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Amendment No. 49, in clause 216, page 103, line 11, at end insert
and monitor the delivery of that strategy.
Amendment No. 59, in clause 216, page 103, leave out lines 13 to 19 and insert
(1) There shall be a committee of the Bank, known as the Financial Stability Committee of the Bank of England, consisting of
(a) the Governor and Deputy Governor of the Bank,
(b) two members appointed by the Governor of the Bank after consultation with the Chancellor of the Exchequer, and
(c) four members appointed by the Chancellor of the Exchequer.
(2) Of the two members appointed under subsection (1)(b)
(a) one shall be a person who has executive responsibility within the Bank for financial stability analysis, and
(b) the other shall be a person who has executive responsibility within the Bank for financial stability operations.
(3) The Chancellor of the Bank of England shall only appoint a person under subsection (1)(c) if he is satisfied that the person has knowledge or experience which is likely to be relevant to the Committees functions and after consultation with the Governor of the Bank.
Amendment No. 50, in clause 216, page 103, line 13, leave out from a to consisting in line 14 and insert Financial Stability Committee.
Amendment No. 68, in clause 216, page 103, line 14, leave out from of to end of line 19 and insert
8 non-executive directors of the Bank appointed by the chair of the court of directors (designated under paragraph 13 of Schedule 1)..
Amendment No. 51, in clause 216, page 103, line 17, at end insert
two other executives of the Bank appointed by the Treasury, and.
Amendment No. 52, in clause 216, page 103, line 18, leave out from 4 to end of line 19 and insert
other members appointed by the Treasury following a transparent appointment process overseen by the Commissioner for Public Appointments.
(1A) A person appointed under subsection (1)(c)
(a) must not be an executive of the Bank or a member of the court of directors of the Bank;
(b) must not be an active participant in financial markets;
(c) should have recent experience of financial markets, knowledge of legal or accountancy matters relevant to the special resolution regime under the Banking Act 2008, and international experience..
Amendment No. 53, in clause 216, page 103, leave out lines 21 to 23.
Amendment No. 62, in clause 216, page 103, line 21, leave out from first to to implementation in line 22 and insert decide upon the.
Amendment No. 70, in clause 216, page 103, line 21, leave out from first to to first the in line 22 and insert monitor.
Amendment No. 69, in clause 216, page 103, leave out lines 24 to 29.
Amendment No. 60, in clause 216, page 103, line 24, leave out give advice about and insert decide.
Amendment No. 61, in clause 216, page 103, line 27, leave out give advice about and insert decide.
Amendment No. 54, in clause 216, page 103, leave out lines 30 to 32.
Amendment No. 71, in clause 216, page 103, leave out lines 33 to 35.
Amendment No. 55, in clause 216, page 103, line 33, leave out court of directors and insert Treasury.
Amendment No. 56, in clause 216, page 103, leave out lines 42 to 43.
Amendment No. 57, in clause 216, page 104, line 16, leave out to (e) and insert or (c).
Amendment No. 63, in clause 216, page 104, line 23, at end add
(3) At the end of section 2(1) of the Bank of England Act 1998 insert and the Financial Stability Objective.
Clause stand part.
I welcome you to the Chair for this afternoons proceedings, Mr. Gale. Before we adjourned, I had moved on from the debate about the amendments to the clause stand part debate and I was talking about the financial stability objective. I identified three key areas for clarification: what does the objective mean, how is it measured and what tools does the Bank have to deliver financial stability?
I gave the definition of the objective that the Governor of the Bank of England had used in evidence to the Treasury Committee. That definition was amplified when we held our evidence session on Tuesday 21 October. The executive director for financial stability expanded on the Governors definition when he defined a situation of financial stability as one where
the financial intermediation mechanism works normally, where households and corporates can mediate their savings into real investment in the economy at home and abroad, and where the payment system operates normally. It is a situation where intermediation works well, where people have confidence in the system and where the payment system operates well.[Official Report, Banking Public Bill Committee, 21 October 2008; c. 21, Q53.]
That is quite a narrow definition. Clearly, it is one that the Bank is happy to use, and it ties in with one of the new responsibilities that have been given to the Bank in the Bill. I am referring to the regulation of payment systems. There is a clear link between that definition and the Banks responsibility.
I am concerned, however, that the definitions that the Bank has used are very much process-driven, focusing on the payment system and how effectively we can mediate savings and investments. Other definitions are available that focus on broader issues. Andrew Crockett, who was formerly the general manager of the Bank for International Settlements, referred to an absence of financial stability as
a situation in which economic performance is potentially impaired by fluctuations in the price of financial assets or by an inability of financial institutions to meet their contractual obligations.
There are two elements to the definition. One is about processthe ability to meet contractual obligationsbut the first one broadens the definition somewhat by talking about the impact that the fluctuation in asset prices might have on the economy.
That raises a different set of issues and links into a definition of stability given by Garry J. Schinasi in an International Monetary Fund publication called Defining Financial Stability. He described financial stability as
a condition in which an economys mechanisms for pricing, allocating, and managing financial risks (credit, liquidity, counterparty, market, etc.) are functioning well enough to contribute to the performance of the economy.
That defines financial stability much more broadly, and it reflects on some of the current problems in the financial system and indicates why the system is unstable. For example, the pricing of risk related to mortgage-backed securities did not appear to work, as the level of risk inherent in those products was underestimated and consequently lower interest rates were charged. The credit crunch, in its early stages, was a sign that liquidity risks in the market were not well understood. We know that from Northern Rock, where the problem was not the banks solvency but its liquidity, because of its exposure to wholesale markets. Peoples understanding of how wholesale markets functioned did not flow into their understanding of liquidity. Banks that were perceived to have adopted a more cautious approach to risk and were widely criticised for the conservatism of their strategies, have withstood the market turmoil with greater resilience than banks that followed more aggressive policies. Again, there is the issue of understanding the risks and the markets. Part of the problem that we face is the consequence of an asset price bubble that was fuelled by an increase of debt and which has caused instability in the market.
I would argue that it is a combination of those issues that has given rise to some of the current problems, such as the threat to payment systems and the means of intermediation. My concern is that the definition that has been adopted or discussed by the Bank is narrow. If we look at the causes of the current financial instability, we will understand that there are wider issues of financial stability than simply the functioning of the payment system. My concern is that if we have too narrow a definition of financial stability we are at risk of losing sight of the threats to that stability and of the policy actions that we might take to combat that.
The hon. Gentleman has used, I think, the same source as I havethe Treasury Committee report. The most appealing definition that I found among those offeredthey are all flawed in various wayswas the one that the hon. Gentleman has not quoted, from the Deutsche Bundesbank:
A steady state in which the financial system efficiently performs its key economic functions, such as allocating resources and spreading risk as well as settling payments, and is able to do so even in the event of shocks, stress situations, and periods of profound structural change.
That somehow encompasses some of the basic functional aspects that the hon. Gentleman talked about in relation to the Governors comments, and also the management of risk and stress analysis, which is another key element.
