Cash Ratio Deposits (Value Bands and Ratios) Order 2008

rose to move, That the Grand Committee do report to the House that it has considered the Cash Ratio Deposits (Value Bands and Ratios) Order 2008. The noble Lord said: The purpose of the order is to reduce from 0.15 per cent to 0.11 per cent the ratio that is applied within the cash ratio deposit scheme, which is itself defined in the Bank of England Act 1998. In so doing, it will revoke the Cash Ratio Deposits (Value Bands and Ratios) Order 2004. The ratio applies to eligible liabilities above the £500 million minimum threshold, and this change will benefit all institutions that make such deposits with the Bank. It is estimated that the change will result in a one-off reduction in the amount of cash ratio deposits held of around £700 million. It may help the Committee if I briefly outline what the cash ratio deposit scheme is. Before 1998, banks maintained cash ratio deposits at the Bank of England on a voluntary basis. As part of the 1998 reforms of the Bank of England, the Government confirmed that they believed it was right that those who benefited from the relevant operations of the Bank should make a financial contribution to its costs. They therefore placed the cash ratio deposit scheme on a statutory footing. Under Schedule 2 to the Bank of England Act 1998, eligible institutions—broadly, banks and building societies—may be required to place non-interest bearing deposits, known as cash ratio deposits, with the Bank of England. The Bank then invests these deposits and the income earned on them is used to fund its monetary policy and financial stability policy functions. Under Schedule 2(4) the amount that an eligible institution must deposit with the Bank is calculated by multiplying so much of its average liability base as falls into each of the different value bands of the scheme by the ratio applicable to that band, and then taking the sum of those amounts. The scheme was last reviewed in 2003, and at that time the minimum threshold of the scheme was increased from the figure of £400 million that was set in 1998 to £500 million. This change to the scheme was enacted through the Cash Ratio Deposits (Value Bands and Ratios) Order 2004. As part of the 2003 review, the Government committed to conducting a further review by 2008 at the latest. The review was conducted last year in consultation with the Bank of England. As part of the review, the Treasury conducted an informal consultation with all institutions currently eligible for the scheme and a formal 12-week consultation. To the former it received 66 responses and to the latter four responses, two of which were from the British Bankers’ Association and the Building Societies Association. The review reached the following conclusions. The cash ratio deposit scheme continues to be a suitable method of funding the Bank of England’s monetary policy and financial stability operations. The ratio applied to those eligible liabilities above the £500 million threshold should be changed from 0.15 per cent to 0.11 per cent but all other variables should stay the same. As an input to reaching this conclusion, the Court of the Bank of England, which is responsible for ensuring the most efficient use of the Bank’s resources, endorsed as a working assumption for the review an estimate of the costs of the Bank’s policy functions of £563 million over the five-year period, which is based on 2 per cent annual spending growth. The investment yield has been forecast to average 5 per cent over this timeframe, and the future growth of eligible liabilities has been assumed to be 4.5 per cent. Under these assumptions, changing the ratio to 0.11 per cent, while maintaining the minimum threshold at £500 million, would result in forecast income from the CRD scheme of £575 million, which is very close to the £563 million required. A number of the assumptions made in reaching this conclusion are subject to uncertainty, which is why the Government have committed to keeping the parameters of the scheme under active review. This uncertainty is in part reflected through the outcome of the previous five-year period. The previous review projected that £575 million would be required to fund the policy functions of the Bank but the outcome was only £531 million. This is principally attributable to the Bank of England taking steps to focus on core activities and improve efficiency. In addition, the cash ratio deposit income for the same period was higher than expected, in the region of £613 million, which is mainly as a result of the growth in eligible liabilities being higher than expected. In the published response to the consultation the Government stated that, subject to parliamentary approval, which this order seeks, they would aim for the change to the ratio to come into force on 2 June this year. Not to meet this date would mean delaying the implementation of this change and for the Bank of England to continue holding a higher level of deposits than it requires. Therefore, I hope that noble Lords will see the merit of the order. I beg to move. Moved, That the Grand Committee do report to the House that it has considered the Cash Ratio Deposits (Value Bands and Ratios) Order 2008. 17th report from the Joint Committee on Statutory Instruments.—(Lord Davies of Oldham.)