Monetary Policy Committee: membership

Bank of England and Financial Services Bill [Lords] – in a Public Bill Committee at 10:45 am on 9 February 2016.

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Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss new clause 6—Financial Policy Committee: procedure—

“In paragraph 11 of Schedule 2A to the Bank of England Act 1998, after subsection (7) there is inserted—

‘(7A) The Financial Policy Committee shall inter alia at least each year commission and publish promptly external research into the level of systemic risk to the stability of the financial system in the UK.

(7B) As soon as reasonably practicable after each meeting of the Financial Policy Committee, the Bank shall publish a record of the meeting before the end of the period of 6 weeks beginning with the day of the meeting.””

Photo of Harriett Baldwin Harriett Baldwin The Economic Secretary to the Treasury

It will be useful to consider the new clause, tabled by the hon. Members for Leeds East and for Wolverhampton South.

Clause 6 brings the Financial Policy Committee into line with the Monetary Policy Committee and the Prudential Regulation Committee. It makes the Financial Policy Committee a policy committee of the Bank, rather than a sub-committee of court.

Aligning the statutory status of the Financial Policy Committee with that of the Monetary Policy Committee and the proposed Prudential Regulation Committee will simplify and bring greater clarity to the governance of the Bank. Clause 6 also adds the deputy governor for markets and banking as a member of the Financial Policy Committee. That is a role with clear read-across to the work of the FPC, and it is right that the committee should have the benefit of the deputy governor’s expertise. A new external member will also be added by the clause, in order to maintain the balance between executive and external members. That will ensure there continues to be a strong challenge function on the committee, to avoid the risk of groupthink.

While clause 6 deals with the status and membership of the Financial Policy Committee, new clause 6 would impose two requirements on the committee. I will address each of those requirements in turn. Proposed new subsection (7A) would require the FPC to commission and then publish external analysis of the level of systemic risk in the UK. I hope I can convince the Committee that that subsection is unnecessary.

The Bank of England Act 1998 already requires in section 9W the Financial Policy Committee to produce a financial stability report twice a year and for that report to set out the committee’s views on the stability of the financial system, including its assessments of the strengths and weaknesses of that system. The FPC draws on many sources in order to make that assessment, both from within the Bank and externally. For example, the Bank undertakes a systemic risk survey of market participants that seeks their views on risks to the financial system. The results of that survey are published alongside the financial stability review.

There are already commentators outside the Bank who provide analysis of financial stability. To name but a few, the International Monetary Fund undertakes the annual article IV process to assess the economic performance and financial stability of the UK and produces a global financial stability report; the Organisation for Economic Co-operation and Development produces papers on UK financial stability; and the European Systemic Risk Board publishes an annual assessment of systemic risks in the financial system of the EU. All of that is before I even mention the legions of financial sector analysts who produce reports every day on a wide range of financial stability issues.

If the Opposition are concerned that the Financial Policy Committee’s reports might be a product of Bank groupthink, I can reassure them that the existing legislation has provisions in place to prevent that. As I mentioned, the external members of the FPC provide outside views and challenge to the executive members of the committee, helping to prevent groupthink. The Government place great importance on that challenge function, which is why clause 6 increases the number of external FPC members by one, so as to maintain the ratio of executive members to external members. External members of the FPC have dedicated staff within the Bank so that they can undertake analysis and research upon issues of interest to them, which ensures that the external members have sufficient resources to undertake independent analysis.

As well as the provisions in the 1998 Act, the Bank has taken many steps to seek out views from external sources. The Bank has a long-standing tradition of engagement with other central banks, international organisations such as the Financial Stability Board and academics. Indeed, the Bank currently has an ambitious agenda of research—the “One Bank” research agenda—which extends across all the Bank’s areas of responsibility and is an excellent example of the Bank’s open and collaborative approach. The Chancellor was one of many guest speakers at the Bank’s open forum on 11 November last year, which I hope Opposition Members were able to attend, alongside academics and members of the financial services industry. The Bank sought external views on a range of topics.

Proposed new subsection (7B) would require the Financial Policy Committee to publish a record of its discussion within six weeks of each policy meeting. I am sure the hon. Members for Leeds East and for Wolverhampton South West will be reassured to hear that, under the Bank of England Act 1998, there is already a requirement in section 9U for the FPC to publish a record of its policy meetings within six weeks of them taking place. I hope I have convinced the Committee that clause 6 should stand part of the Bill and that new clause 6 is unnecessary. I hope the hon. Member for Leeds East will not press the new clause.

