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Lord Peston: Before my noble friend sits down, he raises an interesting piece of technical financial economics. Can my noble friend tell us whether there have been any studies done in the Bank which relate the benefits of the lender of last resort function and the availability of liquidity, to the loss of interest via cash-ratio deposits? If there have been any such studies I have never seen them published. I have always assumed that the Bank has an extraordinarily good deal in terms of cash-ratio deposits, and I would always advise, if asked, "Do not to go down the path of fees or anything like that; you will end up a good deal poorer than you are". I wonder whether he has additional information? In saying that, I support exactly what my noble friend said.

Lord McIntosh of Haringey: No, not off the cuff; but if there is anything of any value I shall write to my noble friend.

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The Earl of Home: I thank the Minister for that response and should like to make just a couple of comments. Indeed, I have read much of what he said in his remarks in the consultation document issued last November, but the fact is that the Bank of England, which we still cannot call the Bank of the United Kingdom, whilst a provider of liquidity to part of the system, is certainly not a member of last resort to any member of the banking system. The bank is under no obligation, legal or otherwise, to bail out any bank which might happen to have a temporary financial liquidity problem.

I have some sympathy for the comment of the noble Lord, Lord Peston, on this, and perhaps we can have it more appropriately answered under Amendment No. 10 which we will come on to in a minute. The noble Lord said that he would take this seriously. I am not saying here that I am substituting a fee and charging basis for cash ratio deposits; I am merely suggesting that the Government should add this as an extra element of flexibility. However, in the hope that the Government will look at that side, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 6 agreed to.

Schedule 2 [Cash ratio deposits]:

The Earl of Home moved Amendment No. 10:

Page 20, line 2, at end insert--


. The powers conferred by this Schedule shall be exercised only after the Government has explored other ways of financing the operations of the Bank.").

The noble Earl said: This amendment carries on from the other and is particularly designed to ask the Government--who obviously do not like the use of fees and charges--to consider whether they have really explored all other options open for funding the operations of the Bank.

As we were saying, with the departure of the supervisory function, the relevance of the Bank to banks and building societies in particular has dropped dramatically. The main extra (albeit probably temporary) activity of the Bank--that of setting interest rates--could in a perverse way work against the interests of banks. That is because banks, especially those with large treasury departments, have more opportunities to make money at a time of high volatility in interest rates than they do during periods of stability.

We heard a great deal during the passage of this Bill about the requirement that the Monetary Policy Committee should attach high priority to monetary and price stability. If, therefore, it does its job properly, the effect would act against the interests of those institutions. Paradoxically, it may be a good reason for putting the CRDs on to a statutory basis, as building societies and banks may not now be such enthusiastic payers, perhaps, as they were.

I said also in relation to the last amendment that the Bank does not have to be a lender of last resort, which I believe to be another reason why the banks will now be less interested and reaction to the Bank somewhat

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less relevant to the banking system than before. Can the noble Lord tell the Committee whether the Government really did explore the other ways and suggestions for funding this part of the Bank's exposure? Those were, I gather, put forward as a result of the consultation paper. One suggestion was based on turnover; other criteria for companies such as insurance companies or fund managers could be related to funds under management. For market makers and brokers, numbers of transactions might possibly be relevant criteria.

The Government seem to have rejected those and I would be grateful if the noble Lord could tell us whether they really did consider them and why they were rejected? I beg to move.

5.45 p.m.

Lord McIntosh of Haringey: The short answer to the question of the noble Earl is that we did. We explored other sources. He read the consultation documents. As usual, it is difficult to publish the responses to consultation documents because one is never sure whether or not the people who make them wish their comments to be published. However, if there is any way in which we can make more information available to him as a result of the consultation process, I shall certainly undertake to do so.

My answer to the previous amendment, which I would have preferred to have grouped with this one, indicates the careful consideration which has been given to alternative methods of funding, such as fees and charges. I should, however, remind the Committee that cash ratio deposits have been part of the framework for financing the Bank for a long time. The banks have accepted it on a voluntary basis and there is no indication that they are resisting the idea of continuing it on a statutory basis.

Let me also make clear that the Bank already has many other sources of income. That is not the only way in which the Bank is financed. It receives money from the Government for issuing banknotes, for managing the foreign exchange reserve and for providing gilt registration services. That is about £75 million in 1997-98. It receives money from private clients for banking and settlement services and income from its own reserves.

We should therefore put cash ratio deposits into context. The noble Earl is entitled to ask for as much as we can give him about the consideration which has been given to this issue, but my conclusion must be that we have explored others and that this seems to be the best solution. I would urge him to withdraw the amendment.

The Earl of Home: I am grateful to the Minister for saying that he will make such responses available to me as he can within the confines of confidentiality in the responses given to him. I hope that throughout the early years of the experience of the Bank funding under this new provision, the Bank, in conjunction with the Treasury, will continue to look very hard to see whether this really is the most appropriate way to fund part of

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the Bank's operations. We shall keep an open mind as to whether there are other systems which should be reconsidered or revisited as a possibility.

With those reassurances from the Minister that he has indeed looked at other options, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Earl of Home moved Amendment No. 11:

Page 20, line 11, at end insert ("and
(d) an institution authorised to accept deposits under any other Act.") .

The noble Earl said: Having previously spoken about cash ratio deposits, or the theory of them, it now seems that they are here to stay and will indeed be enshrined in the law. It seems to me to be only fair that we should explore whether paragraph 1 of Schedule 2 covers the right group of institutions. Paragraph 1 specifically categorises three types while paragraph 2 says that the Treasury may add anyone else it feels like. It seems to me that the first is too restrictive and the second is rather too wide.

If we look at those covered by paragraph 1 of Schedule 2, I do not believe that it is right to say that just because a bank or a building society takes a lot of deposits it will necessarily benefit from the actions of the Bank as envisaged, any more than any other institution. Any company will use the money markets if it has excess cash, and obviously anybody with liquid capital will make more money if rates are high. However, this does not apply exclusively to banks and building societies. They are certainly not unique in that they alone benefit from the Bank's provision of liquidity. Banks indeed must keep liquidity for other reasons, not least of which are prudential management reasons.

Another reason that I say that paragraph 1 is too restrictive is that through the increasing use of credit cards and other incentives, an increasing number of companies are offering credit and will often offer discounts on goods purchased if there is a credit balance on the customer's account. This credit is returnable if the customer closes his account. It is quite possible, if this proves popular, that it could become quite big business. Let us take supermarket chains as an example. In effect, they would be embarking on a type of banking service that would not necessarily come under the Banking Act 1987. While it may be necessary to regularise their activities by statute, it may not be desirable at that time to amend the Banking Act. A short new Bill may be a better way to achieve the objective.

That is just one example, but I am sure that other noble Lords can think of many others. Indeed, the Bill anticipates that there may be others by including sub-paragraph (2).

Returning to that clause, that itself may go too far the other way. If anyone accepts a deposit which is, in effect, an earnest of a good intent by a potential purchaser, in the way this Bill is drafted, that could then be caught up within sub-paragraph (1).

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Taking that to an extreme, someone like a property developer could be caught in it if he accepts a deposit from a potential house owner but then has to return it, indeed plus interest. That is an extreme example and noble Lords may say it is going too far. But again, it is an example that it could go too far the other way.

It seems to me that an appropriate halfway house between these two extremes would be, if Parliament agreed that a deposit-taking activity should be regulated, that the institutions affected by an Act of Parliament should come under this clause. I beg to move.

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