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Financial Institutions

I should also like to express my appreciation to the noble Lord, Lord Bilimoria, for securing this debate. This is my first contribution to a debate since my maiden speech earlier this week. I have handed in my registration of interests, but it has not yet been processed. I assure the Committee that I have nothing relevant to declare, save that which we all have that is relevant to declare: a real interest in the truly extraordinary issues facing the world at the moment in terms of financial instability, the performance of the global economy and the needs and interests of those in the developing world. Institutions such as the IMF and the World Bank have a key role in assisting countries hit by negative shocks, but recent events in financial markets have confirmed that the world economy has changed irrevocably. The noble Lord, Lord Bilimoria, started with a quotation from Keynes. Having also recently read the book by the noble Lord, Lord Skidelsky, I shall take a quotation from Keynes: "““The difficulty lies not so much in developing new ideas as in escaping from old ones””." One of the challenges for us in our role in supporting the IMF, the World Bank and other institutions is recognising that in a changed environment they themselves must have changed roles, changed processes and changed cultures. The noble Lord, Lord Bilimoria, reminded us of the critical interdependency between economies. These are not times when single national initiatives alone will suffice, although the initiatives taken by this country and others to support confidence in their own banking and financial institutions have clearly played a very valuable part. Contagion is a word that we now come to associate with global economics and global finance. The Government support the strengthening of the robustness of international controls. In particular, my right honourable friend the Prime Minister has emphasised the important role that he sees for the Financial Stability Forum, which will certainly need more resource than it currently has, and to which the noble Viscount, Lord Eccles, alerted us. We see a more assertive role for the Financial Stability Forum in accounting, rating agencies, and the regulation and transparency of the derivative markets—in short, a role that meets the call of the noble Viscount for it to be proactive rather than reactive. We support the expansion of the top table at the World Bank and the IMF through the extension of its membership, which the noble Lord, Lord Bilimoria, talked about. We have also publicly spoken about the unacceptability of the gentleman’s agreement under which the leadership of the World Bank and the IMF is determined, and we have argued forcefully for an open and transparent process of appointment that leads to the best equipped people being appointed to those important roles. In response to the observations of the noble Lords, Lord Bilimoria and Lord Parekh, about supporting the institutions and making them become more legitimate, I should say that we have agreed that the IMF quota reform in April 2008 was an important further step towards making the organisations stronger and more accountable. As I said, we support making them much more open and transparent about the performance of their duties. The UK has also been vocal in support of the IMFC chair coming from an emerging market economy. My noble friend Lord Desai argued the case for abolishing the IMF. I am not persuaded at this point that substituting IMF support for support from a consortium of private banks is entirely the best approach. Indeed, some of the difficulties with which the IMF is now coping are a direct consequence of the need to substitute private bank-provided finance which has been used to support long-term capital investment and budget deficits in a number of countries. He made a more powerful point about the need to change the way in which the IMF works if it is to perform an effective function in the future. The noble Viscount, Lord Eccles, invited us to speculate that reference to architecture is spin rather than substance. I assure him that it is not. We are talking about putting our shoulder to the wheel to ensure that fundamental changes are made in the IMF and the World Bank to improve their efficiency and make them relevant to the needs of today. The noble Viscount also asked whether the reports from the IMF received as much attention as they should have done. That is an endemic problem. My former colleagues at the Bank of England would point to the fact that they alerted us to difficulties in the banking sector to which the sector itself seemed oblivious. I can think of ways in which the IMF and the World Bank could communicate their views more forcefully. Indeed, a report on the actions taken subsequent to their analysis and the publication of their views would be an important step forward. My right honourable friend the Prime Minister has already argued in support of this. I am indebted to the noble Lord, Lord Skidelsky, for his economic analysis and his focus on the absence of constraint and the persistence of imbalances, which are the fundamental source of the instability with which we are now coping. His remarks were trenchant, powerful and highly relevant. The IMF and the World Bank are responding to the challenges. The IMF has made up to $250 billion available to support nations affected by the global financial turmoil, and the fund is already in discussions with several countries to provide advice and, where necessary, to bolster countries’ reserves. I am delighted to see that the call made by my right honourable friend the Prime Minister to supplement the resources available to the IMF through the concept of a trust fund in which those countries that are in substantial balance were able to provide funds which would be invested alongside the IMF, has led to such a positive response from China, as the noble Lord, Lord Newby, told us today. We hope that the Prime Minister’s visit this weekend to the Middle East will be a further step in advocating the case for putting more resources behind the IMF in the future. It is clear that demands on the IMF for resources are going to be considerable. The noble Lord, Lord Newby, made the case for stronger and more effective surveillance and asked questions in that respect about Iceland, a country about which I have become increasingly knowledgeable in recent days. I share his interest in what we will learn from that. He made the important point that the IMF needs to improve and to become a trusted, accountable and effective institution. He said that if it did not exist, we would probably have to invent it. Rather than invent something, why should we not do what the Government are encouraging: promote an improvement in the culture and processes of the IMF and the World Bank? The current economic conditions may be such that significant additional resources are required, and we are taking steps along with other Governments to ensure that that is achieved. The World Bank has made contributions through its rapid finance facility which was established earlier this year to support countries affected by the food and fuel crisis. The noble Earl, Lord Sandwich, reminded us of that there are great difficulties and poverty in many parts of the world which we must not overlook. Strengthening our economy and banking system is an important step to facilitating our ability to do that. We support a louder voice for countries from developing nations in the IMF and the World Bank, including countries in sub-Saharan Africa. The Prime Minister has been clear in his recommendations on that point. The Government have an important role in mobilising the resources of the IMF, the World Bank, the G7, the G20 and ECOFIN. The noble Baroness, Lady Noakes, questioned whether competition is the right approach here. I would normally expect to hear support for competition from her Benches. There is a case for plurality and for mobilising as many institutions as possible, with the Government acting as a linking mechanism. I thank the noble Lord, Lord Bilimoria, for arranging this debate. I have personally found it extraordinarily helpful, and I am encouraged by the contributions from all sides of the Committee. [The Sitting was suspended from 4.59 to 5 pm.]