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Division No. 1

CONTENTS

Ailesbury, M.
Archer of Weston-Super-Mare, L.
Belstead, L.
Biffen, L.
Boardman, L.
Bruntisfield, L.
Butterworth, L.
Cadman, L.
Cavendish of Furness, L.
Chesham, L.
Clanwilliam, E.
Courtown, E. [Teller.]
Cullen of Ashbourne, L.
Davidson, V.
Dean of Harptree, L.
Ellenborough, L.
Gainsborough, E.
Gilmour of Craigmillar, L.
Gray of Contin, L.
Halsbury, E.
HolmPatrick, L.
Home, E.
Hylton-Foster, B.
Kimball, L.
Kinloss, Ly.
Kitchener, E.
Knollys, V.
Layton, L.
Leigh, L.
Long, V.
Mackay of Ardbrecknish, L.
Mackay of Drumadoon, L.
Macleod of Borve, B.
Milverton, L.
Monro of Langholm, L.
Naseby, L.
Newall, L.
Noel-Buxton, L.
Northesk, E.
Oppenheim-Barnes, B.
Palmer, L.
Rankeillour, L.
Stewartby, L.
Strathclyde, L. [Teller.]
Strathcona and Mount Royal, L.
Swinfen, L.
Teviot, L.
Weatherill, L.

NOT-CONTENTS

Acton, L.
Annan, L.
Archer of Sandwell, L.
Barnett, L.
Bassam of Brighton, L.
Berkeley, L.
Blackstone, B.
Blease, L.
Brooks of Tremorfa, L.
Bruce of Donington, L.
Burlison, L.
Carmichael of Kelvingrove, L.
Carter, L. [Teller.]
Cledwyn of Penrhos, L.
Clinton-Davis, L.
David, B.
Davies of Coity, L.
Dean of Thornton-le-Fylde, B.
Dixon, L.
Donoughue, L.
Dormand of Easington, L.
Evans of Parkside, L.
Farrington of Ribbleton, B.
Gallacher, L.
Gladwin of Clee, L.
Glenamara, L.
Gould of Potternewton, B.
Graham of Edmonton, L.
Greene of Harrow Weald, L.
Gregson, L.
Hardy of Wath, L.
Haskel, L.
Hogg of Cumbernauld, L.
Howie of Troon, L.
Hoyle, L.
Hunt of Kings Heath, L.
Hylton-Foster, B.
Irvine of Lairg, L. [Lord Chancellor.]
Janner of Braunstone, L.
Jenkins of Putney, L.
Kilbracken, L.
Lockwood, B.
Lofthouse of Pontefract, L.
McIntosh of Haringey, L. [Teller.]
Marsh, L.
Mason of Barnsley, L.
Merlyn-Rees, L.
Merrivale, L.
Milner of Leeds, L.
Monkswell, L.
Murray of Epping Forest, L.
Nicol, B.
Northbourne, L.
Orme, L.
Paul, L.
Pitkeathley, B.
Plant of Highfield, L.
Prys-Davies, L.
Puttnam, L.
Ramsay of Cartvale, B.
Randall of St. Budeaux, L.
Rea, L.
Rendell of Babergh, B.
Richard, L. [Lord Privy Seal.]
St. John of Bletso, L.
Shepherd, L.
Simon, V.
Stallard, L.
Stoddart of Swindon, L.
Stone of Blackheath, L.
Strabolgi, L.
Symons of Vernham Dean, B.
Taylor of Blackburn, L.
Thomas of Macclesfield, L.
Turner of Camden, B.
Wedderburn of Charlton, L.
Whitty, L.
Williams of Elvel, L.

Resolved in the negative, and amendment disagreed to accordingly.

23 Mar 1998 : Column 972

Clause 4 [Annual report by the Bank]:

3.57 p.m.

Lord Barnett moved Amendment No. 3:


Page 3, line 5, at end insert--
("( ) The report mentioned in subsection (2)(a) shall, in particular, include a review of the Bank's performance in relation to its objectives and strategy, as determined by the court of directors of the Bank, in the financial year to which the report under this section relates.").

The noble Lord said: My Lords, I shall move Amendment No. 3 on behalf of my noble friend Lord Peston and myself, my noble friend having been delayed for a short while. I am hoping that the amendment will not take long because it is sensible, intelligent and so obvious that the Government are bound to accept it.

