Clause 5
Banking Bill
6:15 pm
Peter Viggers (Gosport, Conservative)
The hon. Member for South Derbyshire made a thoughtful, well-informed and well-judged speech. The lesson of politics is that the battle is not so important; it is the war that matters. I do not necessarily expect the Minister to say that he accepts everything said by the hon. Gentleman and that he will order an immediate redraft, but the points that he made may at some point be taken into account. I completely share his view.
I want to address my remarks to clause 5(2)(d), which is on the crucial issue of the trigger for a special regime. We have to go back to 1997 and the creation of the tripartite arrangements between the Treasury, the Financial Services Authority and the Bank of England. The Bank, to great acclaim, was given the responsibility for setting interest rates, and to effect that the Monetary Policy Committee was created. Rather less noticed was the taking away from the Bank of its responsibility for banking supervision. The FSA was given the duty to control and monitor individual banks, while the Bank of England was given a more general power to control financial stability. The FSA fulfilled its duty, but there is little point in glossing over the facts: there were failures, and they happened on the watch of the FSA, which failed to perceive the systemic risks within some banks. We must learn from our lessons. There is no point in being too polite; we must say that there was a failure there.
The Government propose laying further specific duties on the FSA. Paragraph 26 of the draft code of conduct of the special resolution regime clearly states:
“The decision whether the bank or building society fails or is likely to fail to meet the threshold conditions is a regulatory matter for the FSA.”
That concerns me, because I have felt for some time that there should be a division of responsibility in the future, based on our learning from our mistakes in the past. The FSA should be given what I regard as the box-ticking, the responsibility for regulation, for ensuring that individual institutions meet certain criteria. The Bank of England, however, should be given responsibility for what I call banking supervision.
I distinguish between banking regulation and banking supervision. It should be possible for not only the FSA but the Bank of England to pull the trigger, because since the FSA is responsible for the routine financial regulation of banks it will naturally be reluctant to come forward and say that normal regulation has failed. It will instinctively—naturally—not wish to say that the regulation for which it is responsible has not been successful. There should therefore be a separate mechanism giving the Bank of England the power to supervise, and that power of supervision must provide it with enough personnel and abilities for it to be close enough to the management of banks to know when special action is required. Clause 8(1) states:
“The Bank of England may exercise a stabilisation power in respect of a bank in accordance with section 10(2) or 11(2) only if satisfied that Condition A is met.”
Clause 8(2) then states:
“Condition A is that the exercise of the power is necessary, having regard to the public interest in—
(a) the stability of the financial systems of the United Kingdom,
(b) the maintenance of public confidence in the stability of the banking systems of the United Kingdom, or
(c) the protection of depositors.”
In other words, the Government have put in the Bill the same kind of responsibilities for the Bank as it already has under current legislation. The responsibility for individual bank supervision is to remain with the FSA, whereas the general responsibility for financial stability, under clause 8, will be that of the Bank. That is not good enough.
The draft code of practice envisages, in paragraph 31, that the
“three public interest conditions may overlap (to a greater or lesser degree) depending upon the particular circumstances of the bank or building society and the wider circumstances of the financial system as a whole.”
So the legislation and the draft regulations envisage that there could be some overlap in the responsibilities and powers of the Treasury, the FSA and the Bank. Good, roll it on. Some level of duplication is necessary. It is not good enough to restrict the regulation and the power to pull the trigger to the FSA; the power to pull the trigger must also be available to the Bank of England, because only the Bank of England has long-term experience of bank control, the levers to affect financial stability and the traditions and ability to discern systemic risk, which the FSA, based on its record, has failed significantly to do.
As happens in the United States, I would give slightly different responsibilities to the FSA and the Bank of England, but I think that it is important that the Bank of England should not be restricted to the exercise of general powers and the stabilisation power referred to in clause 8. It should also have the ability to pull the trigger and implement the provisions to introduce the special regimes.