Ms
Keeble: I am pleased to serve under your chairmanship,
Mr.
Gale. I
shall speak briefly. The clause goes to the heart of what many people
are looking for us to do, which is to deal with issues of financial
stability. Although the aim is not defined in the legislation, I think
that people would generally understand it to have a fairly
common-sensical meaning, in terms of their ability to feel some sense
of security about the way that the financial system is managed and its
reliability in terms of the different aspects of their lives that
depend on it. That sense of security has obviously been completely
disrupted by current circumstances.
A few years
down the track, I am sure that people will talk about these
arrangements in the way that they now sometimes talk about the MPC;
they will ask, “Why was it done this way and why wasn’t
it done the other way?” It is, therefore, important that we make
sure that we have got the structure right.
It seems to
me that the kind of structure that we set for a body such as the
financial stability committee will depend on several things: its
functions, the nature of the decisions to be taken, the nature of the
tools at the committee’s disposal, and the requirements of
accountability in a democratic society. That means both accountability
to Parliament and accountability to the public, including the duty to
explain, which has been a key, and successful, part of the MPC’s
role. Both the hon. Members who have spoken mentioned
that. The
choice in terms of models was clearly presented by the hon. Member for
Fareham. Should it be an executive-style structure like the MPC, or a
sub-committee? Despite the fact that there is a slight hybrid nature,
it is basically a sub-committee. Personally, I think that is the right
way to go.
I am using
the MPC as a frame of reference for my comments, because discussions
about the MPC are the kind of discussions that people have more
generally. Part of the MPC’s success is that it has become
established and people talk about it quite widely. People say,
“If the
MPC can fix inflation, why can’t we have something similar to fix
financial stability?” That is a very crude argument. The MPC has
been successful because it has a clear policy framework set by
Parliament; in other words, it deals with the accountability issue.
That gives it a very sharp focus for its work, which is about inflation
and the clear targets around 2 per
cent.
2
pm The
MPC also has a lever—interest rates—to which my hon.
Friend the Member for South Derbyshire referred. Its members explain
well that they have a clear job to do: they have one lever, and after
taking a huge amount of information and discussing it, they must decide
how to pull it. They have been phenomenally successful in doing that,
but it is worth considering now that the issue of public credibility is
at stake. Inflation figures are exactly what the public recognise as
being inflation nowadays, and the lever seems to have lost some of its
effectiveness because of what is happening with interest rates.
Although the committee has been successful, we must be cautious about
saying, “Because it has worked for that, it can work for other
things.” One cannot simply adopt a structure—even a
successful one—and expect it to work in perpetuity. Whether the
MPC should be able to take wider economic circumstances into account
when considering interest rate decisions will, I am sure, become a
major issue. It has been discussed in the Treasury Committee, and I
think that it will become a wider public concern in months to
come.
When we look
at financial stability, we can draw contrasts and look at why a
structure such as that set out in the Bill will probably be more
effective. This is a considerable beefing up of current structures to
do with financial stability, and it has a sharper focus. Under the Bank
of England Act 1998, financial stability is the responsibility of the
tripartite authorities and of one of the deputy governors. The Bill
represents a clearer, sharper focus on what has become the dominant,
economic financial issue of our time. That is welcome, and I would not
downgrade it.
However,
financial stability is not as clear a matter as controlling inflation
or setting interest rates—it is a completely different sort of
event and decision. Although the structure might seem quite woolly, an
enormous range of different materials and issues must be looked at
before the pertinent ones can be picked out and fed into the process,
as set out in the list of functions.
Perhaps I can
illustrate that. I happen to have the financial stability report and
the executive summary. It is a wonderful document—an eight-page
guide to the collapse of capitalism. At one point it gives a guide to
what happened. It has little graphs too—it is like a comic strip
for financial fundies. It says that concern
was “heightened
by severe institutional distress, including at Fannie Mae, Freddie Mac
and Lehman Brothers in the United States, Bradford & Bingley in the
United Kingdom and Hypo Real Estate in
Germany.” This
is not confined only to one country, it is a global event. However much
the Bank of England might like to control the world economy, it is not
quite there yet.
