Mr.
Breed: We broadly support the Governments view on
the directives. In some respects, we have all recently heard the
slamming of stable doors after the horses have bolted. Nevertheless, it
is right that we at least try to co-ordinate some sort of activity
across the European Union to address these difficult issues. I wonder
whether it is possible to regulate and supervise the immense banks that
cover a sort of supermarket range of financial services and products. I
also wonder whether we will end up having to try to de-aggregate them
and regulate and supervise them differently with different capital
adequacy rules and other
requirements. There
is little doubt that we must have further updates on thisnot
only in relation to the Banking Bill but other measuresbecause
we are beginning to see the consequences of what has happened almost
under our noses for the past 10 or 12 years. However, these changes
to the rules are a good step in the right direction, although they might
need to be amended againparticularly in the area of
counter-cyclical capital adequacy, which is clearly an issue that needs
to be addressed. I do not in any way suggest that the process will be
simpleparticularly when we are trying to deal with such
different sorts of banking institutionsbut, nevertheless, as I
say, this is the start of what I think will be a journey. Success in
the whole area of supervision and regulation is likely to be a journey
rather than a realisable destination, and we will frequently have to
address the issue during the next few months and years. On the basis of
what we have heard today, I am happy to broadly support the direction
that the Government are taking in these
directives. 6.23
pm
Mr.
Fallon: I am sorry, Mr. Bercow, if you thought
I was unhappy earlier; it was an inadvertent frown, which I am good at.
I also remind the Committee that my interests are recorded in the
register. I, too, welcome the draft legislation before us. First, I
shall turn to the capital requirements directive. It is worth reminding
ourselves that the current capital requirements directive has only just
come into effect. These measures will amend it all over again. In
happier times, it might have been better to have allowed the new
directive to bed down a little before returning to the fray.
The tests
that the amended directive we are considering must meet are, first,
whetheras my hon. Friend the Member for South-West
Hertfordshire has saidit addresses the issue of
counter-cyclicality, which is obviously increasingly important.
Secondly, we must consider whether the directive continues to
discourage off-balance-sheet activity, which, of course, was one of the
great faults of the original Basel framework. Thirdly, we must consider
whether the directive is proportionate. Of course, this legislation
carries a cost for the firms that have to implement it and, indeed, for
the customers of the products they are trying to sell. Those are the
tests the legislation must meet before the Government sign up to it on
Monday.
As far as the
central elements of the legislation are concerned, I welcome the new
focus on liquidity management, which has clearly been one of the great
weaknesses exposed over the past year or so. I have three particular
reservations. As time passes, I understand that the Minister may not be
able to address them at great length. The first concerns the college of
supervisors. I was genuinely stunned when the Minister said that there
would be no relationship with the European Central Bank. We have
learned to our cost of the lacunae in the relationship between the
supervisory authority, the FSA, and the Bank of Englandthe
provider of liquiditywhen it comes to banks. There must be some
relationship there. The European Central Bank concurs with that view.
That was certainly the impression that it gave to the Treasury
Committee when we visited it last January. There must be some
connection between the body supervising the bank and the body that is
ultimately responsible for providing liquidity. I hope that the
Minister will reflect on his earlier answer in that
respect. My
second reservation concerns the 5 per cent. retention. As far as I
understand the various memorandums deposited with us, the Government
were right to question the
range of the 5 per cent. requirement. That range has narrowed, and
perhaps it is expected to narrow further when the Minister gets to
Brussels on Monday. I remain concerned about two points, the first of
which is how the 5 per cent. retention affects counterparties. I am not
clear what their obligations will be under that requirement. Secondly,
I wonder about the implications for large asset-backed instruments,
such as instruments that might comprise very valuable properties or
buildings. I wonder how feasible it is to apply the 5 per cent.
retention to such an instrument.
My third
reservation concerns the ratings agencies legislation. It is
unfortunate that it was not incorporated in this motion. We need to get
on and deal with the ratings agencies, which have been hopelessly
conflicting in their current operations. In some countries, there are
completely independent ratings agencies that are not paid by the
institution that they are rating, but independently by the people who
depend on their research. The Commission has a proposala
separate draft directive, or some other regulation on ratings
agenciesthat should be considered at the same time.
