Minutes of inaugural meeting of the Bank of England's Financial Stability Committee, July 1, 2008:

The chairman, Mr Mervyn King, welcomed the other newly appointed members and reminded them that the Chancellor had now given the Bank formal legal responsibility for financial stability alongside its existing role for curbing inflation. The purpose of the new committee was to augment the Bank's in-house expertise with fresh blood and to replicate the success of its twin panel, the Monetary Policy Committee.

Mr George Spiv-Bonus, head of trading at Solomon Grundy, said he was pleased to have been invited on to the committee and thought financial stability was a good thing. He was seconded by Sir Eric Paperclip, chairman of the East Dulwich and Peckham Building Society, who said it was imperative that financial stability be maintained. Lord Grandee, chairman of Agglomerated Widgets, emphasised that only by tireless attention to financial stability could the good governance of the economy be carried on.

Professor Bob Sliderule, Applegarth Chair of Applied Derivatives at the University of Gateshead, argued that stability, finance-wise, was key.

On a show of hands it was unanimously agreed that financial markets should, wherever possible and within reason, be stable.

Mr King then invited members to suggest areas of concern and debate activities that might create future instability.

Mr Spiv-Bonus said that while some investment banks had perhaps pushed the envelope a little too far in past years, the lessons had been fully learnt and foolproof new safeguards put in place. It was imperative that the innovation and creativity that had made the City of London a world leader in financial services should not be suppressed by footling new rules and kneejerk interference.

Professor Sliderule drew the committee's attention to a new form of complex derivative that “makes CDO squareds look like deposit accounts”. Professor Sliderule offered to explain to the committee in detail how the new securities were structured and traded. He had the Powerpoint presentation with him and it would take only two or three hours to run through the main points. It was agreed to adjourn for luncheon.

In the afternoon session, Mr King and other in-house members of the committee proposed a possible further crackdown on short-selling during rights issues.

It was argued that while further interference risked being seen as heavy-handed, and could trigger a sudden spike higher in share values, it was imperative that capital-raisings should not be imperilled by market abuse.

Mr Spiv-Bonus excused himself to make an urgent telephone call.

The committee was then asked to consider the fall in house prices and rising unemployment and the possible effect on mortgage lenders' financial strength if borrowers defaulted in large numbers.

Sir Eric explained how, fortunately, banks and building societies had dramatically improved and streamlined their risk assessment systems by no longer requiring prospective borrowers to provide proof of earnings.

The committee agreed to keep a watching brief on the mortgage market and commission additional work from the Bank's inhouse research team. Details should be forwarded in triplicate to the Treasury, the Financial Services Authority and the Tripartite Authority. No further action was needed at this time, it was decided.

The meeting was adjourned.

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