| Previous Section | Index | Home Page |
"We were given a statutory responsibility for financial stability in the Banking Act, and the question I put to you...to which I have not really received any adequate answer from anywhere, was: what exactly is it that people expect the Bank of England to do? All we can do at present, before a bank is deemed by the FSA to have failed, is to write our Financial Stability Report and give speeches."
The Chancellor mentioned the new power concerning financial stability that he has given the Bank of England, but its Governor-the other member of this tripartite arrangement-came before our Select Committee and said that he does not have a clue what the Chancellor expects him to do with it.
It is for these reasons that we have decided that we will need new legislation to bring in a new structure of financial regulation. I have to be absolutely honest with this House: it is not something we particularly wanted to do. There are quite a few economic issues that we are likely to confront if we form a Government, and revisiting financial services regulation was not at the top of our list. However, we honestly came to the view that we would have to do it, because we have to create a system that gives a clearer idea of who is in charge, and that ends these dysfunctional squabbles between the three institutions; a system under which the people in charge can exercise judgment and discretion, and through which the connection is made between the broader risks across the economy and the individual risks to individual firms. As I have said, we have spoken to many market participants and at length to the different legs of the tripartite arrangements, and we believe that that can best be done by putting the Bank of England in charge of the prudential supervision of banks, building societies and other significant institutions.
Surely we have now learned the hard way that we cannot take central banking out of bank regulation, and we cannot judge systemic risk without understanding institutional risk and vice versa. Of course the changes will require new, more collegiate arrangements for the Bank of England, but that, too, is a good thing. There is currently a rather unbalanced Bank of England that is collegiate on monetary policy and quite imperial on financial policy, of which the Chancellor no doubt bears the scars. We therefore propose a more collegiate approach. The whole point is to ensure that monetary policy, the supervision of financial stability and the regulation of individual institutions are better co-ordinated.
When we discussed these matters in TV studios and the like, the Chancellor used to say that no one in the world was proposing to do what we were. Of course, he does not say that any more-I shall come on to his current argument-because he knows that it is not the case. Across the world, countries are coming to the same conclusion that we did. I mentioned Stan Fischer, the governor of the Bank of Israel, and it is worth remembering his reason for what he said. He did not just say:
"It is very likely that prudential supervision will return to central banks when the lessons of this crisis are drawn."
He also said at Jackson Hole, at the conference of central bank governors:
"Information flows are critical, and the plain fact is that information flows more readily within an organisation than between organisations-which is one of the reasons to have prudential supervision within the central bank."
That is a former chief economist of the World Bank and first deputy managing director of the International Monetary Fund, currently a central bank governor, and his view is shared by a whole host of other people. Another example is the current governor of the Bank of France, who said:
"Indeed, one of the main lessons of the crisis may be that those countries where central banks assume banking supervision took advantage of their ability to react quickly and flexibly to emergency situations."
I have already quoted what Jacques de Larosière has said explicitly about the Conservative proposals-that he supports them. The Bundesbank in Germany is now taking control of prudential regulation of banking, and the Belgian central bank is doing the same.
In the United States, the Federal Reserve is seeking to take control of the prudential regulation of important systemic institutions. The Chancellor often says that there are many regulators in the US, and of course there are powerful vested interests behind the Chicago regulator and the like. However, I remind him of what one of President Obama's chief economic advisers, Austan Goolsbee, said earlier this month-that separating banking supervision from central banking meant that a country would
"get into a 'left hand doesn't know what the right hand is doing' kind of problem in a crisis".
When asked to give an example, he cited the UK. That was one of the chief economic advisers of the President of the United States citing the UK as an example of a place where there had been a lot of co-ordination problems.
Mr. Robinson: I do not wish to labour the point too much, but the problem was not that the left hand did not know what the right hand was doing but that neither hand knew what was going on. That is not a problem of co-ordination or integration. I saw the right hon. Member for West Dorset (Mr. Letwin) nodding vigorously at the idea that information flows more easily within an organisation than between two organisations, but the logic of that is that we should merge the whole of government so that we could get information more freely. In reality, it simply is not true. There are some natural divisions where it is better to have the inevitable squabbles between organisations out in the open, so that we can all take a view on them. The Treasury should have access to two different sources: one handling monetary policy, a huge responsibility, and the other with the massive responsibility of prudential regulation. Bringing them together will not solve the problem.
Mr. Osborne: Do I believe that there is a perfect system of banking regulation? No, I do not. Do I think that all banking crises can be avoided in future? No, I do not. Do I think that we can abolish boom and bust? No, but I believe that we can create a more functional arrangement than there is at the moment. I am sure that the hon. Gentleman has seen that the current relationship is dysfunctional, and I have experienced that at first hand in my meetings with the three parts of the tripartite arrangement. If countries all over the world are learning the lesson that central banks have to be deeply involved in prudential supervision, we should learn it in the UK.