Those are my
reservations on the capital requirements directive, and let me now turn
briefly to the deposit guarantee scheme directive. Some matters have
already been aired. I have to say to the Minister that they are being
dealt with at a leisurely pace. We had the run on Northern Rock, and we
have had difficulties with banks right across the continent. There are
Danish housewives queuing to get their deposits out of a British branch
in Copenhagen, and so on. We have had issues of nomenclature, in which
an Icelandic bank is registered on the Isle of Man, or
whatever.
We need to
get on with thisI am concerned at the slippage in the
timetable. Originally, we were supposed to have an agreement across
Europe on the minimum compensation payment by the end of next year.
Now, it appears that nothing will be done until December 2011; that is
too leisurely. I am not as worried as the hon. Member for South-East
Cornwall is about the three-day requirement. I see no difficulty in
getting cheques back to depositors relatively quickly. That is what
happens in the United States and it happens now in Japansuch
things can be dealt with in the three days. The banks deposits
are frozen and cheques are paid out within two or three days. The
industry is wrong to continue to pressurise Governments to extend the
period. I think that 20 days might well prove to be too
long. I
have three specific points about the compensation procedure, the first
of which is on the coverage. I assume from what the Minister said that
we are still talking only about retail depositors, and that it is not
intended to widen the coverage of the scheme any further than the
existing retail depositors. However, sadly, we have learned that
several charities involved in depositing in Iceland were not covered
fully by the scheme, and now face formidable difficultiesas,
indeed, do a number of public authoritiesin getting their
deposits returned. I will just leave on the table the thought as to
whether the definition of retail deposit is
sufficient. Secondly,
on mergers, in a banking crisis banks are folded into other banks. That
is what we want to happen; we want them to be rescued, with building
societies being merged, and so on. What happens if people have
€100,000 in one building society and €100,000
in another building society or bank, and, suddenly, the two institutions
are merged and they lose half the coverage they previously had? That
issue needs to be addressed. It has certainly had to be addressed here
in respect of some recent
mergers. Thirdly
and finally, I am not sure whether transparency is dealt with in the
current Banking Bill or whether those colleagues serving on the Banking
Bill Committee have addressed this point, but I hope that at the end of
this exercise we will make it clear to customers what their entitlement
is. On walking into the branch of a bank in the United
Statesyou have probably done so many times, Mr.
Bercowyou will see on the counter or in the window your
entitlement and exactly what the compensation is if that bank should
fail. I should like our banks to make that much clearer, so that people
do not have to read the Sunday supplements or make expensive phone
calls to the Financial Services Compensation Scheme, and so that they
have a clear indication in every branch as to exactly what their
entitlement is. Then, we can start to rebuild confidence in the
system. I
fully understand if the Minister cannot answer all my questions, but if
he cannot, perhaps he will address them in another
form. 6.31
pm
Mr.
Timms: I am grateful to hon. Members for their
observations. Let me respond to a number of
them. The
hon. Member for South-West Hertfordshire was concerned about a
potential conflict between co-operation at the European level and wider
international co-operation. Clearly, one could conceive of
circumstances in which that might prove to be a difficulty, but I do
not think that it needs to be difficult. There is now good experience
of European-level co-operation contributing to wider international
co-operation, rather than being in conflict with it. Indeed, in the
hon. Gentlemans remarks on pro-cyclicality, he recognised that
some things need to be addressed at European level and he is
right.
We want an
alignment of global regulatory standards. I agree with the hon.
