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Lord McIntosh of Haringey: I must confess that I am slightly puzzled by Amendment No. 11. I do not really know to which other Act of Parliament the noble Earl is referring, nor to what other institutions he is referring. With those difficulties, I find it difficult to respond.

I refer the noble Earl back to my quite lengthy answer to Amendment No. 9, in which I set out in some detail the reasons why we believe it is appropriate that institutions which benefit from the provision of liquidity from the central bank--and that is fundamentally banks and building societies--should be those who contribute to the financing of the Bank. I have not heard an answer to that case which I put forward in such a way that encourages me to give any support to the amendments that the noble Earl is now proposing.

The noble Earl's second amendment would remove the Treasury's power by order to amend the definition of eligible institutions. Let me make it clear that although, on the face of it, this is a Henry VIII power, we do not envisage using it at the moment. However, it is sensible to have this degree of flexibility in order to respond to possible future changes in market and institutional structure. Since any such orders would have to be approved by both Houses, there are sufficient safeguards in place on the exercise of this power. The Delegated Powers and Deregulation Committee has not raised any objection to the power proposed here.

On that basis, the initial designation of institutions is a matter of deliberate policy, and has been carried out after a full exploration of alternatives. The Bill provides in paragraph 1(2) of Schedule 2 for flexibility in relation to any future changes. I hope the noble Earl will withdraw his amendment.

Lord Stewartby: Before my noble friend rises, may I ask whether this would be by affirmative resolution, when the noble Lord, the Minister, says that this would have to be approved by both Houses?

Lord McIntosh of Haringey: I am grateful to be told that it is by affirmative resolution.

The Earl of Home: The Minister said he could not envisage what sort of institutions I was thinking of. Surely, the fact that sub-paragraph (2) refers to people or institutions, or institutions unknown at this moment, answers his own question. He is anticipating that there may be other institutions which, at some time in the future, it may be appropriate to regulate. I took a stab at a couple, one of which I thought was too restrictive, and the other which I thought was too wide, and gave two,

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albeit highly theoretical examples. Surely, if it is envisaged, as it is under Schedule 2, paragraph 1(2), that there may be other institutions which could appropriately be brought into this clause, then surely we should be able to define rather more precisely which institutions they might be.

Lord McIntosh of Haringey: I am grateful to the noble Earl for giving way. Yes, I should have responded to his specific examples, but I believe he will agree, on reflection, that what he was talking about were loans rather than deposits. There is no maturity transformation problem with just granting loans. Maturity transformation can be a problem if you borrow to lend, which is what banks and building societies are doing, and that is what CRDs attempt to evaluate.

The Earl of Home: I hear what the noble Lord has to say on this topic. I will now read his response carefully in Hansard. We may wish to return to this point at Report stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 12 not moved.]

6 p.m.

The Earl of Home moved Amendment No. 13:

Page 20, line 45, at end insert--
("( ) The total burden of cash ratio deposits levied under this Schedule shall not exceed that part of the Bank's expenditure which deals with public goods.").

The noble Earl said: The purpose of Amendment No. 13 is to explore the current position as far as quantifying the costs of the Bank which will be funded through the cash ratio deposit scheme. The consultation paper, to which we have already referred, quotes from the Bank's 1997 annual report which gives pre-tax profits of £121 million and costs of resources of £210 million. It further states that the cost of banking supervision is roughly £50 million, including an overhead allowance. If this figure is deducted from the total costs, it would leave some £160 million to be funded. As the Minister was saying earlier, this comes from various sources: agency services, payments for direct banking services, its own capital and reserves apart from CRDs.

It is, however, difficult to extract precise figures from the way that the Bank's annual report is drafted, and perhaps in the spirit of transparency the Government could clarify these figures for us. Figures produced by the British Bankers' Association put the cost of public goods functions at £75.6 million, or 36 per cent., while the cost of supervision is estimated at £31.5 million, or 15 per cent. What of course we do not know at present is what the on-going cost of the Monetary Policy Committee, which we have spent some time debating today, and the infrastructural back-up related to that committee is going to be, and therefore whether this will have any effect on the percentages that I have quoted.

However, what does seem to be equitable is that the cash ratio deposit system should not have to fund any part of the banking or market services, or indeed

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banknote printing or registration services. Nor does it seem equitable that the profits of the Bank should come from this source either, given, as I have already said, that many other institutions will benefit from not having to make deposits of this nature.