The document
also mentions the nature of the decisions that might have to be taken
and notes the Government-supported recapitalisation of the banking
systems. If
large amounts of taxpayers’ money are going
to be spent on recapitalising the banks, Parliament should have
something to say about it—among other things—including
about the terms, and including the type of questions we heard at
Treasury questions today. The model of
the MPC has been extraordinarily successful. The MPC has taken
decisions about interest rates independently of political influence and
has actually served us phenomenally well, but one cannot then say to
the Bank of England, “You take the decisions about financial
stability and we’ll just sit back and let it happen.”
That is a bit of a crude, over-the-top way of putting
it—
Ms
Keeble: Yes, but the type of decisions that might have to
be taken to deal with a crisis, such as the one we have had, cannot be
delegated. There should be a much closer relationship with the
institutions of the state, which is what we have got in the structure
set down in the
Bill.
Mr.
Hoban: The hon. Lady makes a powerful point. She said in
her opening remarks that we need to think about the tools that are
available. Perhaps an alternative way of looking at the role of the
financial stability committee is to say, “These are the tools
that are available to that committee.” Clearly, we are not going
to give the financial stability committee the power to commit
taxpayers’ money to bailing out banks and recapitalisation. It
does not have those tools, so the task is actually to have a
tools-based approach to developing the remit of the FSC and what its
objectives should
be.
Ms
Keeble: There may well be some issues that it will have to
consider as a sub-committee, and I am sure it will want to work out
some tools and some ways forward. At this stage, when do not have a
clear definition—although we have a common-sense
understanding—and when we are looking at what is frankly still
an emerging phenomenon in the international financial markets and world
economy, I do not want to say that this whole area, which is key to
political decision making and to how the international community works,
will be put at arm’s length in the way in which interest rates
have successfully been. If there were one lever that could work in
relation to international financial stability, we might want to use
that, give it a tight policy remit and say, “We don’t
want it to go above or below a certain level,” and set that out.
The conceptual tools simply are not there and, in those terms, it is
right to have a substantial sub-committee set up in this way, with a
remit to deal with the matter, a reporting line and a much sharper
focus. I certainly accept that the structures we had previously did not
serve us well. The warning signs might have been there, but no one saw
them. Action was not taken until the crisis started to ripple through
from some of the financial institutions and the United
States. I
think that we have the right structure here. It might not be the
world’s most wonderful structure, but it is the right one for
the present circumstances. It will be bolstered by the increasing focus
on financial stability and the increasing pressure that I am sure there
will be from Parliament and elsewhere to make sure that the structure
delivers and that if there are warning signs, they are seen and acted
on.
Angela
Eagle: I shall start by acknowledging your presence in the
Chair this afternoon, Mr. Gale. It is a pleasure to see you
there—I am saying that somewhat belatedly, I know, because we
have had quite a long debate. I shall deal with the earlier point of
order because I have an update that the Committee might wish to hear.
The code of practice has been prepared and will be on letter boards by
the time the Committee adjourns this afternoon. That is something for
everyone in the room to look forward to, as long as they get down to
the letter board before it closes. We all know what we will be doing
this weekend.
We have had
an interesting debate, which is clearly indicated by the number of
amendments tabled to the clause. The clause deals with the nub of the
issue in part 7 on the correct and appropriate structure of
the new arrangements for financial stability, the new duties the Bill
gives the Bank of England in that respect, and how they should be
fulfilled. The hon. Member for Fareham, quite properly, identified two
different approaches and is agnostic about which is the best one, so we
have had a debate about it. My hon. Friend the Member for South
Derbyshire expressed a more definitive view that there should be a more
executive approach. My hon. Friend the Member for Northampton, North
said that we have got it about right. Naturally, as I am here to
explain the Government’s thinking on the model we have set out
in the Bill, I think that we have got it about right and hope that I
will be able to persuade and reassure those who are dubious about it
during the course of my remarks both on clause stand part and on the
amendments.
It might be
helpful if I briefly set out the Government’s approach and the
purpose and thinking encompassed in clause 216. Clearly, the aim is to
strengthen and formalise the Bank of England’s role in relation
to financial stability. As all the hon. Members who have contributed to
the debate this morning and this afternoon have said, the Bank already
plays a key role in supporting financial stability, but unlike its role
in monetary policy, it does not currently have a clear statutory
responsibility to support financial stability.