Photo of Richard Burgon Richard Burgon Shadow Minister (Treasury) 11:00, 9 February 2016

As the Minister explained, the Financial Policy Committee is to be transformed into a committee of the Bank of England. As she explained, it had existed previously as a sub-committee of the court. Again, we see what one commentator, Professor Alastair Hudson, described as a spaghetti of committees. Perhaps we need to look at simplifying them so that the people we represent can understand better the system that is intended to serve them.

The FPC should be a body that takes a much more visible role when there are systemic challenges to the UK financial system. The problem that is created by the so-called spaghetti of committees issue is that it is unclear when and if it will relate to finance as opposed to economic policy more generally, and when it will relate to systemic risk rather than simply to the solvency risk associated with an individual financial institution. The spaghetti of committees issue means that the individual bodies have to fight for their role within the regulatory structure, instead of having their regulatory role clearly established by statute.

We believe that considerable thought should be given to how the FPC could play a more active role in the creation of policy relating to systemic risk. At one level, the body that is supposed to analyse the highest levels of risk to the UK economy ought to be one that regularly takes the lead in relation to policy formulation in that context. The Minister explained and reiterated quite rightly how many external views are published, but it would be helpful for the economy as a whole if the views of the members of the FPC were given greater publicity.

Our intention in proposing new clause 6 is to propose requirements on the FPC to regularly publish external research into the level of systemic risk to the stability of the financial system in the UK. I note the points that the Minister has made on that. Furthermore, as we seek greater transparency, we have again sought publication of a record of the meetings of the Financial Policy Committee within a reasonable timeframe. I am delighted that the Minister has clarified that that is indeed the case, and that that takes place within six weeks. I am reassured by much of what she has said regarding the provisions of section 9W of the 1998 Act on research and surveys and the provisions of section 9U on the publication of that research. Given that, and given the comments made by the Minister, we will not press new clause 6.

Photo of John Mann John Mann Labour, Bassetlaw

The shadow Minister is such a moderate these days. I am feeling nervous, because new clause 6 is an excellent amendment that I wholeheartedly endorse. If we look at the FPC’s membership, they have huge experience of being in companies that have not paid a great deal of tax in the United Kingdom, so some expertise is brought to bear. The multinational structure of the UK economy, lauded as being the most open in the world, is also a potential systemic risk. The tax avoidance scandal demonstrates the scale of that potential systemic risk, not only in terms of the amount of money we are not getting in—that is an ongoing problem—but in terms of the structure of our economy.

For example, if some of the commentators are right about the response of capital to a British exit from the European Union, and if that coincided with a collapse in the euro, our economy would be vulnerable. The FPC needs the ability to work through the scenarios and the options and to see whether our structures are sufficiently good—I put it to the Minister that they are not and that we remain hugely vulnerable. That is one reason.

The second reason is that our housing market has a perverse structure that is worse than that of any other advanced economy. We have an absurdity that we have not been able to deal with, whereby there is huge housing price inflation in London and the south-east, yet the vast majority of houses we are building are in areas such as mine. They take a long time to sell because there is not a huge amount of demand for that new housing, but there is plenty of land and plenty of people willing to build housing, especially if the Government subsidise it. The Government are pressing for more and more housing, yet at the same time they face a systemic risk in the housing market. That is not a problem created by this Government; it goes back several generations. If the housing bubble were to burst in a range of different ways, that would be a fundamental problem.

The third systemic risk, which we saw in 2008, is the level of indebtedness. It was the American sub-prime market that led to the chain of events that caused the world financial crisis, not a specific collapse in this country, but we are hugely vulnerable. We, as a nation, are far too indebted. What is different now from any time in our history for both the corporate sector and individual households is that interest rates are at a record low. There is therefore a whole generation of people—two generations, in effect—whose expectations and economic behaviour is predicated on permanent low interest rates.

Commentators machinate—the Treasury Committee machinates at great length—about whether there will be a 0.25% increase in interest rates, yet we only need to go back 25 years and they were at 15%. That is part of the systemic risk. We therefore do not want to rely on the same old commentators—the OECD or the IMF—who got it wrong before 2008 and are using the same old paradigms.

The FPC should do precisely what the new clause suggests: ensure robustness in the British system. In a sense, that is the point of the FPC; otherwise, it has no point at all. What is proposed in the new clause is exactly what is needed. Indeed, we probably need more than that, but it is a good start. It will get minds concentrated on the scenarios and the options and, critically, whether the financial culture in this country’s businesses and households is sufficiently understanding to deal with the shock to the system that could come and which, by definition, will be outside our national control. That seems to be the point.

