Clause 203

Part of Banking Bill – in a Public Bill Committee at 6:30 pm on 28 October 2008.

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Photo of David Gauke David Gauke Shadow Minister (Treasury) 6:30, 28 October 2008

Backing assets may be the key subject that we shall consider during the Bill’s proceedings. The current arrangement, as I understand it, is that a small level—described as the fiduciary level—of notes issued by Scottish and Northern Irish banks is not covered by backing assets. When I say “a small level”, it appears to be very small; 0.125 per cent. of notes issued, according  to the 2005 figures. That fiduciary level allows the banks to make a return on issuing notes in a process called seigniorage—I hope I pronounced it correctly.

In 2005, the Government proposed removing the fiduciary level and requiring 100 per cent. backing. They said at the time that it was to ensure that there was protection for all noteholders and to provide a level playing field. That produced quite a response and, as the hon. Member for Dundee, East said, the Government have listened. In the July 2008 consultation document, the Treasury stated that some respondents felt that insufficient account had been taken of the costs associated with issuing banknotes and the social benefit supported by the income derived. [Interruption.] Yes, I should be grateful if the Minister could explain the meaning of social benefit supported by the income derived. Are we talking about particular charities that are supported by seigniorage? The proposal in the consultation document is implemented in the draft indicative regulations that the hon. Lady has circulated and which suggest the 60/40 split, whereby 60 per cent. of the value of banknotes is backed by Bank of England banknotes and the remainder is in a segregated interest-bearing account.

I understand how the proposal deals with the provision of support to noteholders and ensures protection for them. Subject to the speed at which some noteholders can obtain payment from the segregated account—an issue to which we shall return in a moment—and a level playing field, does that give those note-issuing banks an advantage? Will there be a source of income that is not available to their competitors? I assume that the Government’s intention is to provide sufficient incentive to make it worth while for the banks continuing to issue the notes, and that they do not want to stop that. Equally, however, they do not want to provide an additional source of income that would not otherwise be available. Is that the intention driving the Government?

Furthermore, although the Minister may correct me, I should have thought that the balance between interest-bearing assets and non-interest bearing assets would depend on what interest rates were at a particular time, and that there might be certain periods when 60/40 was adequate, but at other times the income for the banks would be insufficient or excessive, so we run into issues relating to a level playing field. Will the hon. Lady say whether such a concern is legitimate or, if it is not, can she explain why?