|Previous Section||Back to Table of Contents||Lords Hansard Home Page|
At the centre of our concerns are the operations of the tripartite arrangements in securing financial stability. One of the most peculiar aspects of the situation before us is that the tripartite committee has no statutory foundation, yet extraordinarily the Financial Stability
3 Feb 2009 : Column 610
I very much agree with the Minister that the tripartite arrangement is very important for financial stability and the complex interactions of macroeconomic, institutional and microeconomic variables, all of which can feed into problems of financial stability. We know from the evidence that we have that the tripartite arrangements simply did not work at the commencement of the current financial turmoil. Indeed, those involved admitted that they did not work at all well.
Lessons have been learnt, but I am afraid that I am still under the considerable impression that they are still not working effectively. In the past, the Bank of England had the important role during financial crises of co-ordinating the response of banks and other financial institutions to the crises. It was a meeting of the institutional investors, hosted by the Bank of England in the early 1970s, that called the bottom of the stock market crash. Today, such co-ordination is not evident and indeed would be difficult to achieve, since the Bank of England no longer has the relationship with so many of the financial institutions that it used to have. One would therefore expect the Bank of England and the FSA to work together to achieve that sort of co-ordination. However, Mr Peter Sands, the chief executive of Standard Chartered, stated in December:
In other words, Mr Sands, who is running one of the most important banks in the country, is telling us that there is no co-ordinating activity, which was so important in the past. It is not clear that the difficulties and problems associated with the tripartite system have as yet been effectively overcome.
My amendment in Committee attempted to achieve a statutory basis for the tripartite arrangements. That is why I embodied the FSA and a number of independent persons in the stability committee. I am very disappointed that the Government did not even consider whether there should be independent persons on the committee. The independent members of the Monetary Policy Committee have made an enormously important contribution to the work of that committee, so why cannot we also have independent members on the stability committee?
If the Government are not willing to accept an amendment in this form, I suggest that they abandon the Financial Stability Committee altogether. Over the next several months, we know, because the Chancellor has told us, that there will be significant new legislation on financial regulation and that that legislation is likely to require new institutions to make it effective. Those new institutions will have to be tripartite institutions in some sense and the committee will become an irrelevance. Yet here it is in primary legislation. We really do not need it. It would be much better to wait
3 Feb 2009 : Column 611
It is clear, for example, that in any system of regulatory reform that is reacting to current financial turmoil there must some form of liquidity regulation. The banks must have some liquidity management, which means managing their liability side rather than just their asset side, which has been the regulatory structure until now. How will the Bank of Englands Financial Stability Committee do that when all the information about liquidity, especially about the liability structure of the banks and other institutions, is in the FSA? They will have to work closely together, so there will necessarily be some institutional framework in order for them to do so. It would be much better to devise that framework free of the Financial Stability Committee, which is simply a sub-committee of the Court of the Bank of England and cannot have a primary role in dealing with financial stability as it confronts the British economy in the complex financial structures that we have today.
In these circumstances, and in all humility, I advise the Government either to accept my amendmentthat is probably not terribly humbleor to abandon the Financial Stability Committee altogether so that, as we move into a new era of regulatory reform, we can design the institutions that are appropriate for the effective management of financial stability in the UK. I beg to move.
Lord Turnbull: My Lords, the other issue that I would have raised on what was Clause 228, now Clause 235, was whether creating a Financial Stability Committee within the Bank, along the lines currently proposed, was the best way forward. I accept that the starting premise of this is correct: the Bank would benefit from what might be called ventilation, or exposure to a greater degree of outside thinking. It is ironic that at a time when this is more necessary than ever, the Banks senior leadership will shortly, for the first time since 1997, be made up entirely of insiders, defined as those who have been with the Bank for more than 10 years. While correctly identifying the problem, I wonder whether the proposed solution is indeed the best available; that is, to take four members of the court and put them into a committee chaired by the governor, assisted by the two deputy governors. Oddly, the executive member responsible for markets would not be a full member. I was not convinced by the Ministers explanation that this was a sufficient gene poolthe phrase that was usedto assemble the experts necessary. Some of them, who would be excellent in the role of experts, would not necessarily want to work, in effect, as the non-executive directors of the Bank, with the much wider range of responsibilities that that carries.
