Banking Bill

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Q 28Mr. Todd: How is the Bank supposed to do that?
Ian Pearson: The Bank has always played a key role in financial stability. In recent years, its court of directors has sought to engage further with the Bank in overseeing such objectives and their effectiveness. The Bill puts in additional responsibility for financial stability. It is right for a new legislative objective to underpin that. This approach recognises important differences between monetary policy and financial stability, which we shall probably discuss in a moment. It allows the Bank strategy to deal with changing market circumstances. We shall obviously discuss with the Bank how it implements its enhanced responsibilities.
Q 29Mr. Todd: Indeed, that is set down in the Bill. The strategy is co-devised with the Treasury.
There were comparisons on Second Reading to the Monetary Policy Committee, which is an Executive committee—it decides interest rates. The Bill gives a committee the power to make recommendations, to give advice in various areas and to monitor the activities of the Bank at various points. It is not an Executive committee—is that right?
Ian Pearson: There are a number of different potential models. We see the financial stability committee as different from the Monetary Policy Committee; it certainly does not have Executive powers in the same way. That is not to say that there are not executives on it; our proposals are for the financial stability committee to include executives. Equally, we do not see the financial stability committee as like a company’s remuneration committee, which would consist completely of non-executives. The Bill’s hybrid approach, with the committee having both independent members and executives on it, is the right one. In many ways, the analogy is more with how Government might run a Department or Cabinet Committee, rather than with a private sector or Monetary Policy Committee model.
Q 30Mr. Todd: Is there no difficulty having the effective chief executive of the Bank chairing a committee to which the Bill gives the power to monitor his activity? The Governor certainly has Executive functions. Is there no conception of possible conflicts in that? I would have thought that they were obvious.
Ian Pearson: I do not see—
Mr. Todd: Even with the excellent Governor that we have. Having a robust conversation about how the powers were exercised is not the role of the committee. Its task is to monitor within the Bill. How can it have that debate with the person or persons who carry out that function actually chairing its deliberations?
Ian Pearson: I do not see the conflicts that you suggest are there. It is more a case of ensuring that we have robust debate within the financial stability committee and that it has responsibilities for contributing to the maintenance of financial stability. It is a sub-committee of the court, and the accountability mechanisms are through the court. I do not see a problem with it being chaired by the Governor of the Bank of England. Indeed, there are many strengths in ensuring that that takes place.
Q 31Mr. Todd: It is not entirely clear within the Bill whether it does always report through the court. You may wish to reflect on the precise wording of clause 216. There are elements when the court is referred to and there is an obligation to report through it, but there are others when it seems to communicate to whoever it feels so inclined to do.
Ian Pearson: I will certainly take that point away and see whether the legislation, as drafted, fits with our intention as the Government. Undoubtedly, this is an issue that we can talk about when it comes to scrutinising the Bill.
Q 32Mr. Todd: Just to help the Committee, will the Minister look at proposed subsection 2B(2)(a) of clause 216? It refers to a recommendation through the court of directors, but the rest of the clause appears to consign its thoughts into a vacuum of wherever it thinks those functions should be best directed. Where did the idea of the financial stability committee come from? The Select Committee probed that, and no one put up their hand, said that it was their idea and that they thought it was great.
Ian Pearson: With respect, my best answer is that it emerged.
Mr. Todd: A ghostly apparition in the room appeared above someone’s head.
Ian Pearson: It emerged. It now has a broad measure of support.
Q 33Mr. Hoban: Can the Minister define what he means by financial stability? It is not defined in the Bill.
Ian Pearson: It is deliberately not defined in the Bill. We see the concept of financial stability as being a high-level one. To define exactly what you mean by that would get you into lots and lots of difficulties.
Q 34Mr. Hoban: But does that not make it rather difficult for the Bank to fulfil the obligation if only a high-level concept is undefined?
Ian Pearson: The Bank is sophisticated enough to deal with high-level concepts and to assess its responsibilities against them appropriately.
Q 35Mr. Hoban: But surely it should be made clear in the Bill, which we shall scrutinise, to the wider public what the Bank’s remit in respect of financial stability is, rather than relying on the Bank to know the meaning of financial stability, and for it perhaps to emerge from some discussion. Should it not be in the Bill?
Ian Pearson: I do not believe that a detailed definition in the Bill would be helpful. That is a debate that we can hold when we reach that part. Nor do I think that there any difficulties in the Bank of England’s interpreting its responsibilities when it comes to financial stability. I am sure that you can ask it the question.
Mr. Hoban: I am sure that I will.
Ian Pearson: Would you want a detailed definition of financial stability on the face of the Bill so that you can be told how to operate? I suspect that it would not find it helpful, but it is undoubtedly a question that you can ask the Bank.
Q 36Mr. Hoban: One of the criticisms levied at the tripartite arrangements was the lack of clarity about who took the lead and who took responsibility for certain issues. Does not leaving a broad description of financial stability out of the Bill give rise to the same sort of challenge in the future?
Ian Pearson: No, I do not believe that it does. Overall, the Bill is very clear about lines of responsibility and accountability, whether it be the special resolution regime or the enhanced statutory responsibility for financial stability that we are giving the Bank of England.
Q 37Mr. Hoban: The Governor himself, in his evidence to the Treasury Committee, gave a definition of financial stability. Why have you not incorporated that in the Bill?
