Banking Bill

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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.
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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 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—
Mr. Hoban: It is a bit.
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.
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.
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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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