Mr. Darling: I am listening to what the hon. Gentleman says about America and the various things that have been said there, but the fact is the American Government are not proposing to merge all their regulatory bodies, because they recognise that there are practical difficulties. For everyone who says that the Fed ought to be more intimately involved in regulation, there are other people saying that it should not, and the American Government are simply not doing that. I do not understand his argument that simply by reversing the FSA into the Bank of England, all the problems that we have been talking about would not have happened. I just do not accept that.
I noted what the hon. Gentleman said about what Governors say, and as long as they are independent of Government, they will say what they want. I presume he is not proposing that, were he to get into power, the Governor of the day could not say what he thought.
Mr. Osborne: Of course the US is not creating a single regulator in the Federal Reserve, and as the Chancellor well knows, one of the major reasons for that is the enormous vested interests that stand behind the insurance regulator in New York, the derivatives regulator in Chicago and so on. The congressional obstacles to even attempting to come up with such a plan would be insurmountable. However, the US Government are proposing-and already facing quite a battle in Congress-to give the Federal Reserve prudential supervision powers over the largest and most systemically important banks. In the United States, of course, there are many thousands of banks, whereas in the United Kingdom there are many fewer than that. The US Administration have decided that the Federal Reserve needs to be involved in the prudential regulation of banks.
I have never claimed that our changes will solve all the problems, but they will at least remove the pretty substantial problem of a dysfunctional regulatory arrangement in which it is not clear that there is speedy co-ordination of action. There are huge institutional jealousies and, as the Chancellor has no doubt experienced at first hand, there are dysfunctional relationships.
We are trying to get this right, and we understand that the biggest challenge is the transition. We are therefore making a huge effort, and we have created a consultant board with people at a working level in the industry. I have the help of the former managing director for financial policy at the Treasury, who is directly helping me on devising the plan. I recently went to speak to the senior management of the FSA about it and, because of the constitutional arrangements, I am now in direct discussion with the Chancellor's officials about how to get it right.
I am very conscious that we need to get the transition right and, in the end, the decision that I faced was twofold. The first question was whether I believed the change had to be made, and I came to the view that it did. The second was whether I should then keep my decision secret, as the previous shadow Chancellor who became Chancellor did. I thought that, in the end, that was part of the problem that we are dealing with today.
There are some perfectly reasonable proposals in the Bill on the content of regulation. Having recovery and resolution plans, which are contained in clause 12, is a good idea. However, I spoke last week to the chairman
of one of our largest banks, who has often made accurate observations about what is going on, and he made the point that the situation is already turning into a bureaucratic nightmare and that sight is being lost of what the living will concept should be about. There is a simple, clearly understood plan for dealing with a collapse of that particular institution, but he thinks that it will become an enormous bureaucratic operation, which will lose its clarity.
We welcome the new powers in clause 13 to curtail market abuse and those in clause 14 to suspend and penalise individual market practitioners. I suspect that the issue is whether there is an appetite to use those powers. It is worth bearing in mind the observations of the former Director of Public Prosecutions, who said:
"Our system for regulating markets and for prosecuting market crime is completely broken. In Britain, no one has any confidence that fraud in the banks will be prosecuted as crime."
I emphasise that the former Director of Public Prosecutions said that.
We support the restriction on the provision of credit card cheques in clause 27, although I agree with the consumer group, Which?. It said last week that
"we are disappointed that the Government has not taken further measures against irresponsible lending in the Bill."
One of the institutional changes that we shall make is creating a consumer protection agency that will bring together the consumer-regulating powers of the Financial Services Authority and the consumer-credit powers of the Office for Fair Trading in a single body. That will be a powerful new agency.
The Chancellor briefed the press about the clauses on bonuses with enthusiasm. Perhaps he can assure us, as the Bill begins its passage-it is the first day of debate-that he is confident about the legality of clause 9. I cannot help noticing that the former Lord Chief Justice, Lord Woolf, has already started to ask questions about its legality. It would therefore be good-perhaps it could be done in Committee-to have some answers from the Government now rather than waiting for a year to pass, after which some court strikes down the provision. We need to address Lord Woolf's remarks and concerns.
On bonuses more generally, we made our proposals about the coming year end. I simply remind the House that the Prime Minister promised the country that the days of the big bonuses are over. We wait and see whether that particular Prime ministerial promise will be fulfilled in the coming months.
The Bill contains some perfectly reasonable clauses, but it does not address the central issues, which the Governor of the Bank of England asked it to tackle-first at the Mansion House, then in Edinburgh and last week at the Treasury Committee. He said that the Government's provisions in the two previous banking Bills and two White Papers amount to "little real reform". He challenges us all to address what he calls the
"too big to fail issue".
He is right to challenge us about that. My view is that some of the riskiest investment banking activities, such as large-scale proprietary trading, do not sit easily with retail deposit taking. However, I also take the unashamedly pragmatic view that any structural solution to the problem should be enforced internationally. In the meantime, we should use capital rules to provide new safeguards.