I will end on this point. It is quite a feasible scenario that at 7 o’clock in the evening of 12 March, after the German regional elections, the German media will be announcing the end of Chancellor Merkel. It is also a feasible scenario that the main opposition party—Labour’s sister party, the Social Democratic party—will come an unprecedented fourth. It is being seen as the most significant political day in 50 years in Germany, and it will have a huge immediate impact on the euro and the stability of the eurozone. We do not have an approach to dealing with that, because we presume that such major shocks to the system are not going to come. That is precisely the point of having the FPC and that is why the new clause is such a good one. We ought to be robust.

Photo of Harriett Baldwin Harriett Baldwin The Economic Secretary to the Treasury 11:15, 9 February 2016

I would certainly be very concerned if the hon. Member for Leeds East were developing a reputation as a moderate, not least because that might cause him not to be put forward as a Labour candidate at any future election. That would be a very worrying development. My analysis of his political point of view is that no one in this country could describe him as a moderate. This may be the first occasion on which he has been described as such. “Trot” might have been a more appropriate description of some of his political views, but I digress in an entirely inappropriate way.

I want to respond to some of the points raised and indeed to the important speech made by the hon. Member for Bassetlaw about the fact that the UK is an open economy. Therefore, by its very nature, it is open to economic developments in the rest of the world. He highlighted three topics with which the Financial Policy Committee should rightly be concerned. The first was the importance to financial stability in this country of the UK Government being able to receive tax revenues in order to pay for public services. He will know that it is incredibly important in this regard that we work with other countries and, notably, the OECD on the base erosion and profit shifting work, which is an important matter, perhaps not so much for this Committee but for other Committees in this House. That is an incredibly important issue on which we work internationally.

I reassure the Committee that, in terms of the overall resilience of the UK banking sector today, compared with the resilience at the time of the last shock, it does appear to be increasingly resilient. We would like to put that on record. The aggregate capital ratio, the common equity tier 1 ratio, is currently 12% for the banking system as a whole, which is a full 3.7% higher just since the end of 2013. The major UK banks all came through their stress test with the FPC at the end of last year without being asked to raise more capital. The FPC concluded that the UK banking system would have the capacity to support lending to the real economy even in the context of a severe global economic slowdown triggered by a downturn in the emerging economies.

The hon. Member for Bassetlaw also mentioned the housing market. Again, I think that it would be really valuable for the Committee to put on the record that the Government have granted the FPC powers of direction regarding residential mortgages and are also consulting—I hope that Opposition Members will support this—on extending its remit to cover powers regarding buy-to-let mortgages as well. Those are important points.

The hon. Gentleman also mentioned the rise of private sector borrowing. On that point, we argue that progress has been made to improve the personal financial position of households in the UK. Household debt relative to income has fallen from 168% in 2008 to 142% at the last reading. That includes both mortgage and unsecured debt. The FPC does study these numbers very closely. It stated, the last time that it looked through them, that given the actions that it has taken household indebtedness currently does not pose an imminent threat to financial stability, not least because underwriting standards are currently more prudent than in the past. Of course, however, the FPC must and will continue to monitor the household sector and will take further action if necessary.

Photo of George Kerevan George Kerevan Scottish National Party, East Lothian

I appreciate the Minister’s overview of the financial markets and how stable they are. Obviously, she has not read the financial press this morning. The whole basis of the international bank resolution regime that we have brought in since 2008 is based on convertible bonds. The convertible bond market has gone berserk in the past two days. Constant default rates on commercial paper covering bonds have spiked by a whole number of points. Let me assure the Minister that the markets are not anywhere near as quiescent as she tells us.

Photo of Harriett Baldwin Harriett Baldwin The Economic Secretary to the Treasury

Again, the hon. Gentleman puts words into my mouth that I did not utter. However, I did want to point out that the FPC looks at the financial sector’s resilience. No one would deny that the markets are going through rough and troubled times, but the FPC’s role is important and I hope he will agree that its powers to look at different aspects of the economy have improved the architecture of financial regulation since the last crisis. I highlight the way in which the Bank of England, as part of its monetary policy remit, has kept inflation as low as it has.

The hon. Member for Leeds East pointed to the “spaghetti” of the Bank’s organisation. I agree that we need clarity to be able to tell our constituents about how the architecture works. I share that objective. The Bill improves the pasta-related shapes of financial architecture. I would argue that the current situation, with a subsidiary and so on, is more like spaghetti. When I was trying to think of an appropriate pasta-related analogy for what the Bill does in establishing new architecture that we can explain to our constituents in simple terms, I came up with the idea of three ravioli—independent, but, importantly, in the same bowl.

Question put and agreed to.

Clause 6 accordingly ordered to stand part of the Bill.

Clause 7