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Question: Are you looking forward to the Iqaluit summit?

Answer: Not to such a long flight. I thought I was pushing my luck when I got the G20 ministers to go to St. Andrews, Scotland. I've never been in the Arctic in my life - I've seen it from an airplane now and again, so there's that. But when I start seeing the temperature and they're telling me to cover my face and my skin lest it get burnt in the cold - ugh.

Q: What direction should bank regulation take? The Canadian Finance Minister is going to be pushing for more robust capital and reserve requirements, possibly beyond Basel II. The Obama proposal involves disaggregating banking functions and restricting proprietary trading. Are you backing either approach?

A: There is a real sense that we need to make reforms, and I think there are a couple areas in particular where there is a pretty unanimous view as to what needs to be done. One is in relations to the adequacy of the capital that banks hold - we need to make sure that the capital held is commensurate with the risk that banks are undertaking. And that's a view that's held on both sides of the Atlantic - in Canada, the States, ourselves and France and Germany.

I think there's also a fair amount of agreement that we need resolution plans so that if banks get into trouble, we know in advance which regulator we deal with, and which countries would take responsibilities for which parts, and critically who would pay for it.

I believe that because there's broad agreement on that, and we reached agreement last year, we need to get on with it.

I think there are issues where we're going to need some further debate.

For example, we proposed last December that we might look at an international levy, sort of an insurance fund. Paul Volcker [former U.S. Federal Reserve Board chairman]has suggested something similar.

Q: You mean a transaction tax?

A: It would be a matter of debate whether it would be a transaction tax or a levy on wholesale deposits - the principle, I think, is the same. But there would need to be a lot of work done; it would have to be international, otherwise people would simply go offshore. And you'd also have to have agreement, to avoid double taxation, about who was holding this fund, what it was supposed to cover - that would take time.

And equally, if you look at the Volcker proposal in relation to proprietary trading - as he said in his testimony to a congressional committee earlier this week, this is something you'd have to get international agreement upon.

Q: Are you interested in that at all?

A: One of the things we said in the consultation document is, if you look at our banks, most of them are not a big problem - with RBS [Royal Bank of Scotland]for example, proprietary trading is about 1 per cent of their profits.

But it's one of a range of things that the general principle is, if you get into risky activity, you need to hold sufficient capital so that if it goes wrong, you've got a buffer to fall back upon.

Q: Can British banks be split by function as Obama proposes?

This is a different proposition.

I think the concept of 'too big to fail' misses the point. Remember the US banking system is different - they've got 3,000 retaol banks providing most of their credit; we've got six that provide 80 per cent; in Canada I think the position is about the same.

I think that what this crisis has shown is this: the conventional regulatory approach was, if an institution was ok, then you don't need to worry about it. What the last two years has shown is, it's the connections between these banks that's the problem - the interconnectivity. Northern Rock was one of the best capitalized banks in the country; it met all the requirements. But the problem was that it had a funding model that was dependent on it being able to raise money on the markets. When that stopped, it collapsed.

So I think the better way of dealing with this is to have a proper resolution procedure, a living will, so you can look at these things in advance. If the proposition was 'break up your banks,' then I would say no, I don't think that's the thing to do.

The more transparency, the more people know what it is that they're trading in, the more other people can know what they're trading in, the better it can be. Part of the problem in 2008 was that banks became so suspicious of what each other was holding that they said they wouldn't trade in them. When banks lose confidence in banks there's a real problem.

Q: A lot of this needs to be dealt with very quickly. Your counterpart in France feels that the Basel standards are adequate to deal with it. But are they quick enough?

A: The last Basel process took 10 years. And we don't have ten. We don't have two. It's rather like, if your house catches fire because of a fault in the wiring. And everybody works together to put the fire out, and pledges to mend the damage. And then it's so tempting to leave the wiring repairs for another day. And I think that would be a disaster for us: we need to get a move on.

The G20 reached agreement on a whole host of things, in London and then in Pittsburgh. I hope the seven of us this weekend can agree on the urgency of actually implementing changes, and persuading the rest of our G20 colleagues that this is a problem that has not gone away, it needs to be sorted out. And indeed our recovery in the future is dependent on us having an effective, functioning banking system, and a safer banking system. To get a safer banking system is very important.

Q: Is there any consensus on how to deal with currency and balance-of-payments imbalances, especially between China and the U.S.?

A: It has been an issue in the last ten years, but it has now become a more urgent problem.

This is why it's important that we now have a G20 process, because countries like China need to be part of it.

The last couple years have shown that you cannot rely on the U.S. consumer to drive growth over the next ten years. The last two years have shown us we were all affected by this.

If we are all going to sit around the top table we have to realize we have responsibilities as well as rights. And I think this is a problem that needs to be resolved, it needs to be resolved sensibly, and I don't think it's particularly helpful to blame one side or the other, because everyone can point to something that somebody didn't' do, but I do think we have to have a grown-up conversation about it.

It was recognized at the end of the Second World War that this is an important issue. And sixty or seventy years on, it's far more important that we engage with the same degree of vigour.

I do think that China will realize that it's in its interest to have a better equilibrium than they've got at the moment. There's no country in the world that's big enough now to pull down its shutters and say 'we'll go it alone.' You simply cannot do that. The United States cannot do that, no country can do that.

And that's why it's important to get everyone into one international forum to try and resolve these matters. And they're not easy. Everyone else has got domestic politics with a large or small P. But I think, again, twelve months ago people were talking about this, including the Chinese. The problem's not going away, and it will come back if we don't sort it.

Q: Do you agree with the G20 ministers that there should be a shift in reserve currencies?

A: You can discuss that forever and a day, but the fact is that there is a reserve currency at the moment, and what would be another one is open to question. We could go down a blind alley and ignore the questions that do need fixing.

Q: The issue of continuing stimulus versus getting the fiscal house in order - is it possible to have a coordinated answer among countries? Can that happen?

A: I think it will happen, de facto. There is a remarkable degree of unanimity in relation to the need for fiscal stimulus, and most countries have done that. And I agree with what Dominique Strauss-Kahn [head of the International Monetary Fund]said over the last few weeks: that to withdraw support prematurely is a bigger risk than to delay it.

We're very clear that once the recovery is established, and our deficit reduction plan starts in 2011, we will more than halve the deficit over a four-year period.

Q: But not until 2011.

A: There's a slight tightening next year. But I think to take the support off prematurely would be to risk delaying the recovery - and there seems to be a change of emphasis from the opposition, so maybe we're all agreed on that now.

I think we will see recovery: unemployment is less than we expected, less than in the US or euro area, though it's still too high for us. If you look at business confidence, there are signs there.

Q: Is that backed by real consumption or just stimulus funds flowing through the system?

A: I am confident that we are on the right path to recovery. But the public sector's role at the moment is to fill the gap that really needs to be filled by private investment coming back. I think there are signs that it will come back, but it's not come back yet, so that's why I have maintained public investment.

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