The hon. Gentleman makes a good point. I did not wish to regurgitate everything that was in the Treasury Committee reportjust perhaps most of it. This dual aspect of financial stability is what is really important. It is about how the systems function and their resilience, but it is also about the allocation of risk. Narrowing the definition of financial stability could potentially lead to ignoring the risk aspect of that stability. It is important to reflect on that. As the Bank comes to terms with its new role and looks at its financial stability objective, I hope that it will consider actively the allocation of risk and the price that risk gets in the marketplace.
It is difficult to define financial stability. I expect that explains why the Government moved from their policy in July of wanting a definition in the Bill, to just saying that it is a high-level concept. Sir John Parker, in his memorandum on this to the Treasury Committee, suggested that there could be a qualitative objective for financial stability, rather than a quantitative objective, which might be developed to identify factors that could be used to define far better what financial stability would be. In his evidence, he suggested five factors that might be helpful in coming up with a qualitative objective:
First, the Bank cannot and should not seek as its objective the elimination of all instabilities...within the...system. That could only be achieved by suppressing the financial intermediation...Second, the tools available to the...banks...are limited, which implies that the elimination of financial instability is unrealistic. That is important to recogniseI shall come on to tools later on, but there is a limited range of policy levers available to the Bank to tackle financial instability. I shall propose one additional lever that the Bank might be able to use. To continue:
Third...the objective of the...authorities should be to ameliorate the effects costsof failure, which goes back to the definition that the hon. Member for South Derbyshire quoted. How can we build resilience into the system to ensure that, where there is a failure, the system continues to function effectively? Some of the clauses in the Bill tackle thatthe reforms to the Financial Services Compensation Scheme will help the system perform better when there is a banking failure.
Sir John also suggested, fourthly, that the Banks role with regard to financial stability would be strengthened with its new responsibilities for oversight of payment systems, which we debated on Tuesday, and the operation of the special resolution regime, which we will come on to in part 1 of the Bill. His fifth comment was that, while financial stability might focus on the banking sector, there are non-banking activities that have an impact on financial stability. In our debate this morning on clause 214, the Minister explained the rationale for Government amendment No. 28 in the context that non-banking institutions can have a significant impact on financial stability, given the intermediation in the system and some of the business models that have been employed over the past few years.
If the Bank were to look at Sir Johns comments about the factors that could be used to set up a qualitative measure, that might help flesh out the definition of financial stability beyond that stated in the Bill. It would also help provide a framework for assessing how well the Bank met its objectives. Part of the challenge, in how the Bill is structured, is how to hold the Bank to account for deepening financial stability, when we only have a vague definition of financial stability andwe all accept thisit is difficult to measure.
I am sure that there will be a rash of research into the definition of financial stability. We may be able to reach a consensus in time, but the absence makes it harder to hold the Bank of England to account. As I said earlier, we shall know where there is a lack of financial stability, but the problem is in determining it. Sir Andrew Large, a former deputy governor of the Bank, said:
There is neither a clear over-arching analytical framework nor a commonly agreed set of indicators of incipient financial instabilities...We are dealing with tail eventslow probability scenariosrather than central projections. It is about aberrant rather than normal behaviour and situations: less predictable and harder to model.
That presents us with a challengehow do we measure financial stability? The Governor alluded to this in the evidence that he gave to the Treasury Committee:
I think therefore the danger is that financial stability looks like a period in which you are merely sowing the seeds of the next crisis and it appears to be a tranquil time but in fact beneath the surface those seeds are germinating and will produce the crisis down the road very eloquent. I happily give way.
The Minister makes a very interesting comment and I will come to that later with remarks about the tools that the Bank has to deliver financial stability. Some activities in the financial markets may be acceptable at a low level but as they grow in scale they cause wider risks to the economy. The Governor might have been pessimistic but I think he was right in what he said about relatively low-level activity in a particular area. When things such as credit default options and credit default swaps were first thought about they were seen as valuable financial instruments, but as their usage grew a risk to the economy arose. I think the Governor is being realistic rather than pessimistic when he says that what we might accept as normal at one point might become a threat to financial stability in the long term.
Would the hon. Gentleman not accept that the Governor was speaking widely about the general issue? I do not see how the hon. Gentleman can relate the Governors remarks to a discussion about how either an executive committee or a sub-committee of the Bank of England can work. A number of the issues that the Government are talking about are dealt with by regulation or by the FSA.
This is about how one measures the objective of financial stability and whether the financial stability committee has an executive or non-executive role. That is not relevant to this discussion. It is something that either model of the FSC or the hybrid model in the Bill will have to come to terms with.
I understand what the hon. Gentleman is talking about but, having sat through all that evidence that the Governor gave, what he was talking about were pressures that build up within the system. Most of those pressures are properly dealt with by the FSA or by other forms of regulation. They are not necessarily matters that the financial stability committee would ever deal with, whatever model was taken for its structure.
Yes. One challenge in looking at the risks identified in the financial stability report published by the Bank this week is to understand when the Bank identifies a risk who responds to it and how. I agree with the hon. Lady that some responses may be within the remit of the Bank of England, some within the remit of the FSA and some within that of the Government. We can all agree that the horizon-scanning role of the Bank in identifying risks is really important but we need to think about who will tackle those risks once they have been identified and that is not exclusively the Banks role. Indeed, the Banks role may be quite limited. I will touch again on some of this in a minute.
I was trying to make the point that it is difficult to measure when there is or is not financial stabilityevents that appear to be normal might hold the seeds of a potential future crisis. We need to accept that that could be the case. In the evidence that the Governor gave to the Treasury Committee he referred to the creation of products such as CDO squared and the relaxation of credit criteria as potentially sowing the seeds of the crisis before us at the moment. Even actions such as the relaxation of credit criteria have a dual edge to them. One effect is to enable more people to have a home of their own but another could lead to sub-prime lending. In looking at some of the seeds we need to think carefully about what the impact might be, and the pros and cons of tackling some of the risks that have emerged to financial stability.
I want to talk about the tools that the Bank has to deliver its objective of financial stability. In last weeks evidence session, Nigel Jenkinson listed tools available to the Bank. He referred to the bank being the ultimate supplier of liquidity to the economy, its roles on payment systems and financial infrastructure and, under the Bill, the operation of the special resolution regime. He also mentioned some areas where the tools available to the Bank are more of an advisory nature rather than direct action. The financial stability report is part of that role: flagging up the risks to the economy, the advice that the Bank can give to the FSA on prudential regulationparticipation in international forums such as the Basel Committee on Banking Supervision and the Financial Stability Forum, for example. These tools are all available to the bank. The extent to which they lead to action depends on whether it is an advisory role or a more executive one for the Bank as an institution, putting aside the debate about what the committee might do. Although the list is not exhaustive, it gives the Committee a flavour of the tools available to the Bank.
