HL Deb 26 March 2004 vol 659 cc1011-4

3.26 p.m.

Lord McIntosh of Haringey rose to move, That the draft order laid before the House on 3 March be approved [12th Report from the Joint Committee].

The noble Lord said: My Lords, the order seeks to increase the minimum threshold above which certain financial institutions are required to maintain deposits at the Bank of England under the cash ratio deposits scheme. Such non-interest-bearing deposits, known as cash ratio deposits, are invested by the bank. It uses the income earned to fund its sterling liquidity, monetary policy and financial stability operations, which benefit these depositors and other eligible institutions. The Government believe that it is right that those who benefit from the Bank of England's sterling liquidity, monetary policy and financial stability operations should also make a financial contribution to their costs.

A review of the CRD scheme last year concluded that it remained a suitable method of funding the relevant bank operations. The review also concluded that the ratio of 0.15 per cent used for calculating the value of deposits, which was set in 1998 and applied to the average eligible liability base of eligible institutions above a minimum threshold, should remain unchanged. It concluded, however, that the minimum threshold should be increased from £400 million, also set in 1998, to £500 million. While intended to maintain the level of income required to provide the appropriate level of funding for the operations concerned, the higher threshold, as at December 2003, would free 19 institutions from the scheme and benefit all remaining contributing institutions by reducing the level of their deposits by £150,000.

The review's conclusions were put out to consultation on 1 August 2003. The Government's response to consultation was published earlier this month, on 3 March. There were only four responses. The Government and the Bank of England concluded that it would be reasonable to take that as indicative of general endorsement of the review's recommendations. At the outset of the consultation process, the Government said that they attached great importance to making the statutory cash ratio deposit scheme and the principles underlying it more transparent. The Government work closely with the bank on that, and it is anticipated that the bank's forthcoming annual report will reflect progress to date.

The draft order before the House will, if made, increase the threshold at which cash ratio deposits become eligible from £400 million to £500 million but leave all other parameters of the scheme unchanged. We will continue to monitor the effect of the scheme and will conduct a further formal review at the latest in 2008. I beg to move.

Moved, That the draft order laid before the House on 3 March be approved [12th Report from the Joint Committee].—(Lord McIntosh of Haringey.)

Baroness Wilcox

My Lords, in 1998, when the value bands were set, our colleagues in another place rehearsed the arguments for cash deposit ratios and for the levels at which they should be set. I do not wish to detain the House any longer than is necessary, but I find it interesting to note that, six years ago, Members of another place were calling cash ratio deposits a "connoisseur's piece" and "the last relic of attempts at direct control of the volume of sterling money".

Even back in 1998, it was noted that banks' liquidity was actively managed by banks in accordance with the strict liability requirements of the Bank of England. It was therefore suggested that the proposal for cash ratio deposits was simply a tax to be borne only by banks and building societies. I would be grateful if the Minister could tell us the protected revenue in the next financial year to the Bank of England from the new levels of compulsory cash deposits.

Finally, it is six years since the value bands were uprated. They are now being uprated by 25 per cent. Why are they being uprated now? Why not before? Why are they being uprated by 25 per cent?

Lord McIntosh of Haringey

My Lords, I was very interested to hear the quotations from the 1998 debate, which were rather elegant. I think that I can answer the questions asked by the noble Baroness, Lady Wilcox. Currently, there are £1.7 billion of deposits that earn £107 million in interest for the Bank of England. That is thought to be a reasonable amount bearing in mind the benefits that the banks and building societies obtain from the sterling liquidity monetary policy and financial stability operations of the Bank of England. The change will lose the Bank of England £21 million in interest because there will be a lower level of deposits.

The noble Baroness asked why the value bands are being uprated by 25 per cent. They are being uprated by rather more than inflation over the period of six years. If we were doing it strictly in line with inflation, the threshold would be approximately £450 million rather than the £500 million that we propose. There is therefore a net benefit to the banks and building societies from that change. I imagine that, as always, the Bank of England is being very efficient in the way that it spends its money, as well as rational in the way that it collects money. I commend the order to the House.

On Question, Motion agreed to.

House adjourned at twenty-eight minutes before four o'clock.