 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Banking |
Banking Bill |
The Committee consisted of the following Members:Alan
Sandall, Mick Hillyard, Committee
Clerks † attended the
Committee Public Bill CommitteeThursday 30 October 2008(Afternoon)[Mr. Roger Gale in the Chair]Banking Bill1
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—
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 216UK
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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