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Financial Regulation

Volume 712: debated on Wednesday 8 July 2009

Question

Asked By

To ask Her Majesty’s Government whether the forthcoming White Paper on financial regulation will settle the respective roles of the Bank of England and HM Treasury.

My Lords, since 2000 the respective roles of the Bank of England, the Treasury and the Financial Services Authority in financial stability have been clearly set out in a memorandum of understanding between the three authorities. The paper Reforming Financial Markets, published today by the Treasury, introduces a more formal and transparent structure for the three authorities by establishing a statutory council for financial stability chaired by the Chancellor, which will analyse and examine emerging risks to the financial stability of the UK’s economy and co-ordinate the authorities’ response.

My Lords, will my noble friend thank our right honourable friend the Chancellor for kindly making his Statement in advance of my Question? That was very helpful. However, it needs a lot of clarity and I hope that we will debate it before too long. Does my noble friend agree that although the Statement confirms that the Governor of the Bank of England is basically the head of a quango, albeit an important one, he is not responsible for policy, which is for the Chancellor, and now he will no longer be responsible for regulation, which will be for the FSA? On the other hand, does my noble friend agree with the governor’s statement that if banks are,

“too big to fail, then … they are too big”?

I gather from the Statement—a very lengthy one—that he disagrees. In that case, does he accept that banks, either big or small, are not too big to fail?

My Lords, I recall the time when my noble friend was a mighty force in the Treasury. He seems to have demonstrated that force today by getting the Chancellor to produce the Statement today and to answer in such a constructive way the points which he is seeking to make. The answer to his question is obvious. We have learnt from the financial crisis that difficulties and threats to the British economy can occur as a result of large institutions and indeed of not-so-large institutions. The House will recall Northern Rock, which is certainly not one of our largest banks. Consequently the issue of size is not necessarily the crucial one. What is at stake is whether the failure of any financial institution poses a threat to the stability of the financial system. That is what the new machinery is designed to ensure does not happen.

My Lords, will this council for financial stability not serve to diffuse authority within the banking system away from the three bodies that the Minister referred to, when we really want concentration in the banking sector?

My Lords, I do not think that it will do that at all. What it will do is make the co-ordinating mechanism which exists between these three authorities open and transparent; and of course the Chancellor, in chairing it, is directly accountable to Parliament for decisions taken. In that respect I would have thought that the House would have appreciated that this is an advancement of openness, clarity and confidence about the way in which the three institutions will work together to promote financial stability.

My Lords, I have looked at the White Paper though only cursorily because it has only just become available. It looks absolutely first-class, and of course I agree with my noble friend Lord Barnett that the sooner we debate it, the better. However, I hope that my noble friend can answer the one question that still seems not to be fully answered. Am I right in thinking that when it comes to deciding whether to use taxpayers’ money to bail out a bank that has taken undue risks, the decision will absolutely be taken by the Chancellor and no one else?

My Lords, under the new structure, which will be much more open compared with its predecessor, when a risk occurs which is of such significance that it threatens the financial stability of British institutions, decisions will ultimately be the responsibility of the Chancellor of the Exchequer.

My Lords, I thank the noble Lord for that reply. Clearly, the buck must stop with the Chancellor. He claimed in his Statement today that he was supporting better corporate governance and strengthening regulation, and that he wants to penalise banks whose pay policies create unnecessary risk and focus on short-term profit. So why did he wave through Mr Hester’s £10 million bonus package, which depends entirely on the performance of the share price over the past few years? Taxpayers own the bank through UKFI, so why is he washing his hands when he has the power to stop this scandal?

Because, my Lords, the priority for RBS and the priority for the Government is not only to restore as rapidly as we can faith in the financial stability of institutions in this country but also to ensure that funds to deal with the desperate needs of industry, commerce, householders and people in all roles in our society flow as early and as freely as possible. We all recognise the challenge. I repeat that the last time we had a financial crisis of these dimensions, it took advanced countries close to a decade to recover, yet we are judging the efficacy of the Government’s activities in a matter of months after the crisis first occurred. That may be a measure of the success of the actions taken.