My Lords, I begin by drawing attention to my entry in the list of Members' interests: in particular, that I am chairman of a regulated bank, Santander UK, and a shareholder in Santander Group. As we have heard from the noble Lord, Lord Sassoon, the Bill seeks to respond to the lessons of the present crisis. However, I agree with a number of speakers in this debate that we cannot lay the blame for the financial crisis entirely, or even largely, on the architecture of financial regulation. The banking crisis has been a worldwide phenomenon and, as the noble Lord, Lord Eatwell, has pointed out, at its heart was an intellectual flaw-the belief that developments in financial management techniques and globalisation gave us the opportunity to expand lending while spreading risk. This mistake was made by banks, regulators and Governments. At the same time, though, it is also widely accepted that in a number of respects the existing architecture, particularly the tripartite arrangements, did not function as well as we would have liked, and this legislation seeks to address some of those weaknesses.
I agree with many noble Lords that the most important aspect of the Bill is the responsibility being given to the Bank of England for what has become known as macroprudential policy. However, while supporting this change, I think that we must be aware of the difficulty of the task. Like all forecasting, identifying financial bubbles is always difficult-indeed, it is almost impossible. After all, the MPC did not foresee the extent of potential effects of the bubble, and it is not clear to me why we should be confident that the FPC would have done so much better in dealing with those problems, unless it had managed to identify some automatic stabilisation mechanisms.
We must also guard against concentrating too heavily on avoiding the pitfalls of the previous crisis. Looking back at the design of the previous legislation at the end of the 1990s, in which I had some involvement, I recall two outcomes that the Treasury sought to avoid. One was that we might end up with an unnecessary overlap of work on financial stability, with both the Bank of England and the FSA competing for influence in this area. In the event, neither organisation was doing as much as we now think appropriate. The Treasury also worried that the Bank of England was too inclined to rescue banks and wanted to build in safeguards for appropriate consultation with the Treasury as the provider of funds. The possibility set out in Alistair Darling's book that the Chancellor would be pressing the Bank without success to provide more liquidity to banks was not on the list of concerns 15 years ago. So, as well as dealing with the lessons from the most recent crisis, it is important that we also prepare for a wider set of challenges, behaviours and events. As the noble Lord, Lord O'Donnell, said in his excellent maiden speech earlier today, we need a robust framework and should not simply seek to deal with the issues that we have experienced over the past five years.
Personally, I support the ambitions of the Bill. However, there are three areas where I see room for improvement. First, I add my support to those looking to ensure that the framework of the macroprudential policy provides sufficient safeguards to ensure that the proposed FPC adopts a symmetrical approach to macroprudential supervision-that is, it should be equally as aware of the problems of a policy being over-restrictive as it is of over-exuberance.
The Bill has some checks and balances, requiring the FPC to avoid an adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term, but I question whether this is enough. That is not to say that this is not a difficult problem; we can see the difficulties in maintaining symmetry in the present situation. After all, if macroprudential policy means anything, we should now be going through a period where it is directed at supporting economic activity. However, we also have to have sympathy with the instinct of the supervisors of individual banks who want to secure the safety of the banks that they supervise by requiring increased amounts of capital and liquidity in those banks. That is, after all, one of the crucial lessons from the crisis.
The problems in the euro area also point to strengthening the liquidity and the capital defences of the banks. My point, though, is that the systemic effect of these individual decisions has to be monitored closely and carefully so that the requirement for the safety of individual banks is balanced with a view about what is needed to support growth in the economy. For me, that would be best achieved by having a clear requirement for symmetry in the conduct of macroprudential policy. How that should be done is not an issue for today but, as a minimum and in line with the MPC's remit, the MPC needs instructions that make clear that over-rapid reductions in leverage, debt and credit growth should be judged as being just as bad as unsustainably high levels. That is very much the framework for the MPC in terms of inflation, and I do not see why it cannot be carried over into this aspect of policy as well.