We are
therefore formalising what has been informal in the past. In doing so,
we have to plump for a model, rather than continue the informal
arrangements that have always been in place. Perhaps that is where all
the different models have come from. It is proper that people should
think through how those models are formulated and the potential issues
with them. The Government have proposed the model set out in new
section 2A(1) of the 1998 Act, which gives the Bank of England a
statutory objective
“to contribute
to protecting and enhancing the stability of the financial system of
the United Kingdom”.
My hon.
Friend the Member for South Derbyshire astutely noticed the use of the
phrase “to contribute to” as the way of expressing the
Bank’s duties. That phrase reflects the fact that the Bank does
not have a duty to ensure financial stability on its own, because that
would be impossible. That responsibility is shared nationally with the
FSA and HM Treasury and internationally with the European Union and
other international bodies, which all have a major role to play,
alongside market participants themselves.
Financial
stability cannot simply be guaranteed on a national basis like an
interest rate. The interest rate either is or is not at a certain
level, like a price, but
financial stability is a much more complex concept
to grab hold of, and what is important for delivery might shift over
time as the institutional framework shifts and as markets and market
participants evolve. It is therefore a moving target and a complex
matter to deal with. It is important that we bear that in mind when
considering the institutional approach that the Government suggest in
the
Bill. We
are clarifying the Bank of England’s position by setting out an
objective in legislation. That has been widely supported by respondents
to our public consultations and by the Treasury Committee, even if it
did not quite go along with the model that the Government decided to
put forward in the
Bill. New
section 2A(2) sets out that the strategy that the Bank will follow to
fulfil its new objective will be set by the Bank’s court of
directors, consulting with the Treasury, and on the recommendation of
the new financial stability committee, as set out in new section
2B(2)(a). It is right that the court, as the body with the ultimate
responsibility for the Bank’s affairs, has the final say on
setting the financial stability strategy.
2.15
pm The
clause will also create a new financial stability committee, as
outlined by various hon. Members who have contributed their views on
the model, as a sub-committee of the court of directors. The committee
will further strengthen the Bank’s framework by directing and
supervising the Bank’s functions in relation to financial
stability and by providing expert support. The committee will be
chaired—this has been the subject of comment, which I shall deal
with when I come to the subsequent amendments—by the Governor of
the Bank of England, when present, and other membership will consist of
the two deputy governors and four directors of the court, who will be
appointed by the chair of the court of directors. Those external,
non-executive directors will bring valuable and relevant expertise to
bear on the Bank’s decision making in the area of financial
stability, and they will ensure that the Bank commands authority and
credibility in discharging its new financial stability
objective.
Mr.
Todd: I do not know how to put this, but the current
membership of the court might not necessarily provide the depth of
experience that my hon. Friend appears to seek in filling those four
positions. Am I to understand that the process may entail a complete
replacement of the court with a new—reduced—membership,
or will there be some continuity for the current
membership?
Angela
Eagle: The Bill makes provision in later clauses
for a reduction in the court’s size, in part to acknowledge some
of the structural changes that we are dealing with. The idea is that
when the Bill becomes law, the terms of all current court members who
are appointed will lapse and there will be a reappointment process. The
reappointment process at that stage will consider the appropriate
balance of expertise and presence for the new smaller court. Although
all current outside members of the court will have their membership
terminated, it does not mean that they will not be reconsidered for
appointment. However, the entire process will take place in the new
context, without having to think about transitions. I hope that that
reassures my hon. Friend.
In
naming non-executive members of the committee, it will be vital to
maintain a balance between ensuring that they have relevant expertise
and experience of financial markets, and avoiding damaging conflicts of
interest, which is why the Bill imposes the same restraints on members
of the proposed financial stability committee as already exist for
current members of the court. They must declare any direct or indirect
interest in any dealing or business that could potentially produce a
conflict. If the financial stability committee considers that a
conflict of interest could occur, the member will have no influence or
vote on those
matters.
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