Banking Reform

Lord Eatwell Excerpts

Thursday 17th June 2010 Lords Chamber

[Lord Eatwell]

My Lords, I am once again grateful to the noble Lord for having repeated the Statement made by the Financial Secretary in another place. It is a very useful Statement, since it reveals beyond all reasonable doubt the degree of influence that the Liberal Democrat wing of the coalition has on the development of policy in this area—it is nil.

To assess the importance of this massive institutional upheaval, it is worth reflecting on the earlier upheaval that accompanied the creation of the Financial Services Authority 13 years ago. I was at that time a member of the board of the old Securities and Futures Authority. I later sat on the regulatory decisions committee of the new FSA. I can assure your Lordships that with the best will in the world, and with the talented leadership of Sir Howard Davies, regulatory enforcement was none the less seriously impaired by the transition process itself. Putting together complex institutions with different organisational structures, different pay grades and different employment and management practices, inevitably tends to take the eye off the ball. It took more than two years for the new structure at the FSA to become what could be called fully operational.

There must be a real fear that the same will happen again—at a far more critical time. The DNA of the Bank of England and of the FSA are quite different. The Bank makes one important decision every month; the FSA makes a hundred decisions a day. Has a comprehensive risk assessment been made of the negative impact of the upheaval itself? If so, will the Government publish that risk assessment? Is it planned to unify the employment and management practices of the Bank of England and the new subsidiary? Given that the FSA and the Bank have very different structures—the FSA has a chairman and a chief executive, the Bank has but a governor—what is to be the governance structure of the new organisation? What is the estimated cost to the taxpayer of the creation of the new institutions?

Another important angle from which to assess these institutional proposals is their congruence with the objectives of financial policy. Again, it is worth while looking back to the creation of the tripartite structure. The Chancellor of the Exchequer said yesterday that,

“our plan is to hand over to the Bank of England the responsibility for macro-prudential supervision. That should never have been taken away from it”.

I am sure that the Minister will acknowledge that this statement is rather less than accurate. Will he confirm that, on the day that Lehman Brothers collapsed, around 100 staff were working in the financial stability division of the Bank of England? Will he also confirm that their task was to analyse and manage the stability of the financial markets?

My point, however, is not to pick over the entrails; it is, rather, to emphasise that prior to the crisis, nobody in the Bank, the FSA, the Treasury, the Basel committees or the Federal Reserve was paying sufficient attention to the issue of systemic risk. Now it is universally agreed that macro-prudential regulation and supervision must be a fundamental task of the authorities, and that new macro tools are needed. It is equally agreed that this must require close co-ordination between all aspects, macro and micro, of the regulatory process. However, the nature of that co-ordination must of necessity be a function of the policy to be pursued. Unfortunately, the Government have not as yet presented their policies for macro-prudential regulation. They have not decided what the new tools to be wielded by the authorities will be. In restructuring the institutions before they know what they want them to do, and how they want them to do it, are they not putting the cart before the horse?

I wonder whether the noble Lord will indulge me by allowing me to refer to some other matters raised in the Mansion House speech that he and I discussed yesterday and which are relevant to the future of banking in this country. I refer to the membership of the new Independent Commission on Banking. The noble Lord told us yesterday that the membership,

“will require a well balanced set of skills and experience covering banking, business, competition, consumer issues and regulation”.—[Official Report, 16/6/2010; col. 987.]

In the Mansion House speech last night, the Chancellor announced the membership of the commission. In addition to Sir John Vickers, it comprises an outstanding economic journalist, a former head of Barclays Bank, a former utilities regulator with long, recent experience of the insurance industry, and the man who led the team at JP Morgan that created credit derivatives, one of the main toxic instruments of the recent crisis. They are all distinguished and competent people with wide experience but there is nobody from any business other than financial services—not a single person with recent high-level experience of industry, and hence of the relationship between industry and finance; somebody, for example, from the Engineering Employers’ Federation who has experience of small and medium-sized industry and its financial needs. There is not really a single person with experience of the consumer interest, although I acknowledge that Miss Spottiswoode has been part of the Which? inquiry. Will the Chancellor be making further appointments to the commission to redress the current imbalance?

I return to the main point. The Government have failed to demonstrate the necessity of the extraordinary concentration of powers in one institution announced today. Monetary and fiscal policy will be united once again—not in the hands of elected Ministers, but instead in the hands of unelected officials of the Bank of England. Will the Minister confirm that that is not what he described yesterday as a restoration of powers? It is a major enhancement of powers to levels never experienced in this country before. Britain will now have the most centralised, monolithic financial management structure in the world.

To create this structure will require the replacement, or at least substantial amendment, of the Financial Services and Markets Act. Will the Government follow the good practice of their predecessor and establish a pre-legislative scrutiny committee for the requisite Bill? And when are we likely to have sight of the Bill? This side of the House is as committed as are the Government to the need for regulatory structures that sustain stable and secure financial services for British industry and British families. We remain to be convinced that the proposed upheaval is either necessary or sufficient to achieve that goal.