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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