---

Banking Bill

My Lords, this amendment, similar to the one that the noble Baroness moved in Committee, would create a requirement for the Bank of England to write to the FSA on the subject of financial stability. The FSA would be required to respond to any such letter and have regard to it when determining whether the banks are meeting their threshold conditions with respect to the adequacy of their resources. Judging from the title of the proposed new clause, I see that such communication is to have regard to the level of debt. In Committee, the noble Baroness indicated that the purpose of her amendment was to address what she identified as a ““policy instrument gap”” between the Bank of England and the FSA. She suggested that the macro-level analysis of the Bank of England was insufficiently integrated with the work of the FSA in regulating individual firms. If noble Lords will allow me, I should like to address this specific concern before turning to the details of the proposals made by the noble Baroness. It is clear that we are in challenging times. It is also clear that the events of recent months were unanticipated; indeed, they were not in their entirety predicted by any central banker or regulator that I am aware of. With respect, I do not believe that our present difficulties have emerged as a result of the lack of policy instruments of the kind that the noble Baroness suggests. Nor do I believe that any major failure of the UK’s regulatory framework has led directly to the difficulties facing our financial system today. All countries are facing serious economic challenges, regardless of their regulatory frameworks and regardless of whether they have single or twin peak regulation. To lay the blame for the economic problems that we face on the nature of the regulatory framework of any individual country seems to me to be mistaken. I do not believe that any ““policy gap”” exists in the lines of communication between the Bank and the FSA, but I recognise the concerns raised by the noble Baroness, and I am grateful to her for raising this issue again. I hope that I can reassure her both on the general point with regard to the effectiveness of the co-operation between the FSA, the Bank of England and the Treasury, and with regard to some of the specific policy issues that she raised in Committee. When we considered this point in Committee, the noble Baroness drew attention to specific issues that she felt had been insufficiently considered by the tripartite authorities. In this regard, she mentioned the views of the Deputy Governor of the Bank of England on the financial cycle. I pay tribute to the tremendous work done by |Sir John Gieve as Deputy Governor of the Bank of England. He will be retiring shortly, but he has served the Bank in an extraordinary capacity in the most challenging times and often in quite hostile circumstances. I commend his contribution to the work of the Bank. I assure noble Lords that the tripartite authorities are considering very carefully the implications of the current financial crisis, including the observations by Sir John Gieve and the other deputy governor, Charlie Bean. They have both identified excessive debt as a causal factor in the current crisis, but they have not called for amendments along the lines of those suggested by the noble Baroness, Lady Noakes. With respect, I believe that the noble Baroness is mistaken when she indicates that the current arrangements for the sharing of views within the tripartite, on this or any other issue, are insufficient. As I indicated in Committee, I strongly believe that both the Treasury and the FSA should have full access to the advice and views of the Bank of England when taking decisions in pursuit of their respective functions, but both the FSA and the Treasury already have sufficient access to the wisdom of the Bank. The tripartite authorities meet on a regular basis—monthly, weekly and at times daily—at both the principals’ and the deputies’ level, and there are ample opportunities for the Bank to raise any concerns that it may have about debt or any other matter that it believes is important to financial stability. In short, the Bank of England lacks no opportunity for voice. I hope that I have satisfied the noble Baroness’s concerns about the need for a new clause such as the one that she proposes. I should like to turn now to the difficulties inherent in the proposed new clause. Fundamentally, it would require the Bank and the FSA to publish letters. This returns to the difficult tension between transparency and the need to avoid undesirable impacts on the market; we will return to that tension later on Report. Some occasions may call for a frank exchange of views between the Bank and the FSA which, from the perspective of market sentiment, it would be imprudent to subject to publication. Perhaps I may follow up on the concerns I raised about the noble Baroness’s amendment in Committee. Her new clause rightly reflects the fact that published letters should not deal with the position of specific financial institutions or other persons. However, given the Bank’s role as a lender of last resort, the most useful advice that it could offer—and, as I said, already does offer—to the regulator regarding financial stability is highly likely to relate to specific institutions or other persons who are in receipt of liquidity or other financial assistance from the Bank. Clearly, that could not be made public. Therefore, any information in a public letter would have to be based on aggregate-level assessments of debt in the financial system as a whole. It is hard to know how the FSA could meaningfully respond even to such an aggregate assessment without making reference to specific firms. The FSA conducts its supervision on a risk-based basis, taking into account specific factors that affect each firm individually. It would have to evaluate the Bank’s advice in this same way and would have to consider the impact of the Bank’s aggregate assessment on each institution it supervises. Noble Lords will remember that this was one of the principal objections I raised to this clause in Committee. The regulator’s independence in making judgments about individual firms would be undermined if it had also to have regard to aggregate-level judgments made by the central bank. Putting aside that fundamental objection for the moment, I fail to see how the FSA could publicly respond to the Bank in any terms other than that it had noted the Bank’s advice and would take it into consideration. While agreeing with the need for the tripartite authorities to work effectively together, and with the principle of information-sharing between them, I cannot agree that this new clause provides a suitable mechanism. However, it may be of some reassurance to note that in Clause 243 we are taking steps to ensure that the Bank of England is empowered to share with other members of the tripartite specific information about individual financial institutions and with regard to financial stability. Tripartite co-operation can only be enhanced as a result. I strongly believe that the provisions of Clause 243 will address any remaining concerns that noble Lords may have. In addition, I would of course accept that there are lessons to be learnt from the financial crisis. Indeed, regulators the world over are striving to learn them. Here in the UK, the FSA has embarked on an ambitious supervisory enhancement programme in the wake of its report on Northern Rock, and the noble Lord, Lord Turner, is conducting a further review of the way in which the authority carries out its functions. The Bank of England, too, is undergoing change as it steps up to take on the new responsibilities which this Bill confers on it, particularly with regard to the special resolution regime. I can assure the noble Baroness that the tripartite authorities are active, engaged and co-operating closely to address the challenges to financial stability that we currently face. There is no need for new public reporting structures to be introduced to make this process of collaboration function. In closing, the noble Baroness, Lady Noakes, made reference to the Bank of England’s financial stability report. Although that is a high quality document, it tends towards the academic. It is not necessarily read by the right people and the Bank of England is working hard to ensure that it gets into the hands of independent directors, heads and members of risk and audit committees, rather than into academic libraries. I hope that the Bank might move towards the less Delphic style of communication that the governor himself evidences in oral evidence to the Treasury Select Committee and in his speeches. I hope that the Bank’s financial stability reports might also learn from the examples I cited. I do not believe that a report of the sort envisaged in this amendment would be appropriate. On that basis, I ask the noble Baroness to withdraw her amendment.