---

Banking Bill

My Lords, there is a slight oddity in the grouping in that we are going to have the same debate all over again, but with the more sweeping proposals that I tabled first in Committee and have retabled on Report because we did not get satisfactory answers in Committee to the issues that were raised. 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 Committee will be in primary legislation when it is just a sub-committee of the Court of the Bank of England. It is very strange that we need to have primary legislation for a sub-committee of the court but do not require it to establish the position of the tripartite committee, which the Minister has just argued is so enormously important. 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: "““The policymakers need to engage with the providers of capital to the banking system, rather than just talking to the banks, because ultimately you need a convergence in expectations””." 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 for the development of regulatory reform and then put into place the institutional structures that will be more appropriate for that reform. 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 England’s 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 amendment—that is probably not terribly humble—or 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.