Gentleman that that should not be done through a single regulator, at
European level or global level. There would be real problems in any
such institution, because it would be too far removed from the
localised issues that it was seeking to regulate for it to be
effective. Co-operation is the way to square the circle. That is why we
support the convergence of European Union supervision, provided that
the focus is on the outcomes, rather than the practices, of that
supervision. I do not think that there needs to be a conflict between
greater co-operation at the European level and
internationally. The
hon. Gentleman asked why we were dealing with hybrid capital here,
rather than waiting for the Basel procedure. The answer is that the
proposal we are discussing gives substance to the Basel guidance, which
is not clear at the moment because we have 27 different regimes. This
is an opportunity to clarify those
arrangements. The
hon. Members for South-West Hertfordshire, for Sevenoaks and for
South-East Cornwall all mentioned pro-cyclicality. I observed, in my
opening remarks, that that concern has not been addressed in the
directive that we are discussing. The financial system tends to be
pro-cyclical. A number of policy responses have been suggested,
including adopting a non-risk-weighted leverage ratio, dynamic
provisioninvolving changes to the accounting rules to require
banks to build up reserves against future lossesand introducing
some counter-cyclical element. There is agreement internationally that
we need to explore those different policy options and the UK position
is to support work on those at the Financial Stability Forum.
In the UK, the Treasury, the
Bank of England, and the FSA are working together to assess the options
in the course of the coming year, and a working group has been set up
to review the issues within Europe. The Financial Stability Forum has a
particularly important role to play and has featured quite prominently
in recent discussions at the G20, which recognised in particular the
need to broaden the membership of that forum, so that it can do its
work more effectively. I am grateful for the hon. Gentlemans
support of the UCITS directive. I take his point about the loss of a
memorable number in the deposit guarantee scheme, but I think that
arrangements can be made, notwithstanding that fairly minor
loss.
In response
to the hon. Member for Sevenoaks, it is unfair to say that nothing has
happened on this matter. Actually, we have reached this point quite
quickly since work began, earlier this year. There will be an increase
from the current €20,000 level to €50,000 in July next
year and the further increase will be in 2011. The issue has been taken
forward with some urgency and I entirely agree that that was
necessary. Let me say
a little more about the 5 per cent., how it has varied, and how it will
be applied. The original Commission proposal required that no risk
transfer should take place without the seller of the risk transfer
product retaining a 5 per cent. stake. It also proposed detailed
prescriptive requirements on transparency of sellers, on due diligence
for investors, and on monitoring of the underlying quality of assets,
with severe capital penalties for non-compliance. That would have had a
significant impact on the UK because London is responsible for over
half of the securitisation issuance in Europe.
We managed to amend the
compromise proposal in four key areas, some of which I have mentioned
already. The scope of the proposal has been narrowed from all credit
risk transfer products to pure securitisation activity. Additional
flexibility has been agreed on the retention of four ways in which an
institutions 5 per cent. stake can be calculated.
Proportionality in the qualitative requirements has been
addressedthey will now only apply where appropriate. The severe
capital penalty will apply only in cases of negligence. As I mentioned
earlier, the impact of the requirement will be reviewed after one year
of operation, to take account of international developments and further
evidence. On the quantitative requirement, our view is that it was
unnecessary, but that with the modifications I have outlined, the
position now proposed represents an acceptable
compromise. Going
back to the deposit guarantee scheme, the hon. Gentleman rightly made
the point that there is no requirement, for example, for schemes to
cover charities, although of course the directive does not limit member
states from widening coverage if they so choose.
We have had an
interesting and useful discussion, particularly on the capital
requirements directive, but there has been general support for the
other directives, too. I am grateful to the Committee for its help in
enabling me to present the UK position with confidence at the meeting
of ECOFIN next
week. Question
put and agreed
to. Resolved,
That the
Committee takes note of European Union Document No. 12149/08 and
Addenda 1 and 2, draft Directive on the co-ordination of laws,
regulations and administrative provisions relating to undertakings for
collective investment in transferable securities (UCITS); No. 13713/08
and Addenda 1 and 2, Draft Directive amending Directives 2006/48/EC and
2006/49/EC as regards banks affiliated to central institutions, certain
own funds items, large exposures, supervisory arrangements, and crisis
management; and No. 14317/08, Draft Directive amending Directive
94/19/EC on deposit guarantee schemes as regards coverage level and the
payout delay; and endorses the Governments approach on all
three draft Directives.[Mr.
Timms.] Committee
rose at twenty minutes to Seven
oclock.
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