Ian Pearson: As I said, perhaps you can ask the Governor whether he believes very strongly that there should be a definition in the Bill. We do not feel inclined to have one, and we think that there are good reasons for not going into specific detail about what is meant there. Undoubtedly, one of the purposes of these evidence sessions is to gather evidence, which can help us to form our deliberations when we come to the detailed consideration in Committee.
Q 38Mr. Bone: In relation to financial stability, the Minister referred in his helpful opening statement to the recapitalisation of the banks, which would fit within the framework that we are discussing. There was an injection of £37 billion in shares; have the terms and conditions of those share offerings been determined and when is it likely that the share issues will take place?
Ian Pearson: When I made my introductory remarks, I made it clear that the Banking Bill was part of a range of reforms and actions that we are implementing as a Government. We have taken action with regards to recapitalisation of the banks. The package of measures that was announced included £37 billion for bank recapitalisation, an increase in the special liquidity scheme to £200 billion, and £250 billion for debt guarantees to support inter-bank lending. That is a big package in anybody’s book. The details of the individual negotiations are not in the remit of the Bill, but the Government are acting in the usual transparent way in that area.
Q 39Mr. Bone: That is very helpful, but you did not answer the question. Are those terms and conditions finalised, and when will the money be injected into the banks?
Ian Pearson: My understanding is that the terms and conditions have been finalised; deals have been done with the banks and the information is publicly available. I think that it is available in the House of Commons Library.
Q 40Mr. Bone: But the Prime Minister said the opposite yesterday. I thought that it was as the Minister said because I have looked at those documents. However, under questioning yesterday, the Prime Minister said that the terms and conditions had not been finalised, so I am trying to find out whether they have been.
Ian Pearson: The Prime Minister’s word is better than mine, so I do not have anything different to say. If you have seen the terms in the Library—[Interruption.] I am advised that the final details are still being settled.
Q 41Mr. Bone: So they have not been finalised, and the Library documents are not the finalised version.
Ian Pearson: It would appear not.
Q 42Sir Peter Viggers: I have a general, simplistic question. Decades ago, regulation of banks took place behind closed doors—the Governor’s eyebrow and pressure brought to bear—and banks got regulated. Did you, as a Minister, seeing this massive tome, wonder whether it would be possible to make regulation much simpler, and just authorise the Bank of England to do what is necessary to regulate and control, and to ensure the security of the banking system? Were questions asked about whether all this detail was necessary? It is absolutely certain that we will be back in a year’s time with a banking (amendment) Bill and, I suspect, the following year and the year after.
Ian Pearson: Sometimes people hark back to the days when they knew their bank manager—when if they ran a business they just had to go to their bank manager and say, “I need a bit of money”, and it would get sorted out. Perhaps they also hark back to the days when the Bank of England regulated more informally. I think that the world has changed. Modern regulation is very different from the regulatory regimes that were in operation in the 1950s and ’60s. The whole world’s financial markets have changed quite dramatically.
The decision we took in 1997 to bring all the different regulators together was the right one. It is interesting to note that many other countries have adopted our approach. I remember working for a company whose members were regulated by FIMBRA, LAUTRO and IMRO. There was a range of different regulatory bodies. Bringing them together in one body covering not just banks and building societies but insurance and other areas is a model that has been copied around the world. I think that it is the right one. I know that there has been debate about this, but I believe it is the right approach to adopt. In the current climate, to suggest that we can rip that up and have light or little regulation is not what people expect. It would not be the responsible thing to do.
May I add a last word about the details of the agreements? I am advised that only very minor details are still to be settled on the agreement between the banks in question and the Government, so the information in the Library contains all the substantive detail involved.
Q 43Mr. Bone: That is very helpful. Does that mean that the money will be injected fairly soon if there are only minor details left?
Ian Pearson: I would not want to comment on that. That is a matter for the banks and the relevant authorities.
Q 44Geraldine Smith: You may not be able to answer this, but do you have any idea how long it will take for the banks to get back to normal and start lending money properly to business and things? Do you think that the recession we could be heading into is caused by the financial situation with the banks?
Ian Pearson: That is going a bit broader than consideration of the Bill, but let me say a few words on it. That is a real question for many of our constituents. It is very difficult to give a straight answer. There has been a global financial crisis. We know that it started in the United States with problems in sub-prime lending. We know that until recently it has been exacerbated by high oil and food prices. That has produced a challenge for financial institutions and economies right across the world. We have seen the United States taking action. We have seen Germany, France and Italy do so. Only recently we have seen the recapitalisation of ING. We have seen announcements that Sweden is taking action to bring greater stability to its banking system, too. We are all taking action. We are all desperately trying to get bank lending going again. There are some signs that it is working.
Q 45Geraldine Smith: If the banks have been recapitalised, surely there should be no excuse not to lend money now?
Ian Pearson: I am optimistic that we have turned the corner with regard to bringing stability to the financial system as a result of the actions that we have taken, and that others have taken following our lead. We cannot say that we are out of the woods yet, but, as I said on Second Reading, we are on the right path. The fact that others are following a similar path gives us signs for encouragement. There are clearly big concerns about the impact it has had and will have on our economies, which is one reason why the Government are looking at taking a range of actions to support people and businesses through difficult times. The best thing that we can do is to have a Government who are on the side of people and businesses, and trying to take prompt and decisive action to support them.
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