I am also puzzled as to why, if a committee of this kind is needed, it could not have been set up months ago without primary legislation. As the noble Lord, Lord Eatwell, has pointed out, it is inevitable that the whole architecture of regulation will be revisited, not only in the UK but internationally. I, too, wonder whether it makes sense to commit ourselves to legislate on something that will probably have only a short life
3 Feb 2009 : Column 612
This Bill provides for a Banking Liaison Panel to help the Treasury and a Financial Stability Committee to help the Bank, while the FSA already has various practitioner panels. What is missing is something to bring this all together at the tripartite level and sort out the conflicts and trade-offs that the different parties will inevitably bring. For example, the FSA is currently encouraging banks to husband their capital with great care and build it up, while the Treasury wants to encourage banks to commit more of that to increasing their lending. That is precisely the kind of issue that something working at the tripartite level could help to sort out. The Bill currently addresses a particular issue but misses an opportunity to look at something that would have a greater purpose. We will have to wait, but time will probably tell that the noble Lord, Lord Eatwell, and I are right.
Lord Northbrook: My Lords, I support the noble Lord, Lord Eatwell, and his amendments to strengthen the Financial Stability Committee. I take his point about the likely short life of the committee and how it might benefit from the extra membership, particularly as the Minister has stressed the importance of the tripartite regime. To reiterate an old chestnut of mine, I am sorry that the noble Lord, Lord Turner, cannot be here to put in a word for this as well.
Lord Newby: My Lords, I supported these amendments and the noble Lord, Lord Eatwell, in Committee and I certainly support the principle behind the amendments. Since the Committee stage, we have received a long explanatory note from the Governor of the Bank of England as to why this committee would be completely impossible. I fear that there are real shades of Yes Minister in it. It says that,
to take decisions in that area. Instead, he suggests that it is all fine, that the Bank works happily within the tripartite framework and that he would be happy to have this stated in the Bill. I assume that this is why we have Amendment 86, which we have just debated. Again, this is a wonderfully drafted amendment. It is the absolute minimum that you could conceivably say while saying anything at all. It covers the fact that the Bank will work with the other relevant bodies, including the Treasury and the FSA, but qualifies it, lest it be thought that the Bank should strive too hard to work with them, by saying that it shall aim to work with them. The truth is that the governor says that they are happily working together anyway, yet the Bill now says that the Bank will try its best to see whether it can work with these bodies. The implication of both the amendment and the document from the governor is that the Bank is extremely grand, and will work with all the people who want to be involved if it has to, but it is the Bank that really matters.
The entire thrust of what the noble Lord, Lord Eatwell, has been saying, and which I support, is that the FSA and the Bank have equal roles in maintaining financial stability, given that financial stability depends very much, as we have seen recently, not on some general collective financial situation, but the position in individual significant financial institutions where the FSA, by common consent, is in a much better position than the Bank to know exactly what is going on. Given that the Government clearly will not accept these amendments, I follow the logic of the noble Lord, Lord Eatwell. It would be better not to have all this stuff about one sub-committee of the Bank in the Bill because it gives it an inflated importance and creates a misleading impression of how the tripartite system both is intended to work and will work.
Lord Stewartby: My Lords, I add my voice to the sceptical comments from all parts of the House. When I first went through the Bill, this was the part which I found least convincing. We should be grateful to the noble Lord, Lord Eatwell, in particular for setting out so clearly the arguments for replacing the Financial Stability Committee, as defined already, with something that has a better chance of working in practice, and what legislative form that might take. I therefore ask the Government to consider very seriously the points that have been made in this short debate. I do not believe that a group of people with the varied experience of those who have contributed to this debate is likely to go on some blind journey without any sort of conviction that there is a sensible destination. It may be that the solution would be to withdraw these clauses from the Bill and wait for the large regulatory Bill which will come before too long. That would be a sensible way to deal with it, so I support the noble Lord, Lord Eatwell, without necessarily agreeing with all the details that he has put forward.