However, one of the challenges we have to think about is whether the Bank has sufficient toolsI am mixing metaphors horribly herein its armoury
Tools at its disposal to maintain financial stability might be a better phrase. I want to dwell on this for a moment, because it indicates the problems that the Bank of England has in delivering its objective. We would all agree that one of the causes of the current crisis was the asset price bubble. In one of its reports in 2006, the Bank said,
asset prices have risen considerably over the past few years, dwarfing recent price falls...Some of the drivers of rising pricessuch as financial innovation that allows risks to be better matched to investors preferencesare likely to endure. So risk premia may remain lower on average than in the past. But other factors that may have boosted prices, such as low global risk-free yields and benign macroeconomic conditions, may not last indefinitely. Against that backdrop, and despite recent market falls, the price of risk in financial markets still appears somewhat low. Certainly, risk premia on a number of financial assets remain low by historical standards.
That was a very prescient warning of the causes of our current problems.
The question is then, What could the Bank have done at that point? It has clearly flagged up the risk to the market, and to the other members of the tripartite authorities, but in terms of the Banks ability to influence that, its role was reduced to having flagged up the risk; the next measure is beyond its control. The FSA is not required to respond formally to the financial stability report about how it would reflect the Banks assessment of risks, in terms of how it might supervise individual institutions.
One of the conventional responses to the asset price bubble would have been to increase interest rates, making credit more expensive and thus reducing upward pressure on asset prices. However, the remit of the Bank of England, which was introduced in the Bank of England Act 1998, is that setting interest rates is limited to combating inflation, so its actions are constrained by that objective. Therefore, at a time of low inflation and weak inflationary pressures, the Bank has set a low interest rate, but the consequence might have been the context of that in 2006, where that helped to fuel the asset price bubble and then the Bank was unable to cool it down.
Does the hon. Gentleman agree that, in tracking the inflation rate, it is probably a good idea to have the right rate, bearing in mind that the current target has nothing to do with house prices?
Indeed, there is an argument for that. I am wary of trying to use interest rate policy to tackle two objectivesinflation and asset prices. We need to look to other tools to influence asset prices, which I shall come to in a minute.
The UK has not been the only economy affected by the conflict between asset prices and inflation. There have been asset price bubbles in Ireland and Spain because they have high interest rates, and although the rates are right for the eurozone as a whole, they are not right for the economic conditions of those territories. The fact that interest rates cannot be used to affect asset prices indicates a limitation on the Bank of Englands tools for maintaining financial stability, which is why we need to look more broadly.
We have argued that the rules surrounding the level of capital should be reformed to act as a check on the level of debt in the economy as a whole. In part, reform of Basel II to deal with pro-cyclicality could address that. I know that the Government share that position. We also need to think about what checks there should be within the UK regulatory system looking at the level of debt in the economy. In our recent publication on financial stability, we called for a debt responsibility mechanism, which would create a linkage between the Banks assessment of risk and the action that the FSA took as the prudential regulator. The Bank of England would be asked to take on broader responsibility for debt in our banking system and our economy, and for the risks that that debt poses. The Bank would, throughout the year, send an open letter to the FSA setting out its assessment of market-wide risk. The FSA would need to take account of the Banks assessment when regulating lending by individual banks. Imposing tougher capital rules, bank by bank, during boom times would help to stop debt-fuelled bubbles emerging in the first place. The Bank could and should be given that tool to enable it to both look at its assessment of risks and then have a policy lever that it was able to deploy to encourage a response, in this case from the prudential regulatorthe FSA.
The Banks financial stability review, published this week, highlighted the need for improved macro-prudential arrangements to tackle excess lending. There is a growing consensus that we may need to take that approach, both international and, perhaps, domestically, to enable regulation of the amount of credit available in the markets. Certainly, countries such as Spain have looked at other tools, such as dynamic provisioning, to build up a cushion in the good times, so that the banks are not hit too badly when the economy deteriorates.
I will conclude my speech, which will be to the relief of the Committee, and indeed to me because I have spoken for over an hour. [Interruption.] It seems like a very long time. I am grateful to the hon. Members for Northampton, North and for South Derbyshire for their feedback.
We are giving the Bank of England the statutory objective to deliver financial stability. It is not a statutory objective that the Treasury or the FSA have, but it is important that the Bank has it. It is not well defined, it is difficult to measure and I am not sure that the Bank has the tools to do the job. Furthermore, the proposed financial stability committeethe subject that I started on at about quarter to 10 this morningand the structure add to the Banks difficulty in delivering financial stability. How will we hold the Bank to account the next time that we have a financial problem? Has it had the right tools and structure, and does it know what it should be doing to maintain financial stability? The Committee does not want to see a reoccurrence of the events of the past year. This is not a once-in-a-generation opportunity, but it is an opportunity to get it right. I am not sure that we are quite there yet with this Bill, and I would like to see the Government, the Bank and the FSA working a little more closely over the weeks ahead, to see whether we can improve and clarify the arrangements so that the Bank is clear about its role and how it will deliver it.
It is a pleasure, as always, to serve under your chairmanship, Mr. Gale. I will cover similar ground to the hon. Member for Fareham, but perhaps not at quite the length he treated us to.
First, I will focus on what is in the Bill and the purpose of my amendment, and then go back to some fundamental principles. Financial stability and any objective that we set in that regard should be set by a democratic body. In this context, that must be the Treasury, and its policies should be answerable to the House of Commons, so the first goal is for the Government to set out exactly how they intend to drive forward the achievement of financial stability in this country, however defined. That is not set out in the Bill, and my purpose in proposing the amendment is to provoke the Government to say more about it. It would be helpful if they defined their approach more sharply. The Bill does not give responsibility for financial stability to the Bank; what it actually states is that the Bank
shall contribute to protecting and enhancing the stability of the financial systems of the United Kingdom.
That is a rather different thing, because I think that we all acceptthe hon. Member for Fareham made this clearthat there are a number of potential assistants in that process. We have tended to shorthand the text by saying that the Bank has been given that objective, but actually that is not true. It has been given a specific contributing function, and my task is to try to make that function more specific and clearer.
Is not part of the problem that the Bank is the only member of the tripartite with a statutory duty for financial stability? The Bill therefore projects almost sole statutory responsibility on to it, rather than the Bank being a contributor to the process.
In fact, the hon. Member for Fareham is not quite right. It might assist the Committee if I say that the FSA has important objectives in relation to financial stability and the Financial Services and Markets Act 2000, which has a direct bearing on what we are talking about. For example, the FSA has a responsibility for maintaining market confidence in the financial system. That, too, is about financial stability, so it is inaccurate to say that only the Bank of England has that duty in all the laws that impinge on the area we are discussing.
But it is the only body that will be nailed with the particular piece of jelly that we are trying to hammer to the wallfinancial stability. The terminology, which the Minister has rightly quoted, does not quite use those words. One of the difficulties is defining what we mean. We have just had a little exchange about the various definitions, and I accept that they vary widely.
The sort of process that I am used to, if one accepts the principle that core goals should be set by a democratically elected Government, is that the strategy for delivering those goals is worked out between the various participants who are supposed to deliver the objective. I think that we would all accept that fundamentally those participants are the tripartite authorities, but there may be other contributors to the process. The Government must own that task, however. That is why I attempted in my amendments to define more narrowly the role of the Bank of England court. The Bill statesindeed, it is the Banks current reporting practicethat the court determines the Banks strategy in that regard. I have some doubts about whether that is right. The strategy should be set by the Government, and the detailed mechanics of delivering it should be a matter for the governance of the Bank. One of my amendments touches on that point. Clarification of who leads and how to divide the responsibilities would be valuable.
