§ 7.53 p.m.
§ Lord McIntosh of Haringeyrose to move, That the draft order laid before the House on 27th April be approved [31st Report from the Joint Committee].
The noble Lord said: My Lords, this order sets out the bands and ratios that will be used to calculate the cash ratio deposits that credit institutions will deposit with the Bank of England. These cash ratio deposits provide one source of funding for the Bank. This system has worked well for many years.
We have again consulted widely on our proposals. We issued a consultation document on 25th November 1997 and published the Government's response to consultation on 20th April 1998. There were 19 responses. The responses argued for a substantial cut in the CRD burden and some proposed in addition a "sunset clause", or review of the scheme within five years. Responses also argued that CRDs should not fund a dividend to the Treasury and that the Bank should be made more accountable, with better disclosure of costs.
The responses also favoured a banding approach, with a zero band, rather than a threshold approach, in order to avoid a steep marginal rate at the threshold. There was less consensus on the actual values of the bands and ratios. A number of institutions favoured a low threshold with a flat rate, but there was also support for multiple bands with a greater weighting relative to size.
At the outset of this consultation process the Government said that their intention was that the total burden of the statutory CRD scheme on credit institutions in aggregate should be no greater than it was at that time and preferably lower. It was also important to make the statutory CRD scheme transparent so that the Bank was accountable to the institutions placing deposits with it; and now, having completed the consultation process, we intend to establish a clear set of principles as a basis for the scheme and transparent arrangements for their application. These are that CRDs should be set at a level designed to cover the Bank's unrecovered running costs associated with monetary policy and financial stability, with the Bank's free reserves remaining broadly constant in real terms over time.
Under the old non-statutory scheme, banks with eligible liabilities of less than $10 million were not required to place CRDs with the Bank. Banks over the threshold had to keep on deposit at the Bank 0.35 per cent., reduced to 0.25 per cent. on 1st April, of all their eligible liabilities. Under the new statutory scheme this order proposes that the initial CRD ratios should be zero on eligible liabilities up to $400 million and 0.15 per cent. on eligible liabilities over £400 million. We are also committed to keeping these bands and ratios under review and to review the scheme within five years.
1155 The Government's decisions on the scheme reflect the responses to consultation, taking into account the impact of the likely new charging regime of the Financial Services Authority and also the desire for administrative simplicity and clarity.
The new ratio represents a significant reduction in the aggregate burden, even after taking into account the charges of the Financial Services Authority, cutting the total burden from around $165 million at last year's level of deposits to less than $130 million this year—a cut of almost one-quarter. I beg to move.
Moved, That the draft order laid before the House on 27th April be approved [31st Report from the Joint Committee].—(Lord McIntosh of Haringey.)
The Earl of CourtownMy Lords, I would like to thank the Minister again for his description of this order. From these Benches we welcome the two elements of this order. First, the overall cost to the banks and the building societies will be considerably reduced and, secondly, the proposal exempts the small banks and building societies from making any deposits at all. We still believe, however, that the amount of money which the Bank will receive through the cash ratio deposit scheme will exceed the likely expenditure of the Bank in relation to the provision of liquidity. I was particularly glad to hear the Minister tell the House that this matter will be kept under review.
§ On Question, Motion agreed to.