Baroness Noakes: My Lords, I have argued throughout that the Bill does not reflect the tripartite authorities and how they work together; instead, it identifies little bits of things for them to do at various points and fails to address the whole, which I believe it should. Like my noble friend Lord Stewartby and other noble Lords who have spoken, I do not necessarily sign up to every detail of the proposals of the noble Lord, Lord Eatwell. They are better than what is in the Bill, but I think the solution would be to take out financial stability. We can leave in the financial objective with its weak little override about aiming to work with the others. As has already been pointed out, if it is helpful to the governor to have a financial stability committee made up of whomever he chooses to have advising him, and it does not require primary legislation to do so, that can be arranged. However, if other architecture changes to legislation are needed in due course to meet whatever global consideration there is in response to the current financial crisis, that would be a perfectly appropriate time to do this. Many things do not need to be legislated for, and since we are not even legislating for the tripartite authorities, it is extraordinary that we are legislating for a sub-committee. I support the noble Lord, Lord Eatwell.
Lord Myners: My Lords, I am grateful to my noble friend Lord Eatwell for putting before the House a considered set of proposals in which he has clearly invested a great deal of time and thought. His amendments form a coherent package with the purpose of making the Financial Stability Committee into a joint committee of the Bank and the FSA, with further Treasury membership. I respectfully maintain, however, that the model of a joint committee that my noble friend suggests, while being internally coherent, would have an entirely different function from the role which the Government intend the Financial Stability Committee to play. My noble friend has given a strong account of his proposed model. If the House will allow, I will take this opportunity to explain again why the Government are setting up the Financial Stability Committee and why I believe the model set out in the Bill is the correct one.
I should first mention that the Governor of the Bank of England wrote to me towards the end of last week. I can assure noble Lords that the governor is a man of such independence that the idea that he would be directed by a Minister to write a letter is clearly both outrageous and implausible. He has set out his thoughts on our extensive discussions about these issues and I shall refer to some of his comments in due course. The noble Baroness, Lady Noakes, my noble friend Lord Eatwell and the noble Lord, Lord Newby, have received copies of the letter, and I have arranged for a further copy to be placed in the Library of the House.
In Committee, the noble Baroness, Lady Noakes, and the noble Lord, Lord Higgins, asked whether it was necessary to establish the Financial Stability Committee in primary legislation, a question which has again been asked today by my noble friend Lord Eatwell, the noble Lord, Lord Newby, and the noble Baroness, Lady Noakes. The answer, of course, is no. The court already has the power to set up new committees, whether they consist of internal committees such as the already existing Financial Stability Board or sub-committees of the court such as the Transactions Committee.
I take this opportunity to mention that the noble Lord, Lord Higgins, has expressed his regret that he cannot be in his place for this debate on Report. I should like to point out to noble Lords that his absence arises because he is attending a ceremony in The Hague to mark the distinguished services of Lady Higgins, the excellent Judge Rosalyn Higgins, as President of the International Court of Justice, which she has served with enormous distinction. I am sure that all Members of the House will send our best wishes and congratulations.
Lord Myners: My Lords, I return to the debate. A question put by the noble Lord, Lord Higgins, goes to the heart of what the Government are aiming to achieve with this clause. It is clear that the Bank does not need a statutory objective in order to ensure financial stability as one of its key objectives. I draw the attention of noble Lords to the Bank of Englands annual report 2008 where on page 1 it states:
It lists its two core purposes as monetary stability and financial stability. We can see that in practice, the Bank of England considers its two main objectives to be equally important, but the current legislation does not reflect this. The 1998 Act gives the Bank a statutory objective for monetary policy, but there is no similar statutory description for its objective for financial stability. Therefore, for the avoidance of doubt, we are placing the Bank of Englands objective in relation to financial stability on a statutory footing. Does that change in any way how the Bank views its responsibilities regarding financial stability? Of course not, but what it does achieve is to ensure that the Banks dual responsibilities in relation to monetary policy and financial stability are given a similar level of prominence on the statute book. In the light of the prominence of financial stability in the Banks current role, and its role in relation to the stabilisation powers contained in the Bill, it is appropriate that Parliament should endorse the arrangements.
In relation to the stabilisation powers, noble Lords will be aware that the Bill provides the Bank with new powers and levers to protect the financial stability of this country. As lead authority in the special resolution regime, in particular, the Bank will play a crucial role in the resolution of failed banks and will have to take decisions regarding individual institutions, often in extremely fast-moving and pressurised circumstances. To support the governor and the Bank in discharging these enhanced responsibilities, the Government are establishing the Financial Stability Committee. The Bank of England supports this move, as do the Treasury Select Committee in the other place and other interested stakeholders.