Secondly, I focus on the Bills narrow elements. We must define the institutional structure and how it functions. I shall not repeat the comments made by the hon. Member for Fareham, with interventions from me, but I shall try to simplify things. One difficulty is that the court of directors as we know it is not the court of directors to which we may give responsibility in future. The number of members of that court is, of course, specifically modified in the Bill, but my strong feeling is that we shall be looking for slightly different characters in terms not of their morals, but of their background, knowledge and experience. One of my difficulties lies in imagining the Bill in the hands of the people I know and encounter through my work on the Treasury Committee, whereas the challenge is perhaps to envisage a slightly different group of people. That leads me to believe that without sharper knowledge of the sort of qualifications that the individuals who will fill the seats will have, it will be hard to judge the Governments rather uneasy compromise, which gives a substantial role to the court of directors in that area of policy.
I shall go into a little more detail. The court of directors, as it is now, is in essence a non-executive body in its functions. The way in which it is acknowledged in the annual report suggests that it performs a more profound role, but my experience is that that does not seem to be the reality. The Bill asks it both to determine and to review the Banks financial stability strategy. Although I would expect the court, if it were primarily a non-executive body, to review the strategy and monitor its delivery, determination of that strategy should lie with the Treasury and the Banks executive. Giving that critical task to the court, chaired by a non-executive, as the Bill explicitly requires, means that the proper function of scrutiny and challenge is compromised.
Having said that, this country is used to fudge and deals made around personalities and the occupants of individual posts. We have tended to do that for centuries in the role of, for example, the Lord Chancellor, so it is not foreign to say, That may be the theoretical position, but surely we can find another way of cracking this. If that is our approach, I would like the Government to set out with greater clarity how the monitoring and oversight functions are clearly separated from the executive tasks involved in delivering what the Bill requires of the Bank.
It is important for the financial stability committee to recognise that the Bank already has governance structures for some elements. The hon. Member for Fareham referred to the financial stability board, which already exists in the Bank. The deputy Governor is tasked with financial stability, so we are not talking about new tasks and functions with which the Bank is unfamiliar. It carries out core tasks in relation to financial stability. We can argue about whether those tasks have always been done well, but they are explicitly recognised. The Bank regularly publishes a financial stability report focusing on many of the issues that we have discussed. I sense that what is happening is an attempt to formalise the financial stability board and to make it more capable of bearing greater explicit burdens and broadening its membership from its current, relatively narrow, base. It would be useful to see, set out in a clearer form, the lineage from where we are to where we seek to be.
The committee, as set out in the measure, will be a core part of the executive team at the Bank, and there will be four non-executive directors drawn from the court, who would normally see their core role as challenging and monitoring the performance of the Banks executive. The tasks that the committee has been given are a curious mixture. The first, in new section 2B(2)(a)
to make recommendations to the court of directors contains an explicit relationship to the court, so that subsidiarity is confirmed and there is a reasonably clear definition of what is expected. However, as I pointed out in our evidence session, it is not clear to whom the committee is answerable regarding other tasks. In subsections (2)(b) and (c), the committee is invited to give advice on critical issues to persons unspecified. It could be to the court or anyone elsethe Treasury, the world at large or the financial community; I do not know. The issues on which it may give advice include
whether...the Bank should act in respect of an institution and
whether and how the Bank should use stabilisation powers.
The gathering of information before a critical executive decision by the Bank is a vital part of what is in essence an executive function. To me, that sits ill with the membership of the board that has so far been defined.
It does sit ill. The hon. Gentleman is absolutely right about the advice being givenit might be given to the world at large, and it might be general rather than specific. Is there not a contradiction between the possibility of offering that sort of advice, which might be public, and the abolition of the weekly return, thus allowing the Bank to publish only the information that it sees fit? Is there not a contradiction between publishing general, global advice while possibly restricting information that might allow people to determine whether that advice is good?
The hon. Gentleman anticipates a point that I shall touch onthe communication and public role of the body if we set it up in the form that is being discussed.
Subsections (2)(d) and (e) provide for the accepted, non-executive function of monitoring various activities within the Bank. To be rather explicit, I think that those matters should be carried out by non-executives. Much though I admire the current GovernorI do not wish to imply otherwiseif I were in his position, I would find it uncomfortable to sit on a body that was monitoring the performance of my duties if I were chairing that body when it happened. I am not sure how I would manage a meeting of that kind if the process was genuinely meant to be challenging and critical. The Governor is a man who might be able to master that process, but it is certainly not one that many people would be particularly comfortable with.
May I draw a parallel with the private sector? Where a plc has an audit committee, the financial director would not be a member of that audit committee to avoid the great tension to which the hon. Gentleman referred. [Interruption.]
As was said in a quiet intervention from my right, we are talking about a unique set of circumstances, so it is difficult to draw comparisons. That is a fair comment. However, if we work out the principles of the matter, it can be helpful. The hon. Gentleman is right to say that, in a corporate environment, we would expect the model to be one in which the executive responsible for carrying out a function would at least not be leading the meeting that discussed whether the person or persons had done the job appropriately.
I shall not press the amendments to a Division, but I want to disentangle the process to some extent or at least encourage the Government to make more explicit their rationale for choosing such an apparently compromised framework to deliver the tasks. My alternative would make clear the oversight duty of the court. It would establish the financial stability committee not as a sub-committee of the court, but as an entity in its own right. It would place it within the executive framework of the Bank, correctly led in my view by the Governor. It would add four members who are separate from the executive and not members of the court either, and in that sense would have parallels with the Monetary Policy Committee, as no member of the MPC is a member of the court of the Bank of England.
My proposal sets out some qualifications. I do not claim that my choice is particularly wise, but it attempts to find some qualifications and disqualifications in respect of the membership. Although the precise means of the committees operation need not be defined under the Bill, I can see it fulfilling some functions beyond those that my amendment structure has left from the Bill, as drafted. In response to an earlier intervention, the Bank already publishes a financial stability report. It is fair to say that in the evidence sessions enjoyed by the Treasury Committee the Governor and other Bank officials made it clear that close reading of the financial stability report would have revealed many of the problems that have crystallised into the crises that beset us now.
In our consideration of this and other matters relating to the crisis, it has come across quite frequently that there is a strong argument that the communication function is critical. Some remarks made by the hon. Member for Fareham have some resonance. It would be valuable if there was open communication and an obligation for people to respond to it, so that they acknowledge that warnings have been expressed and must prepare a response that at least says, Weve heard that, and this is our reaction, and this is how we will manage the information that has been provided. Adding external weight to the body that produces that communication would be helpful. Both the line of questioning that I followed in the Treasury Committee and the evidence that the Committee heard was that that experience needs to be drawn from well outside these shores, too. We have much to learn from other countries about managing financial stability. Furthermore, that would not be a new experience for the Bank. I believe that one of the members of the financial stability board in an ex officio role is a key Scandinavian banker who was presumably selected by the Banks executive to provide exactly the sort of experience of the Scandinavian banking crisis that would be helpful when considering some of the complexities of both anticipating loss of financial stability and attempting to rectify the problems caused by it. Deepening the intellectual base of the committee and the communication channels available to it are part of what I am proposing.