23 Mar 1998 : Column 973

Amendment No. 3 seeks to add the words,


    "The report mentioned in subsection (2)(a) shall, in particular, include a review of the Bank's performance in relation to its objectives and strategy, as determined by the court of directors of the Bank, in the financial year to which the report under this section relates".

As I indicated, it is clearly a sensible amendment and the other two amendments grouped with it are consequential. For example, Amendment No. 5 seeks to insert the words,


    "a statement of the Bank's objectives and strategy, as determined by the court of directors of the Bank, for the financial year in which the report is made".

In other words, that should be included in the report. I know that my noble friend will recognise how sensible the amendments are and I therefore need not take up any more of the time of the House. I beg to move.

Lord Mackay of Ardbrecknish: My Lords, I am intrigued at the confidence of the noble Lord, Lord Barnett. I noted his words, that his noble friend was "bound" to accept the amendment. I am not sure from where he gets his confidence. Unfortunately, his noble friend Lord Peston is not present; he will not be here for some time and the debate cannot go on long enough to await his arrival.

The noble Lords, Lord Peston, and Lord Barnett, made some important points in Committee in relation to the objectives and strategy of the Bank and what they were in relation to the court of directors. Later on we shall come to the objectives and strategy of the Monetary Policy Committee, which will not at all be related to what the court of directors does. The one thing we clearly obtained from the Minister in Committee was that the Monetary Policy Committee was totally independent and would not take instructions from the court of directors or anyone else. Perhaps I shall have a question mark on the "or anyone else" later in the proceedings, but at the moment I shall take it at its face value. Therefore, we wondered in Committee what the objectives and strategy of the court could be if it was not to be at all involved in the objectives and strategy of the monetary policy committee.

We had an interesting discussion in Committee and I hope the Minister will accept that he is, to quote his noble friend, bound to accept these amendments. If he is, he could perhaps explain them to us; and if he is not, perhaps he can say a few words about the objectives and strategy of the court.

Lord McIntosh of Haringey: My Lords, my noble friend Lord Barnett is half right. Certainly, the speeches that were made in Committee in support of similar amendments were sensible and intelligent. I did have some problems with the wording of the amendment and I am glad to see that the problems I had are now resolved in the wording that is before us.

The particular difficulty I had was that it was not clear whether my noble friends, in moving the amendments, wanted a review of the Bank's performance in the year to which the report related--that is, the previous year--or the current and future year--the year in which the report is made. Amendment No. 3 now provides that

23 Mar 1998 : Column 974

there should be a report for the previous year and Amendment No. 5 complements it by saying that there should also be a statement of the Bank's objectives and strategy for the financial year in which the report is made.

In answer to the noble Lord, Lord Mackay of Ardbrecknish, it is of course for the court to decide what the content of its statement of objectives and strategy should be, but I should say to him that it goes very much beyond the monetary policy aspects which are the responsibility of the Monetary Policy Committee. As I made clear in Committee, the Bank has very many other responsibilities which are properly the subject of the report referred to in the amendments and the court of directors is also responsible for the management of the Bank.

The amendments, as they are now re-presented to the House, seem to us to be a useful clarification of the reporting responsibilities of the court and its sub-committee, and the Government are happy to accept them.

Lord Barnett: My Lords, I am most grateful to my noble friend. I always knew that he was a very sensible fellow, but he is particularly so now. I beg to move.

On Question, amendment agreed to.

Lord Barnett moved Amendment No. 4:


Page 3, line 7, leave out ("period") and insert ("financial year").

On Question, amendment agreed to.

Lord Barnett moved Amendment No. 5:


Page 3, line 8, at end insert (", and
("(b) a statement of the Bank's objectives and strategy, as determined by the court of directors of the Bank, for the financial year in which the report is made.").

On Question, amendment agreed to.

Clause 6 [Cash ratio deposits]:

The Earl of Home moved Amendment No. 6:


Page 3, line 25, after ("with") insert (", and the payment of fees in lieu of such deposits to,").

The noble Earl said: My Lords, in moving this amendment, I wish to speak also to Amendment No. 19. In Committee we discussed which institutions should produce cash ratio deposits for the Bank. This amendment specifically allows for the payment of fees in lieu of deposits for other categories of institutions for which the provision of cash ratio deposits is not appropriate. When I moved the amendment on fees and charges in Committee, the Minister gave us an interesting insight into the Government's thinking on CRDs, but he did not give any answer to the amendment. So, in effect, I am asking the same question today in a rather different form.