Ms Keeble: The hon. Gentleman refers to changes in the structures. There was always a financial stability power or function, though one could say that it was not used. There has been much discussion of the holy grail of the macro-prudential tool to go with the financial stability function. Has he identified such a tool, other than capital ratios? Who would operate it? That seems to be the missing bit, about which the Governor of the Bank of England has been talking.
Mr. Osborne: I happen to believe that the main tools are capital ratios, which operate as far as possible counter-cyclically-or at least not pro-cyclically, as they seem to do at the moment-and that the standards should be set internationally through Basel, the Financial Stability Board and so on. If that can be achieved internationally in the next few months, we should get on and do it. A bit of a risk is emerging-we are applying capital rules in a pro-cyclical way and risking a second credit crunch in the next few months. That deserves closer observation. The most useful thing that could emerge from the G20 process is some sort of international agreement on capital rules. We should want London, Edinburgh and so on to be homes of globally successful financial businesses. We want Britain to be the home of wholesale financial services in Europe, but we also want to protect the British taxpayer. The best way in which we can do that through macro-prudential tools and capital rules is by trying to achieve some international standards. I therefore agree with some of the public comments that the Chancellor made about what we want to achieve through the forums I mentioned.
However, there are some worrying developments. The Chancellor talked about some of the European proposals. It is not clear that the alternative investment fund managers directive as drafted is in the UK's national interest. It will drive the hedge fund industry-at least, significant parts of it-to Zurich. I think that the Government have finally woken up to that and are fighting a bit of a rearguard action. The Chancellor raised national sovereignty or the right of a national Government to have their say about whether there should be financial support, and I completely agree with him. However, the conclusions of ECOFIN do not seem to be replicated in the documents that have been produced. Those matters require the Government to be extremely active and aggressive in fighting for the UK's interests and trying to get an international or European playing field that is in this country's national interest. I think that the Treasury could present its arguments more aggressively.
Mr. Osborne: Just before I give in- [Laughter.] That is an appropriate remark given that my hon. Friend wishes to intervene.
Mr. Cash:
I am sure that my hon. Friend will not in any way give in on my point, but I hope that he will at least take serious account of it-I have raised it with him many times. It comes back to what I put to the Chancellor: in a situation in which majority voting prevails, if the architecture and the final decision-in other words, the control rather than who is in charge-turns on the European structure, does my hon. Friend agree that we must show today and in our debate in a couple
of days that we will not fall for the argument that we do better through the City of London being in the European architecture? Majority voting means that we will be consistently outvoted. That is where the power lies and I hope that my hon. Friend accepts that that is a serious matter which needs to be considered.
Mr. Osborne: I agree that, having established the red lines, we need to make their existence clear in the directives and new institutional arrangements. I want the Chancellor to insist-because the issue may arise before the election-on his view that national Governments must have the final say, with the right of veto, over the decision to commit national taxpayers' resources to supporting a bank.
I must also note that allowing the French to take the Commission job on financial services, for which they were clearly bidding from the beginning and was doubtless part of the horse-trading that ended in some of the other Commission arrangements, may turn out to be a serious diplomatic mistake. One goes only on the briefings in newspapers, but as far as I understand it, the Prime Minister and Lord Mandelson were against the appointment, we were told that it would not happen and that the President of the Commission would split the jobs. Then, lo and behold, Monsieur Barnier emerges as the person in the Commission responsible for financial services. There is an understandable French objective to get some wholesale financial services to France and away from Britain. I am not sure that that is in the UK's national interest. Perhaps one day, in the Chancellor's memoirs-the bits that are not in the Bill; let us hope that there are more interesting bits-he will explain exactly how it all came about.
Let me draw my remarks to a close with a final observation. Of course, the route to protecting the British taxpayer will never be some new banking Bill or a new European directive. What we need to deal with are the root causes of the credit crunch, and those are the huge macro-imbalances in our economy. We were not the only country in the world with those imbalances, but they were worse here than anywhere else. Lord Turner put well it in his report when he said that
"rapid credit expansion was underpinned by major and continued macro-imbalances, with the UK-like the US-running a large current account deficit".
The truth is our households were more indebted, our banks were more leveraged, our housing boom was greater and our Government budget deficit was larger than almost any other country in the world. The extraordinary thing is that the then Chancellor thought that this period was one of stability and an end to boom and bust. We are living with the consequences of that hubris today. It is why Britain is the last country in the G20 to still be in recession.
So this Financial Services Bill is tinkering at the edges. We need to end the dysfunctional tripartite regime; we need a new system of regulation that puts the Bank of England in charge; we need to address the issues that the Governor of the Bank has raised; and we need an international regime better to protect taxpayers while ensuring that Britain remains competitive. Above all, we need to move from an economy built on debt and highly dependent on the success of financial services to an economy built on savings that is home to successful financial services and to other successful industries.
This Bill cannot do that, and nor can this Government. That is why we need a new Government and, eventually, a new Bill.
| Next Section | Index | Home Page |