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Building Societies: Special Deposits

Volume 590: debated on Wednesday 17 June 1998

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2.52 p.m.

What representations they have received from building societies about being required to place special deposits with the Bank of England from 1st June.

My Lords, the Bank of England Act requires banks and building societies to place cash ratio deposits with the Bank of England in order to fund the unrecovered running costs associated with its monetary policy and financial stability activities. Only institutions with more than £400 million eligible liabilities will have to place cash ratio deposits with the bank; so about two-thirds of all building societies will be exempt.

We received six representations from the building societies sector. A summary of all representations was included in the Government's response to consultation on cash ratio deposits published in April 1988. I have placed in the Library a copy of the response to consultation from the Building Societies' Association.

My Lords, I thank my noble friend for that reply. Will he confirm that this new requirement will cost the larger building societies many millions of pounds annually, which will have to be borne by the depositors and mortgage holders? Will he also confirm that the building societies have made representations that other financial deposit takers, such as insurance companies, contribute to the costs of the Bank of England thereby spreading the burden? Will my noble friend inform the House why such other organisations have not been invited to take part in the new scheme?

My Lords, my noble friend is right in that the larger building societies will have to contribute to the cash ratio deposits for the first time. I am sure he will recognise that as so many of them act as banks as well as building societies, it would be very difficult to discriminate between them. He is also right in saying that the building societies believe that alternative methods of funding the Bank of England should be examined. I believe that that has been done. They wrote to the Economic Secretary to the Treasury on 22nd April and said,

"The overall outcome of the consultation, which has resulted in the exemption of small banks and building societies from the CRD scheme, will be viewed favourably by most societies".

My Lords, the scheme is going to cost the building societies more money, particularly the large ones and that is going to affect the rate of return for depositors in building societies. In addition, it will add to the burden of borrowers. Does the Minister agree that it is a big mistake to charge the building societies, when they are trying to keep down the borrowing rate, because of the Government's disastrous policy as regards the base rate?

My Lords, the noble Lord is being very selective in his argument. Building societies and banks are active in the mortgage market. It would be invidious to discriminate in that respect. In any case, the total burden of cash ratio deposits will fall. Between 1997 and 1998 the cost increased from £147 million to £182 million, assuming an interest rate of 7 per cent. The new cost, at the rate which has been announced under the Bank of England Act, will be only £129 million. I suggest that the effect on mortgages in total is likely to be positive rather than negative.

My Lords, perhaps I am widening the Question somewhat, but does the Minister agree that there must be concern that the recent increase in mortgage interest rates by the building societies and the new bank building societies is more likely to increase the likelihood of a hard landing for the economy as we move through the year?

My Lords, the noble Lord is widening the Question more than slightly.

My Lords, is it not increasingly apparent that there is a serious lack of co-ordination between the Government's monetary and fiscal policy? Can the Minister tell us whether the Treasury or the Bank of England is now responsible for controlling the money supply? In that context, does the Minister envisage that in future the deposits will be used to that end?

My Lords, the Government are in charge of both monetary and fiscal policy. They chose to delegate to the Bank of England responsibility for short-term interest rates, but that does not mean any derogation of authority or responsibility.