As we know from the activities of the MPCI touched on this during an interventionit spends a good part of its time travelling the country, listening to other people. The Bank has an excellent collection of regional agents who often host functions with MPC members so that they can listen carefully to the experience of those on the ground in the economy. Members of the financial stability committee, when it is established, would play a valuable role if they did something similar. Gathering information, not merely from data in the economy but from the anecdotes and experiences of those who are working to deliver wealth in our country, is an important function of people carrying out such a role. Communicating that to the outside world, not just in a report, which I have mentioned, but in speeches is, as we know, an important part of the MPCs work. The hon. Member for Fareham mentioned the role of David, or Danny, Blanchflowerdepending on how well people know himin these matters. To be honest, all those involved perform that function.
It will be important to have people who do not share exactly the same intellectual leanings on the committee. Diversity of membership is a strength and an incredibly powerful educational resource for those of us who dip into many of these subjects. A range of experts should approach the issues from various directions and would present challenges, both to other parts of the intellectual community and to those in the real economy, who are the critical determinants of whether we will succeed or fail.
The operational duties of the Bank in that respect, which are covered in aspects of the Bill, could benefit from greater external experience and challenge. Again, the Bill has the potential to do that. If it is confined only to drawing from a membership who are members of the court, it will narrow the ability to respond to that need.
A further point that came up in the discussions in the Treasury Committee is the importance of stress-testing and war-gaming in these critical areasexamining data that indicate where weaknesses might be and positing some of the scenarios that will have to be confronted by the various authorities involved in dealing with threats to financial stability. Although the exact circumstances to be faced can never be predicted, there is evidence, certainly in respect of the Northern Rock crisiswhere it was obviousof inexperience in tackling some of the functional tasks of addressing the what if scenarios that lie before us. When discussing this subject, I am afraid that such scenarios tend to be rather dramatic and outside our normal experience, as we have seen. Defining some of those scenarios and testing how we might respond to them institutionally is thus an important function of the body we are talking about. All the things I have mentioned are executive resources, making the Bank do its job as an executive better.
To answer the Ministers question about which model I would prefer, I favour the more executive model. I have a pretty strong suspicion from the evidence that we heard from the Governor that that is his preference too. That may explain the slightly hybrid body that confronts us; it has some executive features and some non-executive features, and it has some curtailment of members in various respects too.
I sense that what we have in these provisions is a typical compromise that is designed to meet the rather unique circumstances. That is why I have not gone down the route of thinking, Well, this is how we do it in plcs, and so on. These are unique circumstances. There is no right answer, but there may be some issues of principle that we can get wrong.
I want this debate to be an opportunity for the Government to set out more sharply what they are trying to do and the means that they have chosen to achieve it, as well as the linkages to where we are now, so that we can see more clearly the path that is being put down for us.
As I said, some of the frameworks already exist within the Bank; some of the tasks are already there. Some questions remain. How do we move from A to B? What are the underlying principles, and why have we chosen a model that, on the face of it, does not fit the expected division of non-executive and executive functions? The Treasury Committee was certainly robust on that last point.
I am pleased to serve under your chairmanship, Mr. Gale.
I shall speak briefly. The clause goes to the heart of what many people are looking for us to do, which is to deal with issues of financial stability. Although the aim is not defined in the legislation, I think that people would generally understand it to have a fairly common-sensical meaning, in terms of their ability to feel some sense of security about the way that the financial system is managed and its reliability in terms of the different aspects of their lives that depend on it. That sense of security has obviously been completely disrupted by current circumstances.
A few years down the track, I am sure that people will talk about these arrangements in the way that they now sometimes talk about the MPC; they will ask, Why was it done this way and why wasnt it done the other way? It is, therefore, important that we make sure that we have got the structure right.
It seems to me that the kind of structure that we set for a body such as the financial stability committee will depend on several things: its functions, the nature of the decisions to be taken, the nature of the tools at the committees disposal, and the requirements of accountability in a democratic society. That means both accountability to Parliament and accountability to the public, including the duty to explain, which has been a key, and successful, part of the MPCs role. Both the hon. Members who have spoken mentioned that.
The choice in terms of models was clearly presented by the hon. Member for Fareham. Should it be an executive-style structure like the MPC, or a sub-committee? Despite the fact that there is a slight hybrid nature, it is basically a sub-committee. Personally, I think that is the right way to go.
I am using the MPC as a frame of reference for my comments, because discussions about the MPC are the kind of discussions that people have more generally. Part of the MPCs success is that it has become established and people talk about it quite widely. People say, If the MPC can fix inflation, why cant we have something similar to fix financial stability? That is a very crude argument.
The MPC has been successful because it has a clear policy framework set by Parliament; in other words, it deals with the accountability issue. That gives it a very sharp focus for its work, which is about inflation and the clear targets around 2 per cent.
The MPC also has a leverinterest ratesto which my hon. Friend the Member for South Derbyshire referred. Its members explain well that they have a clear job to do: they have one lever, and after taking a huge amount of information and discussing it, they must decide how to pull it. They have been phenomenally successful in doing that, but it is worth considering now that the issue of public credibility is at stake. Inflation figures are exactly what the public recognise as being inflation nowadays, and the lever seems to have lost some of its effectiveness because of what is happening with interest rates. Although the committee has been successful, we must be cautious about saying, Because it has worked for that, it can work for other things. One cannot simply adopt a structureeven a successful oneand expect it to work in perpetuity. Whether the MPC should be able to take wider economic circumstances into account when considering interest rate decisions will, I am sure, become a major issue. It has been discussed in the Treasury Committee, and I think that it will become a wider public concern in months to come.
When we look at financial stability, we can draw contrasts and look at why a structure such as that set out in the Bill will probably be more effective. This is a considerable beefing up of current structures to do with financial stability, and it has a sharper focus. Under the Bank of England Act 1998, financial stability is the responsibility of the tripartite authorities and of one of the deputy governors. The Bill represents a clearer, sharper focus on what has become the dominant, economic financial issue of our time. That is welcome, and I would not downgrade it.
However, financial stability is not as clear a matter as controlling inflation or setting interest ratesit is a completely different sort of event and decision. Although the structure might seem quite woolly, an enormous range of different materials and issues must be looked at before the pertinent ones can be picked out and fed into the process, as set out in the list of functions.
Perhaps I can illustrate that. I happen to have the financial stability report and the executive summary. It is a wonderful documentan eight-page guide to the collapse of capitalism. At one point it gives a guide to what happened. It has little graphs tooit is like a comic strip for financial fundies. It says that concern was
This is not confined only to one country, it is a global event. However much the Bank of England might like to control the world economy, it is not quite there yet.
