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Clause 216

Part of Banking Bill – in a Public Bill Committee at 2:00 pm on 30th October 2008.

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Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee 2:00 pm, 30th October 2008

I shall start by acknowledging your presence in the Chair this afternoon, Mr. Gale. It is a pleasure to see you there—I 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 Government’s 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 Government’s approach and the purpose and thinking encompassed in clause 216. Clearly, the aim is to strengthen and formalise the Bank of England’s 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 Bank’s 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 England’s 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 Bank’s 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 Bank’s 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 Bank’s framework by directing and supervising the Bank’s functions in relation to financial stability and by providing expert support. The committee will be chaired—this has been the subject of comment, which I shall deal with when I come to the subsequent amendments—by 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 Bank’s 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.