOSURES TO CHINA

I was also asked for my views on the scale of UK banks' exposures to China, a question prompted by a recent paper by Dong He and Robert McCauley at the Bank of International Settlements (BIS) . Dong and McCauley noted that UK banks had, in aggregate, the largest exposures to China of any country's banking system.
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As I said during the hearing, this came as no surprise to me given the UK's position as a global financial centre, and the increasingly important role that China plays in the global economy. Indeed, the extent of the banking linkages between the UK and China was discussed in an article published in the Bank's most recent Quarterly Bulletin , in which the scale of UK banks' claims on mainland China was also noted
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The claims of UK-owned banks on China totalled $184bn in Q2 2013 (see chart 1 in the annex to this letter). These exposures have increased by around 2.5 times since the end of 2009, albeit from a relatively low base, compared to a 1.5 times increase across all of the banks that report their exposures to the BIS (Chart 2). Despite this growth, claims on China are still only the fifth-largest component of UK-banks' external exposures (Chart 3). Chinese exposures remain much smaller than UK banks' exposures to the United States, and are also less than exposures to a number of smaller economies.

"Transmitting global liquidity to East Asia: policy rates, bond yields, currencies and dollar credit", by Dong He and Robert N McCauley, BIS

Working Papers 431 http://www.bis.orE/publ/work431.pdf

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"Bringing down the Great Wall? Global implications of capital account liberalisation in China", by John Hooley, Bank of England Quarterly Bulletin, 2013 Q4 www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/obl304prereleasechina.pdf

China's financial system is still closed relative to other economies. But there are increasing signs of relaxation of capital controls and greater use of the Chinese currency abroad. If this continues then foreign banks - including UK banks - could reasonably be expected to increase their holdings of the assets of China - the world's second largest economy. I should note that the Bank monitors potential risks that could arise from UK banks' overseas activities very closely. To do so, it works with other central banks and supervisors, including those in China. Our forthcoming stress testing work can be used to account for idiosyncratic risks to which firms are exposed, including concentrations of risk in a particular region or country. I trust that these responses are helpful to the Committee.

Annex Chart 1: Claims on China of major banking systems, 2013 Q2

US$ billions - 200 - 180 - 160 - 140 - 120 - 100 - 80 - 60 - 40 - 20 - 0 lands AU!> tralia :rland I Ger

Chart 2: UK-owned and all BIS-reporting banks' claims on China

Percentage change on previous year - A l l reporting countries
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2006

2007

2008

2009

2010

2011

2012

2013

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Sources: Bank of International Settlements (BIS) consolidated database and Bank calculations. Chart 3: External claims of UK-owned banks by country, 2013 Q2
US$ billions 1,200 1,000 - 800 - 600 400 200

Sources: Bank of International Settlements (BIS) consolidated database and Bank calculations. Chart 4: Share of foreign-owned banks' total claims on China, 2013 Q2 vs 2008 Q1
Per cent of all BIS reporting banks' external claims on China Mar-08 Jun-13

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Source: Bank of International Settlements (BIS) consolidated database.

Sources: Bank of International Settlements (BIS) consolidated database, SNL Financial and Bank calculations.