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Session 2007 - 08
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General Committee Debates

Banking Bill

The Committee consisted of the following Members:

Chairmen: Mr. Roger Gale, Mr. Jim Hood, Mr. Eric Illsley
Barlow, Ms Celia (Hove) (Lab)
Blizzard, Mr. Bob (Lord Commissioner of Her Majesty's Treasury)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Eagle, Angela (Exchequer Secretary to the Treasury)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Keeble, Ms Sally (Northampton, North) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Pearson, Ian (Economic Secretary to the Treasury)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Smith, Geraldine (Morecambe and Lunesdale) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Viggers, Sir Peter (Gosport) (Con)
Wilson, Phil (Sedgefield) (Lab)
Alan Sandall, Mick Hillyard, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 30 October 2008


[Mr. Roger Gale in the Chair]

Banking Bill

1 pm
Mr. Mark Hoban (Fareham) (Con): On a point of order, Mr. Gale. The order of consideration of the Bill has been varied to enable us to move on after the current provision to part 1. The purpose of reordering the order of consideration was to enable members of the Committee to have access to the code of practice referred to in clause 5 before the relevant date. The Economic Secretary to the Treasury said in the evidence session and at other points that the code of practice would be made available today. As of 10 minutes ago, I had not received the code of practice. I wonder whether it is the intention of Treasury officials to ensure that it is circulated.
The Chairman: Strictly speaking, the provision of all Government papers is a matter for the Department involved, not for the Chair, but if the Exchequer Secretary to the Treasury wishes to respond, I should be pleased to allow her to do so.
The Exchequer Secretary to the Treasury (Angela Eagle): Yes. The code of practice should have been sent today. It is a surprise that the hon. Member for Fareham has not got it, so we will check to see—
Mr. Mark Todd (South Derbyshire) (Lab): Nobody has got it.
Angela Eagle: Well, if nobody has it, I will personally check to see where it is. It is obviously for the convenience of the Committee that that important document in draft form is available, so I thank the hon. Member for Fareham for bringing the matter to my attention. I will certainly investigate.
The Chairman: It clearly is important to the Committee that the relevant documents are available in a timely fashion, so I am sure that if officials dealt with that, the Committee would be grateful.