The document also mentions the nature of the decisions that might have to be taken and notes the Government-supported recapitalisation of the banking systems. If large amounts of taxpayers money are going to be spent on recapitalising the banks, Parliament should have something to say about itamong other thingsincluding about the terms, and including the type of questions we heard at Treasury questions today.
The model of the MPC has been extraordinarily successful. The MPC has taken decisions about interest rates independently of political influence and has actually served us phenomenally well, but one cannot then say to the Bank of England, You take the decisions about financial stability and well just sit back and let it happen. That is a bit of a crude, over-the-top way of putting it
Yes, but the type of decisions that might have to be taken to deal with a crisis, such as the one we have had, cannot be delegated. There should be a much closer relationship with the institutions of the state, which is what we have got in the structure set down in the Bill.
The hon. Lady makes a powerful point. She said in her opening remarks that we need to think about the tools that are available. Perhaps an alternative way of looking at the role of the financial stability committee is to say, These are the tools that are available to that committee. Clearly, we are not going to give the financial stability committee the power to commit taxpayers money to bailing out banks and recapitalisation. It does not have those tools, so the task is actually to have a tools-based approach to developing the remit of the FSC and what its objectives should be.
There may well be some issues that it will have to consider as a sub-committee, and I am sure it will want to work out some tools and some ways forward. At this stage, when do not have a clear definitionalthough we have a common-sense understandingand when we are looking at what is frankly still an emerging phenomenon in the international financial markets and world economy, I do not want to say that this whole area, which is key to political decision making and to how the international community works, will be put at arms length in the way in which interest rates have successfully been. If there were one lever that could work in relation to international financial stability, we might want to use that, give it a tight policy remit and say, We dont want it to go above or below a certain level, and set that out. The conceptual tools simply are not there and, in those terms, it is right to have a substantial sub-committee set up in this way, with a remit to deal with the matter, a reporting line and a much sharper focus. I certainly accept that the structures we had previously did not serve us well. The warning signs might have been there, but no one saw them. Action was not taken until the crisis started to ripple through from some of the financial institutions and the United States.
I think that we have the right structure here. It might not be the worlds most wonderful structure, but it is the right one for the present circumstances. It will be bolstered by the increasing focus on financial stability and the increasing pressure that I am sure there will be from Parliament and elsewhere to make sure that the structure delivers and that if there are warning signs, they are seen and acted on.
I shall start by acknowledging your presence in the Chair this afternoon, Mr. Gale. It is a pleasure to see you thereI am saying that somewhat belatedly, I know, because we have had quite a long debate. I shall deal with the earlier point of order because I have an update that the Committee might wish to hear. The code of practice has been prepared and will be on letter boards by the time the Committee adjourns this afternoon. That is something for everyone in the room to look forward to, as long as they get down to the letter board before it closes. We all know what we will be doing this weekend.
We have had an interesting debate, which is clearly indicated by the number of amendments tabled to the clause. The clause deals with the nub of the issue in part 7 on the correct and appropriate structure of the new arrangements for financial stability, the new duties the Bill gives the Bank of England in that respect, and how they should be fulfilled. The hon. Member for Fareham, quite properly, identified two different approaches and is agnostic about which is the best one, so we have had a debate about it. My hon. Friend the Member for South Derbyshire expressed a more definitive view that there should be a more executive approach. My hon. Friend the Member for Northampton, North said that we have got it about right. Naturally, as I am here to explain the Governments thinking on the model we have set out in the Bill, I think that we have got it about right and hope that I will be able to persuade and reassure those who are dubious about it during the course of my remarks both on clause stand part and on the amendments.
It might be helpful if I briefly set out the Governments approach and the purpose and thinking encompassed in clause 216. Clearly, the aim is to strengthen and formalise the Bank of Englands role in relation to financial stability. As all the hon. Members who have contributed to the debate this morning and this afternoon have said, the Bank already plays a key role in supporting financial stability, but unlike its role in monetary policy, it does not currently have a clear statutory responsibility to support financial stability.
We are therefore formalising what has been informal in the past. In doing so, we have to plump for a model, rather than continue the informal arrangements that have always been in place. Perhaps that is where all the different models have come from. It is proper that people should think through how those models are formulated and the potential issues with them. The Government have proposed the model set out in new section 2A(1) of the 1998 Act, which gives the Bank of England a statutory objective
to contribute to protecting and enhancing the stability of the financial system of the United Kingdom.
My hon. Friend the Member for South Derbyshire astutely noticed the use of the phrase to contribute to as the way of expressing the Banks duties. That phrase reflects the fact that the Bank does not have a duty to ensure financial stability on its own, because that would be impossible. That responsibility is shared nationally with the FSA and HM Treasury and internationally with the European Union and other international bodies, which all have a major role to play, alongside market participants themselves.
Financial stability cannot simply be guaranteed on a national basis like an interest rate. The interest rate either is or is not at a certain level, like a price, but financial stability is a much more complex concept to grab hold of, and what is important for delivery might shift over time as the institutional framework shifts and as markets and market participants evolve. It is therefore a moving target and a complex matter to deal with. It is important that we bear that in mind when considering the institutional approach that the Government suggest in the Bill.
We are clarifying the Bank of Englands position by setting out an objective in legislation. That has been widely supported by respondents to our public consultations and by the Treasury Committee, even if it did not quite go along with the model that the Government decided to put forward in the Bill.
New section 2A(2) sets out that the strategy that the Bank will follow to fulfil its new objective will be set by the Banks court of directors, consulting with the Treasury, and on the recommendation of the new financial stability committee, as set out in new section 2B(2)(a). It is right that the court, as the body with the ultimate responsibility for the Banks affairs, has the final say on setting the financial stability strategy.
The clause will also create a new financial stability committee, as outlined by various hon. Members who have contributed their views on the model, as a sub-committee of the court of directors. The committee will further strengthen the Banks framework by directing and supervising the Banks functions in relation to financial stability and by providing expert support. The committee will be chairedthis has been the subject of comment, which I shall deal with when I come to the subsequent amendmentsby the Governor of the Bank of England, when present, and other membership will consist of the two deputy governors and four directors of the court, who will be appointed by the chair of the court of directors. Those external, non-executive directors will bring valuable and relevant expertise to bear on the Banks decision making in the area of financial stability, and they will ensure that the Bank commands authority and credibility in discharging its new financial stability objective.
I do not know how to put this, but the current membership of the court might not necessarily provide the depth of experience that my hon. Friend appears to seek in filling those four positions. Am I to understand that the process may entail a complete replacement of the court with a newreducedmembership, or will there be some continuity for the current membership?
The Bill makes provision in later clauses for a reduction in the courts size, in part to acknowledge some of the structural changes that we are dealing with. The idea is that when the Bill becomes law, the terms of all current court members who are appointed will lapse and there will be a reappointment process. The reappointment process at that stage will consider the appropriate balance of expertise and presence for the new smaller court. Although all current outside members of the court will have their membership terminated, it does not mean that they will not be reconsidered for appointment. However, the entire process will take place in the new context, without having to think about transitions. I hope that that reassures my hon. Friend.
