My Lords, I am extremely grateful to the noble Lord for taking such trouble over these orders. He raised a number of points. He asked whether
it was the first time that we had used the macroprudential powers. We previously legislated to grant the FPC a power of direction with regard to sectoral capital requirements. This was done through a similar order in 2013. The debate in your Lordships’ House was on 26 February 2013. The FPC was also granted the power to set the UK rate of the countercyclical capital buffer under the CRD IV in the normal way.
The noble Lord was concerned about the lack of detail in the Explanatory Memorandum. The full consultation response document was published on the government website, but I take his point. Those of us who sat through the many weeks and months of consideration of the background policy to these orders when we were putting the Financial Services Bill through your Lordships’ House, had it in our water almost that this was going on. For people who did not do that, which of course is the vast majority of people, it is very important that the accompanying documentation is as comprehensive as possible. I am sure that my colleagues in the Treasury will have noted that, although I am of course very pleased that the noble Lord found the experience of seeking advice from the Treasury so positive.
The noble Lord asked about the extent to which there was concern at the moment about housing and whether this was a precautionary measure or the powers were going to be used immediately. The FPC is clear that these instruments are necessary to tackle financial stability risks that could emerge in the future rather than any risks that we are facing at the moment. As it said in its 2 October statement, the recommendation in relation to these powers,
“relates to the FPC’s general ability to tackle risks that could emerge from the housing market in the future. The Recommendation does not reflect any FPC decision about the current state of the housing market”.
This is recognition of the importance of the housing market in relation to financial stability, but there is no concern at the moment that the housing market is in such a position that these powers are needed immediately.
The noble Lord asked whether, as a result of the Budget, there was likely to be a further problem with house prices and these powers might be needed sooner rather than later. The key thing here is that we are not just introducing new measures for first-time buyers, for example, but are taking, and have taken, significant steps to boost housing supply, including the new planning policy framework and the most ambitious affordable housing programme for 30 years. Everybody accepts that we need to do more on housing, but when the FPC looked at the Help to Buy scheme in October last year, which people are questioning as a potential problem in terms of financial stability, it came to the conclusion that it did not represent a material risk to financial stability, that it had not been a material driver of recent house price growth and that its key parameters remained appropriate.
The noble Lord asked about the SME lending proposals. The Government and the FPC do not expect leverage requirements to have a material impact on lending to the real economy. At the margins, firms that are bound by leverage ratio requirements may be incentivised to increase SME lending relative to other types of lending, as SME lending often attracts a
higher return than other assets that have lower risk weights, as the leverage ration is not risk-weighted. However, we do not expect this effect to be significant.
The noble Lord asked how the leverage tool would affect companies with low-risk assets, particularly building societies. As he pointed out, the key capital constraint for banks and building societies is the risk-weighted capital requirements rather than the leverage ratio. The FPC’s impact assessment suggests that only two of the seven building societies in its sample would need to raise capital to meet leverage ratio requirements. The majority of building societies in the UK use standardised risk models, which means that their average risk weights are above 35%. An average risk weight above 35% means that risk-weighted capital requirements will bind—take effect—before the FPC’s proposed leverage requirements.
The noble Lord referred to the Daily Telegraph, and I commend him on his eclectic reading. He asked whether the Budget changes and the increase in the bank levy would have a deleterious impact on growth. The Treasury’s impact assessment shows that the leverage framework itself is expected to have a positive impact on GDP. As far as the banking levy is concerned, we do not believe that it will have an impact of any significance on growth. The OBR has not yet factored in the impact of these orders simply because they are not through Parliament, so it would not take account of them. However, we do not believe that they will have any significant impact on growth.
I have complete sympathy with the noble Lord’s final point about the importance of these orders and the way in which we debate them. He has taken a very hard-working approach to looking at the orders. Even though they are very important, hardly any noble Lords, with the exception of the noble Lord, Lord Tunnicliffe, have intervened in debates on Treasury orders this Session. The noble Lord, Lord Sharkey, did so in respect of one order, talking about an issue that he had raised at an earlier stage.
We have had some very significant orders. We had an order that had the details of the ring-fence for retail banks. When the primary legislation was going through, we spent hours debating whether it was possible to produce such an order that would work; many noble Lords waxed lyrical about it and said that it was impossible. When the order actually appeared, no one came and spoke to it, apart from the noble Lord, Lord Tunnicliffe, who has been here for all such orders. Other than him, it is fair to say that that order had no debate, although it was very significant and contained a number of issues that were certainly worth spending a bit more time on.
To my mind, there is an issue about the role of secondary legislation. The purpose it serves in terms of affirmative resolution instruments that we are required to debate means that, at the very least, the noble Lord and I have to spend some time looking at them. Despite the noble Lord’s forensic mind, that is not always the most comprehensive scrutiny that I think was in people’s minds when they said that such instruments should be affirmative resolution. There is a big issue
there which, fortunately, goes beyond the scope of today’s orders, and we certainly cannot deal with it today.
I take the noble Lord’s point that if the members of the FPC cannot get it right, who can? With the establishment of the FPC, and indeed the whole of the new regulatory framework for the financial services sector, we have tried to make it as foolproof as possible and to make the risk of the kind of collapse that we saw in 2008 as small as possible. I do not think that anyone believes that you can get rid of risk altogether, but I hope that we have gone a long way towards mitigating that risk by putting in place structures that are resilient and effective.