In Schedule 2 to the Bill the Government admit that they have no idea who might, at some stage in the future, be called upon to put up cash ratio deposits with the Bank. If they had a clue as to who these people might be, they would not have proposed paragraph 1(2) in that schedule. They have therefore given themselves carte blanche to require anyone they like to put up

23 Mar 1998 : Column 975

CRDs with the Bank. Extending this argument further, they cannot therefore know whether requiring a group of institutions, as yet unknown, to put down CRDs is an even remotely appropriate way for the Bank to be repaid for whatever services it is supplying to this, as yet, still mythical group of institutions.

The Minister also said in Committee that they did consult but that it was difficult to publish the responses for confidentiality reasons. I accept that full responses may not be able to be published, but I would be surprised if any of the institutions which did respond would object to the Government publishing the number of institutions that approved the proposal and the number which came up with alternative proposals and what they were, albeit on an unattributable basis. I personally am aware that some institutions proposed "turnover" as an appropriate yardstick and some thought that it would be better to pay fees based on the number of transactions.

At no stage in Committee did the noble Lord tell us why fees based on turnover or the number of transactions were unacceptable to him. Institutions which do very little lending but have other businesses which benefit greatly from stability, which is one of the responsibilities of the Bank, will get away with paying very little, while others whose business is predominantly lending will bear an undue proportion of the burden. That is obviously inequitable, so I hope he will now tell us why these other methods have been rejected.

Further, the noble Lord said in Committee that careful consideration had,


    "been given to alternative methods of funding, such as fees and charges".--[Official Report, 3/3/98; col. CWH 39.]

But what is he actually funding: the Bank's balance sheet or its profit and loss account? Fees contribute to the Bank's p and l, and only ultimately to the balance sheet through reserves. So what the noble Lord is actually saying is that he believes that the Bank really needs the deposits. On that basis, I am beginning to wonder who is providing liquidity for whom.

The noble Lord, Lord Peston, said in Committee that he had always assumed that the Bank has an extraordinarily good deal in terms of cash ratio deposits. He is absolutely right. At the moment the Bank is receiving more than £2.5 billion in interest-free deposits. But it will now get an even better deal for doing less and the institutions providing CRDs will get an even worse deal.

When we talked about this previously the Minister set great store by the fact that banks and building societies benefit from the Bank's vital function as a provider of liquidity to the financial system. If this is such an important function of the Bank, meriting the Bank receiving, at a conservative estimate, some £180 million on an annualised basis as a result of CRDs, why is it not even mentioned in the memorandum of understanding? The MOU talks about stability, the infrastructure, an overview of the system, efficiency, effectiveness and even promoting the City of London. Sadly, no mention is made of Edinburgh. But it likewise makes no mention of the two functions for which it could be of some real worth to banks and building societies; namely, as a provider of liquidity and as a

23 Mar 1998 : Column 976

lender of last resort. Nor are these functions deemed to be worthy of inclusion in the Bank's latest annual report under the heading of the Bank's core purposes.

If providing liquidity into the system is such an insignificant part of the Bank's rationale, not to be mentioned in these two places, one can only assume that the banks and building societies are being asked to fund other functions of the Bank of England. The Treasury justification that banks and building societies uniquely benefit from the Bank's provision of liquidity clearly ignores all the other responsibilities discharged by the Bank for which banks and building societies will be paying, but others not, under this proposal.

Limiting the categories of institutions required to fund the Bank in this way goes totally against trends in the financial services sector as well as the other government policy initiatives in this area. Barriers between different types of institutions are indeed breaking down as the Government know: for instance, banks offering insurance; insurance companies offering banking services; and supermarkets selling mortgages.

The integration of financial services companies was one of the reasons behind the establishment in the first place of the Financial Services Authority. It seems odd that in this era of integration the way the Government have chosen to fund the Bank of England goes totally against that.

The noble Lord tried to justify singling out these two types of institutions by saying that they typically borrow short and lend long. If the Minister had looked at the actual experience of these institutions he would have seen, as regards building societies, that while the majority of their liabilities, for instance, are repayable at short or even no notice, in practice these funds have proved over the long term to be extremely stable. These liabilities are backed, by and large, by mortgage assets bearing extremely flexible interest rates. For banks and building societies in particular, withdrawals of deposits can usually be countered by increases in interest rates rather than by the use of liquidity.