In naming non-executive members of the committee, it will be vital to maintain a balance between ensuring that they have relevant expertise and experience of financial markets, and avoiding damaging conflicts of interest, which is why the Bill imposes the same restraints on members of the proposed financial stability committee as already exist for current members of the court. They must declare any direct or indirect interest in any dealing or business that could potentially produce a conflict. If the financial stability committee considers that a conflict of interest could occur, the member will have no influence or vote on those matters.
It is right that the Government will ensure that the people on the committee do not have a conflict of interest, but I wonder how challenging that is to deliver in practice. Given the interconnected nature of the financial services sector, the Chancellor, or whoever selects the court members, will have to be very careful not to appoint someone who has directorships across a range of City institutions and is an active participant in the market, as they could be excluded under the clause. The alternative is somebody who has recently retired and has no interests, but whose market knowledge is not as fresh as it might be. How will the Chancellor, in appointing court members, to deal with that, particularly given the reduction in the courts size from 16 members to nine?
The hon. Gentleman rightly identifies some of the issues that need to be balanced when deciding who to appoint. They are not new issues for the court, however, because this part of the Bill ensures that the financial stability committee itself comes under the same regime that has worked successfully for the court of directors in the past. He rightly points out that there is always a balance between having those with enough up-to-date knowledge and savvy experience of markets to be able to contribute and avoiding those who have so many conflicts of interest that they have to leave the room for every meeting. That balance will have to be borne in mind when the appointments are made. I do not pretend that it will be easy, but those matters will be in the Chancellors mind when he makes those decisions.
As set out in new section 2B(3), a Treasury representative and others may attend the committee but they will have no say in decisions. The Bill also provides the Bank with additional policy levers by which it can contribute to financial stability. There was talk about a lack of tools, but hon. Members recognised that the earlier part of the Bill, which we shall start to discuss next week, puts other tools at the Banks disposal to contribute to financial stability, in particular its key role in the implementation of the special resolution regime and oversight of inter-bank payment systems.
The functions of the financial stability committee, which are set out in new section 2B(2), reflect the committees role in advising on and monitoring the Banks use of the new tools for maintaining financial stability. The committee will make representations to the court on the nature and implementation of the Banks financial stability strategy. The court will then be able to delegate further functions to the financial stability committee, if necessary.
I believe that the clause establishes a coherent model for the financial stability committees form and functions. Clearly that is why it is in encompassed in the clause. We have debated at some length a range of amendments which seek to change in various ways the settlement of the structure that is outlined in the clause. The hon. Member for Fareham talked about hybridity, as he put it, and wondered whether we should have gone for a pure executive committee or a pure committee of non-executives. Decisions on financial stability may have to be taken extremely swiftly in fast changing circumstances. It may be difficult to ensure that a committee could meet with the urgency and frequency that the use of the special resolution tools would require, which tends to militate against a purely non-executive committee.
to give advice about whether and how the Bank should act in respect of an institution, where the issue appears to the Committee to be relevant to the Financial Stability Objective.
That decision may have to be taken quite quickly, but we are to have a committee that will give advice on how the Bank should act. In a way that new section demonstrates part of the problem: by the time the committee talks about a particular institution it may be too late. It may take too long to get the committee together to talk about how it might approach a particular institution.
Obviously, the financial stability committees work will relate to a range of work that the tripartite system itself, in all of its forms, will be doing to monitor the circumstances of the market. For example, although we do not discuss it in the clause, the FSA has the duty to monitor particularly important market participants on an ongoing basis. I do not anticipate that a problem that serious would suddenly emerge and would not have been tracked earlier as a potential risk. I do not envisage a problem with getting monitoring and advice in a space of time that was too short to draw together the members of the financial stability committee
Let me come to that. The hon. Gentleman referred to the hybridity of the proposed model when expressing his worry that perhaps we had not picked the right one. As I understand it, he was getting at the hybridity between an executive committee, such as the Monetary Policy Committee, and a scrutiny committee. The former has been used as a model by both the hon. Gentleman and my hon. Friend the Member for South Derbyshire and is clearly supported by the Treasury Committee in its report, and the latter is the model that we are all familiar with.
The membership of the financial stability committee, as suggested in clause 216, reflects its functions. It is important to ensure that the committee is set up in a way that best enables it to fulfil its functions, rather than to compare it with very different committees. I agree with my hon. Friend the Member for Northampton, North that the Monetary Policy Committee is not a model on which to base the financial stability committee, simply because the FSCs job is very different from and more complex and more difficult than the nevertheless important one of the MPCdeciding on the price of money, as reflected in an interest rate decision. The FSCs functions as set out in the Bill and as reflected in its membership are primarily advisory, but they are also supported by monitoring functions. However, that does not mean that the committee should be constituted of only non-executive members.
I have already hinted that it is not explicitly stated to whom the committee gives advice, whereas it is clear that the recommendation should go to the court. The Bill is silent on who will receive the committees advice.
That is not because we do not have a view on who should receive the advice. It is not always the case that everything about the operation of committees is necessarily set out in primary legislation.
On a day-to-day basis, the financial stability committee will advise the Banks executives, because it is they who will often need to make decisions on how to deal with individual institutions, in perhaps fast-moving conditions. The Governor and his executives derive their authority from the court: they have delegated responsibility from the court and are ultimately accountable to it. That will be consistent with the strategy that the court of directors has agreed for fulfilling the financial stability objective, and it will be the court that holds executives and the committee to account for supporting it in meeting that objective.
Some decisions relating to financial stability will need to be taken by the court of directors, particularly the setting of the financial stability strategy. On some occasions a sub-committee will advise the court. The approach is context-specific, and it sits better in practice than in primary legislation. I hope that that gives my hon. Friend a view of what was in our mind when we plumped for this structure.
Our model provides the best of both worlds; it allows executives and non-executives to come together to discuss, debate and advise on issues, including crucial decisions regarding banks and the operation of the special resolution regime. In designing the financial stability committee, the priorities of the Government have been to provide the Bank with a single source of co-ordinated expertise and advice; to monitor its functions and actions in relation to financial stability; to ensure that the Banks executives can take timely and informed decisions to safeguard financial stability in fast-moving situations; and to draw clear lines of accountability from the executive and from the financial stability committee to the Banks governing body. The model that we are proposing will allow us to achieve those objectives.
By establishing the financial stability committee as a sub-committee of the court, we integrate it into the existing governance structure rather than tearing it up and starting again. That helps to ensure that the financial stability committee will be central to the Banks decision making on financial stability. The non-executive members of the committee will provide vital expertise on financial stability, while the executive members on the committee, including the Governor as chair, will mean that the committee will be close enough to the action to be able to give informed advice, often in fast-moving situations.
It is right that the Banks executive takes the lead in operational decisions, taking expert advice from the financial stability committee, where possible. It would not be realistic to expect a committee including the expertise of non-executives to meet with the frequency that may be required for decisions in fast-moving emergency situations.