The current rate of eligible deposits is 0.35 per cent., which is at least three times that required to cover the £75.6 million costs anticipated by the BBA. Given the anticipated increase in eligible liabilities anyway, further augmented by the advent of the building societies into the scheme, this rate could be reduced at least threefold, possibly down to 0.1 per cent. I would be grateful if the Minister could confirm that these figures are indeed approximately correct in their outcome, and it is the Government's intention to confine this scheme to the finance of the public group function. I beg to move.

Lord Peston: We are looking at Amendment No. 13 in which the expression "public goods" appears. I once wrote a book called Public Goods in the Public Sector. I wonder whether the noble Earl means the expression public goods to correspond to the technical definition of this as it appears in economics. If he does, am I to understand it is possible in the case of the Bank of England to quantify the extent to which it creates value in a public goods sense? He quoted some figures, but he was speaking so rapidly I could not keep up with him. I would be amazed if one could produce figures of that sort. I have no doubt that the Bank of England creates what we in economics call the public good, but I am somewhat taken aback that the noble Earl seemed to be saying that we could estimate that and therefore relate it to the Bank's income.

I would certainly like to know how the estimate takes place. I would like to know the provenance of that estimate, and I would like to be in a position to check it myself. If I ask what public good the Bank creates, I would wave my hands in the air and say, "A lot"--and certainly my guess would be a lot more than the Bank of England costs us. I was a bit taken aback by that expression, but it may well be that the noble Earl is using the words "public goods" in a completely different sense from that in which we use it in academic economics.

The Earl of Home: Perhaps I may clarify that point. I am quoting from the British Bankers' Association response to the consultative paper. Talking about the public good functions of the Bank as a percentage of resources, it refers to monetary analysis/policy at 6 per cent., monetary statistics 2 per cent., monetary operations 5 per cent., financial stability/structure 4 per cent., Centre for Central Banking 1 per cent., central overhead costs, including personnel, finance, audit and secretaries' department, 18 per cent. This adds up to a total of 36 per cent., which in turn equates to £75.6 million.

Lord Peston: If the noble Earl will forgive me, as I am as anxious as anybody to get a move on, I am still not clear of what that 36 per cent. is a percentage. The numbers just astonish me in terms of the relevant body's ability to do them, but I suppose the answer is that, with

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any luck, if they read in our Hansard our small debate here, they might send me their documentation so that I can persuade myself that it was meaningful. I have no idea what my noble friend is about to say, but my strong advice is not to fall into the trap of assuming that those figures have any weight at this moment.

Lord McIntosh of Haringey I take my noble friend's warnings very seriously. In so far as the figures quoted come from the Bank of England annual report, I can confirm them. In so far as they come from calculations by the British Bankers' Association in its response, I will be considerably more cautious and leave it to my noble friend and the noble Earl to puzzle over.

I can be a little less negative to the noble Earl than I was on previous amendments. The starting point must be that the Government have decided that deposit-taking institutions should continue to contribute to financing the Bank because of the benefits they get from access to central bank liquidity. But government are also mindful of the need to minimise the burden on these institutions. That is why we said explicitly that taking into account also the charges that the FSA intends to levy for banking supervision, it intends that,

    "the total burden on credit institutions in aggregate should be no greater than it is today, and preferably lower".

As to whether the burden from CRD should be limited to certain of the Bank's functions, we take that point seriously too, again with the warnings that my noble friend Lord Peston has given. We have received a number of representations asking for a clear link between the CRD rate and the Bank's expenditure on its monetary policy and financial stability functions. The Government are still considering the responses to the consultation process, but we are looking sympathetically at this approach and see advantages in terms of transparency and accountability, and we hope to announce our conclusions on the CRD consultation soon.

Also, since the order setting the CRD bands and ratios will be subject to affirmative resolution by both Houses, your Lordships will have an opportunity of reviewing the Government's proposals in detail.

As to the issue of what the CRD scheme will raise, in a response to the consultation the Treasury will set out fully the rationale for the level set and the transparency of the Bank's costs.

In the light of those assurances, I hope that the noble Earl, Lord Home, will feel it possible to withdraw his amendment.

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