The noble Lord also said that CRDs are used very commonly in other countries as a way of approximating the benefit of liquidity. That is the weakest excuse I have heard for a long time for justifying any course of action. By all means look at what others have done, but are the Government really not prepared to look at other ideas? What is good for others is by no means necessarily good for us. I know that other ideas have been put forward.

In this amendment we have tried to help the noble Lord by specifying some of the categories of institutions most likely to benefit from the revised role of the Bank. The noble Lord will no doubt have seen that we have actually tried to help him because we have left in his catch-all subsection. A mix between cash-ratio deposits and fees payable by other institutions is a much fairer way of paying for the Bank's role in the future. I beg to move.

23 Mar 1998 : Column 977

4.15 p.m.

Lord McIntosh of Haringey: My Lords, the noble Earl rightly reminded us of the debate we had in Committee and I am grateful to him for raising the matter again. But I am afraid that my answer will be very similar to that made in Committee because, despite the changes in his approach and in the speech he has just made, the fundamental objections still apply. As the noble Earl recognised, the Bank of England has been funded for a very long time by a system of voluntary cash-ratio deposits. This Bill replaces the voluntary scheme with a statutory basis which makes the income secure.

If we adopt a prudent, step-by-step approach and complement that by consultation, as we have done, the most obvious first step is to say, "The system of voluntary cash-ratio deposits has survived without serious criticism. If our objective is to make the income secure then the first step is to keep the cash-ratio deposits system and make it statutory." The amendment widens the population of institutions that fund the Bank to include all institutions authorised under the Financial Services Act 1986.

The noble Earl says that the Bill makes it possible for us to extend the institutions obliged to pay under the cash-ratio deposits system. In Schedule 2, paragraph 1, we specify that the,


    "eligible institutions for the purposes of this Schedule [are]


    "(a) an institution authorised under the Banking Act 1987"

and


    "(b) a European authorised institution".

It is true that sub-paragraph (2) says:


    "The Treasury may by order amend sub-paragraph (1) as they think fit"

but in order to do so it would have to consult and have the approval of Parliament. I remind the House that the Committee on Delegated Powers and Deregulation was satisfied with the order-making procedures proposed here.

So in practice there is a restriction on the Government widening the population of institutions who fund the Bank. The current voluntary scheme applies only to banks authorised in the UK. The proposed statutory scheme also applies to building societies. The noble Earl made a point about the difference between building societies and banks. The point we are making is that both typically borrow short and lend long. Their balance sheets contain loans and other assets of long maturity and deposit liabilities, many of which can be recalled at short or no notice.

The noble Earl reminds us that building societies--and although he did not say so, some banks--are backed by mortgage assets. But the important point is the potential need for access to liquidity. That is measured by the potential maturity proposed in the CRD scheme in the consultation document.

Other financial institutions brought under the fee system proposed by the amendment include security firms and insurance companies who typically match the maturity of their assets and liabilities much more closely. As I made clear in Committee, the Government believe

23 Mar 1998 : Column 978

that it is appropriate for deposit-taking institutions to place CRDs to provide income for the Bank because they clearly benefit from the Bank's function as a provider of liquidity to the financial system.

Only a few banks actually have accounts with the Bank of England to settle obligations with each other but the other deposit-taking institutions manage their liquidity through deposits and credit facilities with the settlement banks, which in turn ultimately depend on their access to liquidity from the central bank. In effect this insures deposit-taking institutions against the risk they run from having liabilities at call but assets which are less liquid. So there is a dividing line between deposit-taking institutions which depend on access to central bank liquidity and the other institutions, referred to in the amendment, which do not.

I wonder whether there is some confusion between the more narrow issue of the funding of the Bank, with which this part of the Bill and the amendment are concerned, and the regulatory and supervisory aspects. The FSA is the institution which will have responsibility for ensuring that individual institutions operate prudently. It is already a requirement under existing legislation that banks and building societies conduct their business in a prudent manner. We do not want to use the cash-ratio deposit scheme, which is a funding scheme, to try to do the FSA's job for it.

On reflection, I wonder whether it is that confusion which to some extent lies behind this amendment. In the interests of prudence in the drafting of the Bill and keeping to the least possible change as we introduce a statutory scheme rather than a voluntary one, I hope the House will agree that what we have proposed is the most sensible solution and that the noble Earl will not press his amendment.


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