I hope that that approach at least explains the thinking behind the model, hybrid or otherwise, that the Government have set out in clause 216 and I hope that it explains why we ask that all the amendments, from amendment No. 58 to No. 63, not be moved or that they be voted against.
Then I will explain why I will not move them, if that is the case. The nub of this is a very English model, which will greatly depend on the people who are appointed to the functions set down in the Bill; it does not have the intellectual coherence that I would like, but it may well work, and that is what we tend to do in this country. On that basis, I will not move my amendments.
Perhaps if the hon. Gentleman makes a brief intervention I can come back and make a longer intervention in answer to his question, rather than try to fit it in quickly. It is not a simple issue, Mr. Gale, as you will have noticed from our earlier discussions. I am happy to come back on that; my apologies for missing it out in my response.
Thank you, Mr. Gale; we got there in the end. Again, my apologies for not covering this point directly.
The debate featured just a sprinkling of the many different definitions of financial stability that the Treasury Committee managed to uncover in its hearings that various people, not only from the UK but from all around the world, have come up with. The one that Nigel Jenkinson quoted and the one that was quoted earlier from the Governor of the Bank is perhaps as good as any. The fact that there are so many definitions and they all differ slightly bears upon why there is no direct definition of financial stability in the Bill in primary legislation. We know it when we see it. In fact, some of the definitions are of financial instability rather than stability. It is interesting to note that Nigel Jenkinson in his evidence at the beginning of this Committees proceedings said:
I do not personally think that it is necessary to have a definition of financial stability in the Bill. We produce regular reports.[Official Report, Banking Public Bill Committee, 21 October 2008; c. 21, Q54.]
My hon. Friend the Member for Northampton, North quoted some of them, as did the hon. Member for Fareham.
Financial stability is context-specific with a very broad definition that can change quickly. We felt that it was such a moving target and so context-specific that it would not fit easily in the Bill. The Bank, of course, will have to agree its financial stability strategy with the Treasury and we have every confidence that it will do so appropriately, drawing on all the available international and academic sources. It has the capacity to call in people to advise it on that subject. Rather than have an awkward and rigid definition of financial stability in the Bill, we felt that this would be the more appropriate and future-proof way of dealing with it. I hope that helps the hon. Gentleman.
That is absolutely where we are. The hon. Member for Northampton, North gently chastised us for using the Monetary Policy Committee as a model for this but I would point out that her right hon. Friend the Chancellor of the Exchequer said:
We should learn from the example of the Monetary Policy Committee, and take a similar approach to financial stability,[Official Report, 5 June 2008; Vol. 476, c. 916.]
The present Under-Secretary of State for Work and Pensions, her hon. Friend the Member for Burnley (Kitty Ussher), said in July, only about six weeks after the Chancellor came up with those wise words:
I know the comparison with the MPC has been made but I think it is an entirely different situation.
It just shows that, even over the course of six or seven weeks, the Treasurys own view of this had evolved. We will see how effective it is in practice. While not necessarily coming back to look at legislation, I suspect that people will pore over the practice of how the Bank of England delivers and contributes towards maintaining and enhancing financial stability. I am sure the Treasury Committee will be kept busy for some time monitoring its activities in that respect.
This has been a helpful debate. It has drawn out from the Government that we will have to see how this works and think about the context. We are in difficult waters at the moment trying to work out the right institutional arrangements, but this debate has been helpful in establishing the start of that process and we shall see how it develops. I beg to ask leave to withdraw the amendment.
(6) Proceedings of the Committee shall be made public in good time unless disclosure of the proceedings would result in a threat to financial stability..
This goes back to how we hold the committee to account. Without wishing to test your patience, Mr. Gale, the comparison is with the MPC, which produces minutes on a monthly basis. They shine a light on how the MPC operates, and its thought processes and deliberations. That is exactly the point where there is a parting of the ways between the MPC and the financial stability committee, and how we expect them to work. From the discussions that we have had and on the basis of the remit of the financial stability committee, particularly when it gets down to institutional level, we know that specific data or information about particular institutions will be discussed, and we need to be careful about how that is disclosed.
At the same time, there will be more generic debates about risks and how the Bank responds to them, and how it exercises its functions under part 5 to oversee inter-bank payment systems. As there will be legitimate public interest in those matters, I tabled this probing amendment to understand from the Minister how she would expect the Bank to report and make known the operations of the committee.
The debate on the last set of amendments was useful, and I think that to come to no overall conclusion after two and a half hours of discussion is probably about right.
Comparison was made with the MPC. One of the great principles of the MPC is that it publishes its findings, albeit some weeks later, which give some reasonable idea of its operation. The amendment seems entirely appropriate, in the sense that if we are to make such comparisons and try to get to that, it would be appropriate for the financial stability committee to publish its proceedings as well. Of course, the sting in the tail is that that could create the financial instability that the financial stability committee is supposed to address. It would torpedo itself.
I am not entirely convinced by all of this. The situation that pertained at one time was that the central bankthe Bank of Englandwas charged with responsibility for financial stability, had a deputy governor in charge of it, and had it on the agenda of the court on a fairly regular basis, yet we are now supposedly to have an independent Bank of England, and we are telling it how it should carry out that function. I am happy that we will support the proposal.
If we are to understand whether the financial stability committee is working, its proceedings will have to be published; otherwise, all of what we have done or are trying to do will be to very little point. I expect that, inevitably, there will be confidentiality in respect of some aspects of the committees proceedings, and it might be right for those aspects not to be published, but on the whole it would be appropriate to publish the proceedings. I support the amendment.
We have already discussed how financial stability issues are different from monetary policy issues, and said that owing to the nature of financial stability, discussions will often be particularly market-sensitive, and at times firm-specific in nature. It is important to bear that fact in mind as we consider amendment No. 64.
The amendment seeks to place an obligation in the Bill that the proceedings of the committee should be made public in good time, unless doing so would result in a threat to financial stability. As the Chancellor said on Second Reading, the financial stability committees deliberations will be made public, although not immediately. The hon. Members for Fareham and for South-East Cornwall acknowledged obvious reasons for that.
We do not consider it appropriate to include such a requirement in the Bill, but we expect that the deliberations will be made public in due coursesometimes in a more timely fashion than at other timesdepending on the context, and it will be for the Bank to decide how it does that. I hope that, with those reassurances, the hon. Member for Fareham will withdraw the amendment.
The hon. Member for South-East Cornwall said that the Bank was independent. It is independent with respect to monetary policy, but it has other duties, as part of the tripartite arrangement and to Parliament, which do not make it independent in every aspect. Clearly, it will want to ensure that it continues to engage with expert advice and the public, and to explain what it is doing in this important part of its work.
I am grateful to the Minister for those comments; she makes some valid points. My only comment is about the timingthe delay between meetings and the publication of minutes. If a pattern is established of the minutes being published on the last day of every month but suddenly they are delayed by six weeks, that would trigger concern about financial stability in the market. We need to be clear about frequency, timing and the expectations of the markets of how the information will be disclosed. However, I beg to ask leave to withdraw the amendment.