Clause 216

UK financial stability
Amendment moved [this day]: No. 58, in clause 216, page 103, leave out lines 9 to 11.—[Mr. Hoban.]
The Chairman: I remind the Committee that with this we are discussing the following: Amendment No. 48, in clause 216, page 103, line 9, leave out ‘, consulting the Treasury, determine and’.
Amendment No. 49, in clause 216, page 103, line 11, at end insert
‘and monitor the delivery of that strategy’.
Amendment No. 59, in clause 216, page 103, leave out lines 13 to 19 and insert—
‘(1) There shall be a committee of the Bank, known as the Financial Stability Committee of the Bank of England, consisting of—
(a) the Governor and Deputy Governor of the Bank,
(b) two members appointed by the Governor of the Bank after consultation with the Chancellor of the Exchequer, and
(c) four members appointed by the Chancellor of the Exchequer.
(2) Of the two members appointed under subsection (1)(b)—
(a) one shall be a person who has executive responsibility within the Bank for financial stability analysis, and
(b) the other shall be a person who has executive responsibility within the Bank for financial stability operations.
(3) The Chancellor of the Bank of England shall only appoint a person under subsection (1)(c) if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Committee’s functions and after consultation with the Governor of the Bank.
(4) The Treasury Committee of the House of Commons may hold an inquiry into any appointment made under subsection (1)(c).’.
Amendment No. 50, in clause 216, page 103, line 13, leave out from ‘a’ to ‘consisting’ in line 14 and insert ‘Financial Stability Committee’.
Amendment No. 68, in clause 216, page 103, line 14, leave out from ‘of’ to end of line 19 and insert
‘8 non-executive directors of the Bank appointed by the chair of the court of directors (designated under paragraph 13 of Schedule 1).’.
Amendment No. 51, in clause 216, page 103, line 17, at end insert
‘two other executives of the Bank appointed by the Treasury, and’.
Amendment No. 52, in clause 216, page 103, line 18, leave out from ‘4’ to end of line 19 and insert
‘other members appointed by the Treasury following a transparent appointment process overseen by the Commissioner for Public Appointments.
(1A) A person appointed under subsection (1)(c)—
(a) must not be an executive of the Bank or a member of the court of directors of the Bank;
(b) must not be an active participant in financial markets;
(c) should have recent experience of financial markets, knowledge of legal or accountancy matters relevant to the special resolution regime under the Banking Act 2008, and international experience.’.
Amendment No. 53, in clause 216, page 103, leave out lines 21 to 23.
Amendment No. 62, in clause 216, page 103, line 21, leave out from first ‘to’ to ‘implementation’ in line 22 and insert ‘decide upon the’.
Amendment No. 70, in clause 216, page 103, line 21, leave out from first ‘to’ to first ‘the’ in line 22 and insert ‘monitor’.
Amendment No. 69, in clause 216, page 103, leave out lines 24 to 29.
Amendment No. 60, in clause 216, page 103, line 24, leave out ‘give advice about’ and insert ‘decide’.
Amendment No. 61, in clause 216, page 103, line 27, leave out ‘give advice about’ and insert ‘decide’.
Amendment No. 54, in clause 216, page 103, leave out lines 30 to 32.
Amendment No. 71, in clause 216, page 103, leave out lines 33 to 35.
Amendment No. 55, in clause 216, page 103, line 33, leave out ‘court of directors’ and insert ‘Treasury’.
Amendment No. 56, in clause 216, page 103, leave out lines 42 to 43.
Amendment No. 57, in clause 216, page 104, line 16, leave out ‘to (e)’ and insert ‘or (c)’.
Amendment No. 63, in clause 216, page 104, line 23, at end add—
‘(3) At the end of section 2(1) of the Bank of England Act 1998 insert “and the Financial Stability Objective”’.
Clause stand part.
Mr. Hoban: I welcome you to the Chair for this afternoon’s proceedings, Mr. Gale. Before we adjourned, I had moved on from the debate about the amendments to the clause stand part debate and I was talking about the financial stability objective. I identified three key areas for clarification: what does the objective mean, how is it measured and what tools does the Bank have to deliver financial stability?
I gave the definition of the objective that the Governor of the Bank of England had used in evidence to the Treasury Committee. That definition was amplified when we held our evidence session on Tuesday 21 October. The executive director for financial stability expanded on the Governor’s definition when he defined a situation of financial stability as one where
“the financial intermediation mechanism works normally, where households and corporates can mediate their savings into real investment in the economy at home and abroad, and where the payment system operates normally. It is a situation where intermediation works well, where people have confidence in the system and where the payment system operates well.”——[Official Report, Banking Public Bill Committee, 21 October 2008; c. 21, Q53.]
That is quite a narrow definition. Clearly, it is one that the Bank is happy to use, and it ties in with one of the new responsibilities that have been given to the Bank in the Bill. I am referring to the regulation of payment systems. There is a clear link between that definition and the Bank’s responsibility.
I am concerned, however, that the definitions that the Bank has used are very much process-driven, focusing on the payment system and how effectively we can mediate savings and investments. Other definitions are available that focus on broader issues. Andrew Crockett, who was formerly the general manager of the Bank for International Settlements, referred to an absence of financial stability as
“a situation in which economic performance is potentially impaired by fluctuations in the price of financial assets or by an inability of financial institutions to meet their contractual obligations.”
There are two elements to the definition. One is about process—the ability to meet contractual obligations—but the first one broadens the definition somewhat by talking about the impact that the fluctuation in asset prices might have on the economy.
That raises a different set of issues and links into a definition of stability given by Garry J. Schinasi in an International Monetary Fund publication called “Defining Financial Stability”. He described financial stability as
“a condition in which an economy’s mechanisms for pricing, allocating, and managing financial risks (credit, liquidity, counterparty, market, etc.) are functioning well enough to contribute to the performance of the economy”.
That defines financial stability much more broadly, and it reflects on some of the current problems in the financial system and indicates why the system is unstable. For example, the pricing of risk related to mortgage-backed securities did not appear to work, as the level of risk inherent in those products was underestimated and consequently lower interest rates were charged. The credit crunch, in its early stages, was a sign that liquidity risks in the market were not well understood. We know that from Northern Rock, where the problem was not the bank’s solvency but its liquidity, because of its exposure to wholesale markets. People’s understanding of how wholesale markets functioned did not flow into their understanding of liquidity. Banks that were perceived to have adopted a more cautious approach to risk and were widely criticised for the conservatism of their strategies, have withstood the market turmoil with greater resilience than banks that followed more aggressive policies. Again, there is the issue of understanding the risks and the markets. Part of the problem that we face is the consequence of an asset price bubble that was fuelled by an increase of debt and which has caused instability in the market.
I would argue that it is a combination of those issues that has given rise to some of the current problems, such as the threat to payment systems and the means of intermediation. My concern is that the definition that has been adopted or discussed by the Bank is narrow. If we look at the causes of the current financial instability, we will understand that there are wider issues of financial stability than simply the functioning of the payment system. My concern is that if we have too narrow a definition of financial stability we are at risk of losing sight of the threats to that stability and of the policy actions that we might take to combat that.
Mr. Todd: The hon. Gentleman has used, I think, the same source as I have—the Treasury Committee report. The most appealing definition that I found among those offered—they are all flawed in various ways—was the one that the hon. Gentleman has not quoted, from the Deutsche Bundesbank:
“A steady state in which the financial system efficiently performs its key economic functions, such as allocating resources and spreading risk as well as settling payments, and is able to do so even in the event of shocks, stress situations, and periods of profound structural change.”
That somehow encompasses some of the basic functional aspects that the hon. Gentleman talked about in relation to the Governor’s comments, and also the management of risk and stress analysis, which is another key element.
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Prepared 31 October 2008