My second issue relates to the Chancellor's power of direction over the Bank of England. There seems to be general acceptance that where there is a material risk to public funds, the Chancellor should have the power of direction. I have two points to make. First, I agree with the Treasury Select Committee that in these circumstances it would be better for the Chancellor to have a general power to direct rather than the complex, circumscribed descriptions that are provided in the Bill. I understand the concerns about giving the Treasury authority to intervene in matters that have been delegated to the Bank of England, but I would rather they were dealt with by reporting and scrutiny arrangements with respect to Parliament rather than by trying to be specific about the instruments of crisis management, which stand no chance whatever of being the most appropriate ones when the time comes.
I also have some misgivings about limiting this power of direction to when the Bank of England has determined that there is a material risk to public funds and not including occasions when the Chancellor takes the view that we are facing a material risk to the macroeconomy. Again, this is an issue of symmetry. It is not difficult to imagine circumstances in a crisis when the Chancellor feels he needs the power of direction to use public funds to support the financial system from a general macroeconomic perspective and there is a disagreement with the Bank. At times of crisis and dislocation when rapid action is needed, the Chancellor has to be clearly in the lead, and this needs to be made clear in this legislation.
My third topic is the governance of the Bank of England. There is general acceptance that the new responsibilities of the Bank of England come with a need for new accountability mechanisms. It appears that there have been improvements in recent years in the court's oversight of the Bank of England from a perspective of the Bank's financial and resource planning, although the noble Lord, Lord Myners, questioned that earlier this afternoon. The big issue now is whether there should be an enhanced role for the court in the oversight of the policy process. I shall make a few observations. First, I agree with the Treasury Select Committee and the noble Lord, Lord Eatwell, that governance cannot be a matter for the Bank itself. The broad structures and responsibilities of the court and the main committees must be a matter for Parliament. Secondly, I agree with other noble Lords that within this framework success will depend heavily on the behaviour of the people involved and that being overprescriptive about governance is a potential trap because the prescription so often does not suit the different circumstances at the time.
My third observation is related to this. It is that we should avoid making this too complicated. In this Bill, there is a real danger of creating multiple committees with inconsistent memberships and oversight procedures along with overlapping and overprescriptive responsibilities. I see this in a large number of cases. The Minister has indicated that the Government are looking at this, and I hope that during this legislative process some simplification can be achieved. That may involve looking at the membership, structure and oversight arrangements of the MPC as well as of the FPC, but I find it quite alarming that there is so much difference between the approaches to these two committees. It is not clear why the structure of the MPC and the FPC should not be consistent in terms of numbers, the balance between executives and external members, the principle of an annual remit from the Treasury and the oversight arrangements. Indeed, as argued by Sir John Gieve in the Financial Times today-the noble Lord, Lord Desai, has mentioned this tonight-in the fullness of time I could easily see the two committees becoming a single committee. In the mean time, I suggest that the members of the FPC who are not on the MPC should have the right to attend, but not to vote, at the MPC and vice versa for members of the MPC who would like to attend the FPC so that they get a much broader view of the concerns of both committees.
I also agree with the Treasury Select Committee and the noble Lord, Lord Flight, that the court should act as far as possible in the style of a unitary company board. Given what has happened to so many other organisations in the public sector, it is not clear why it should not also go down this route. Under this arrangement, much is down to creating a successful working environment between the executives and the non-executives. That has to be both challenging and supportive. One important component is that there should be an appropriate and open method of reviewing decisions and the decision-making process after the event. I notice that there has been some disagreement between the court of the Bank of England and the Treasury Select Committee about the nature of reviews of policy decisions and the decision-making process and about whether policy decisions should be included or whether reviews should be only about the process.
My clear preference is for the court to have oversight of both the process and the outcome of policy decisions. Very often this can be done internally in a way from which organisations can learn for themselves. One sees this happening in many organisations, although sometimes the issues are complex and the differences of interpretation are so sharp that an external review is the only way to do it. However, whether reviews are internal or external, they should happen and they should be allowed for in this legislation. My view is that the non-executives should commission such policy reviews. They should not conduct them, which the Treasury Select Committee suggested. In that case, one would run the risk of serious breakdown of trust within the court. However, the whole principle of reviewing policies and processes-of trying to learn what one can from past mistakes, or even successes-is a crucial part of how an organisation can improve its performance over time.