Why are we establishing the committee in statute? The answer is that the Government have placed the FSC on the face of the Bill in order to highlight and set the role that they expect the committee to fulfil; namely, the crucial task of strengthening and underpinning the Bank of Englands activities in relation to financial stability. Placing the arrangements on a statutory footing ensures that there is no doubt about the Banks functions in this important area, and this gives Parliament the opportunity to debate, determine and endorse these arrangements. As the governor explained in his letter,
Last week, several noble Lords asked questions concerning the exact status, composition and role of the Financial Stability Committee. I shall attempt to explain why the Government believe that the model in the Bill is the appropriate one. The first area of debate is when the FSC should be established as a committee of the Bank in a similar way to the MPC: as a sub-committee of the court or in a different structure altogether, for example, as in my noble friends suggestion of a joint committee of the Bank and the FSA. The Banks financial stability objective is ultimately the responsibility of the court. It is the court that manages the Banks affairs, and it is the court that will set the strategy for the Bank to follow in pursuit of its financial stability objective. As the governor emphasises in his letter,
They are integral to the heart of the operations of the Bank and its governance structure. It is therefore vital that the Financial Stability Committee be integrated into the Banks governance structure in such a way that there is a direct and accountable relationship between the Court of Directors and the committee. For these reasons, I believe it is right for the FSC to be a sub-committee of the court and, as I will highlight when I come to the composition and membership of the FSC, its position as a sub-committee of the court will also allow it to utilise the experience and knowledge of the non-executive directors of the court.
I now move on to the question of the role and functions of the committee. As I have mentioned before, the Governments aim in establishing the FSC is to provide the Governor of the Bank of England with a source of support and expert advice in discharging the enhanced responsibilities and tools that the Bank will have at its disposal. These new responsibilities are, as noble Lords will be aware, lead responsibility in the SRR and statutory oversight of payment systems in addition to those tools and levers that the Bank can and does already use to protect financial stability.
In Committee the noble Baroness described the FSCs functions as a ragbag, and she used the term again today. I cannot agree with her. New Section 2B(2)(b) to (e) give the FSC functions in relation to the Banks role in the SRR and its oversight of inter-bank payment systems. Subsection (2)(f) allows the Court of Directors to delegate further functions to the FSC. As highlighted by the governor in his letter, this will allow the court to give responsibility for some of its existing tools to the FSC. These could include responsibility for decisions relating to the provision of liquidity, decisions which I understand are currently undertaken by another sub-committee of court, namely the transactions committee.
Finally, subsection (2)(a) of new Section 2B gives the Financial Stability Committee a role in influencing the Banks financial stability strategy. It seems completely logical to me that a committee that is intended to be the main focus of financial stability expertise within the Bank of England should make recommendations to court on how the Bank aims to fulfil its responsibilities in relation to financial stability. Therefore, the functions of the FSC, as set out in Clause 235, are a coherent package to allow the committee to advise and monitor the practical implementation of financial stability measures.
Last week, the noble Baroness, Lady Noakes, was of the opinion that the committee cannot advise on and monitor the use of the stabilisation powers at the same time. With respect, I suggest that it would be entirely normal for a committee that includes non-executives to advise an institution or corporation on a specific course of action and later evaluate whether the course of action has been successful. I do not agree that this represents a source of contradiction.
I envisage the working of the FSC involving executive members of the committee and others providing details of the current situation. This could be an institution in the SRR, or a more general concern about a threat to stability. The committee shall discuss possible options in regard to the situation at hand, with the non-executives contributing their experience and knowledge and the executives providing operational and practical input.
The committee shall, as a whole, come to a decision on the course of action that it would advise as the most appropriate in the circumstance. However, the Banks executives will ultimately take the decision on what action the Bank will take, and as such they are accountable to court for their decisions. The Financial Stability Committee will assist court in this regard with its monitoring role. This will be a dynamic process. The committee's expertise and advisory capacity will be enhanced by its role in monitoring the use of the tools.
I hope this will help illuminate to the House why I believe that it is entirely right for the committee to both advise on and monitor the Banks action in respect of financial stability. The noble Baroness also asked who the committee would be advising under subsection (2)(b) and (c). It is clear that on a day-to-day basis the FSC will be advising the Banks executives. It is they who will need to make decisions on how to deal with individual institutions, in what may be fast-moving situations.
|Next Section||Back to Table of Contents||Lords Hansard Home Page|