Financial Services Bill

Debate between Lord O'Donnell and Lord Flight

Tuesday 3rd July 2012 Lords Chamber

[Lord Flight]

My Lords, I support the Government’s amendments. I would like to make two small points to pick up on the point made by my noble friend Lord Trenchard. First, when it comes to the achievement of stability, having adequate competition in the domestic market is crucial. The problem with the banking system is that it became too much of a cartel without enough competition. When cartels exist, they tend to do the same thing at the same time and the resulting problems are often large in scale.

I well remember, following the Barings problem, having many discussions with the then Governor of the Bank of England, the late Sir Eddie George. What happened then was that the lender of last resort principle was deemed to apply only to banks that were too large to fail, so smaller banks such as Hambros were closed down and sold, and we ended up with a moral hazard problem and a cartel problem. I stress that adequate domestic competition is very much part of the stability objective, whereas with economic success it is international competitiveness that is arguably more important, particularly for the role of London.

We will come to this subject later on, but there is an important difference in the interplay between adequate domestic competition and being adequately competitive internationally in terms of the two objectives of stability and economic growth.

[Lord O'Donnell]

My Lords, I rise to support Amendment 35A and in particular to speak in favour of the phrase “subject to that”. It is important that we understand why this was put there for the MPC. The basic economic principle was that low and stable inflation was the best prerequisite for long-term sustainable growth. Shocks to economies happen, which mean that inflation will move away either above or below. When that happens, the MPC has a choice. It has a choice of which path of its instruments—we thought at the time of just interest rates but obviously QE is part of it—it should choose. The legislation gives a very clear answer to that because it says “subject to that, look to the broad economic objectives”, so it should be choosing that path which best meets those economic objectives while hitting long-term stable inflation.

It works for the symmetry with the FPC because we would all say that financial stability is a necessary and sufficient condition of sustainable economic growth. When you get shocks to financial stability—and boy have we had a shock—you then have choices about how you get back from those shocks. I strongly agree with the noble Lord, Lord Eatwell, that in these circumstances you do not want to have pro-cyclical regulation, which could make matters worse. It is really important that the “subject to that” is there and that that builds in the economic policy.

For those who want to explain economic policy in a lot more detail and put subsectors in, I would say that could be a very long list, so I think you have to rely on economic policy. The amendment is very clear. It refers to the Government’s,

“economic policy … including its objectives for growth and employment”.

I, for one, would ask “What is the economic policy of the Government?”. The Prime Minister made that clear when he said that we do not live by GDP growth alone and that what really matters is maximising well- being. Therefore, I think we have an overall strong objective which allows us to get to the right policies. It is not about a simple mechanistic formula.

Financial Services Bill

Debate between Lord O'Donnell and Lord Flight

Tuesday 26th June 2012 Lords Chamber

[Lord Flight]

My Lords, these committees seem to me to be very different bodies. The MPC and the FPC are, in essence, intellectual bodies reviewing policy, one in the monetary area and the other in the stability of the system. They are not bodies employing hordes of people carrying out an executive function. This is in contrast to the PRA, which will be an organisation employing lots of people doing a detailed regulatory task, and the court itself, the board that runs the Bank of England which does all the banking and other things. They are very different entities, and the PRA and the court actually need chief executives. I think it very reasonable that the chief executive of the PRA—you can call him the deputy governor, that is fine—and the chief executive of the Bank of England should be the governor himself. Thus the governor should not be chairman of the court, which should have an independent chairman. When it comes to the MPC and the FPC, the chairman is actually the person who is hosting the taking of the decisions, and so I do not think it is inappropriate for the governor to be chairman of both or at least chairman of one.

[Lord O'Donnell]

I support the noble Lord, Lord Flight, in that and pick up on what the noble Lord, Lord Eatwell, was saying about this issue. I completely agree that the problem is whether the governor concentrates on one area to the exclusion of the other. You risk making things worse if you make the governor chair of one of these committees and not the other. I would say that you cannot have a Governor of the Bank of England who is not sitting on the Monetary Policy Committee. I just cannot see how you would have a governor who does not have a vote on the interest rate for this country. It does not seem to make any sense whatever. The Financial Policy Committee is going to take decisions on instruments such as loan-to-value ratios which will have quite an important bearing on macroeconomic issues which also matter to the MPC. I completely accept the issues about concentration of power. They are very important and should be handled through the accountability relationships that we set up. I also agree that the third body is very different and therefore the governor should not chair it, but the MPC and the FPC overlap so much that I do not think it is feasible not to have one person chairing both. If you were governor, and sent your deputy to chair one of these meetings, can you imagine how much time would be spent instructing them on what you thought they should do and getting feedback? It is far more transparent and open that one person chairs both.