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Banking Bill

My Lords, the amendment adds a new clause after Clause 235. This new clause creates a new mechanism between the Bank of England and the FSA and contributes to a public debate and understanding of the state of banking. In doing so, it responds to calls made by both the Governor and the Deputy Governor of the Bank of England for, to use the governor's words, "““an additional instrument to stabilise the growth of the financial sector balance sheet””." Of course, the instrument exists at a micro-level in the form of prudential capital ratios agreed by the FSA with individual banks, formally through the threshold conditions provided for by the Financial Services and Markets Act. The governor was referring to a macro-policy instrument, which is what Amendment 103 is intended to deliver. I do not think there is any doubt that the banks’ balance sheets were over-leveraged. Indeed I have heard the noble Lord, Lord Myners, talk about this. There is also no doubt that the analysis was there to be seen, for those who took the trouble to look at the available data. Therefore, this is not an issue of available data but more a lack of focus of what the data meant in policy terms. The Bank of England has been issuing a financial stability report twice a year, but I do not believe that it has had much influence. It is a rather academic publication. It does not reflect clear policy positions of the Bank of England and is not designed to be, nor is it in fact, a document which sets out to change policy. When the Bank of England ran banking supervision, there was an automatic connection between the Bank’s macro analysis and its micro decision-making, because only one institution was involved, culminating in the responsibility of the governor himself. That of course disappeared when the Government chose to transfer banking supervision to the FSA. I should stress that I am not in the camp of those who want to return banking supervision to the Bank. I believe that, in principle, the FSA should be the better body. If it gets its act together, it ought to do the job well. However, I also believe that we need to be more specific about the linkage between the banks’ judgment about the state of banks’ balance sheets, and the levels of debt in the country, and the FSA’s responsibilities to translate that into practical regulatory action. There should also be greater public awareness of the issues. These issues are too important to be discussed only behind the closed doors of the tripartite arrangements. My amendment, which is a gamma version of the beta test version that I moved in Committee, requires the Bank to write to the FSA twice a year, setting out its assessment of financial stability. The FSA then has to have regard to that when carrying out its bank supervision. The Bank’s letter to the FSA and the FSA’s response would be published. This amendment avoids a criticism of the version that I moved in Committee in that proposed subsection (3) specifically avoids referring to specific institutions. That was never part of my intention. Rather, the FSA should respond in terms of the general approach to tightening or loosening capital or liquidity requirements. The Minister said in Committee that this mechanism would make life uncertain for regulated firms. The reverse should be the position, because of the transparency of the process. If all of the analysis and debate were kept secret within the tripartite authorities, which is what the Minister argued for in Committee, that would generate uncertainty for firms. The plain fact is that firms should expect to have their commercial policies changed as a response to the overall analysis of developments in financial stability. The fact that they were not checked at all during the decade or so of balance-sheet expansion was a blot on the history of financial regulation in this country, and that is exactly what we need to address. I beg to move.