The FPC hosted a programme of three fringe events at the 2008 Liberal Democrat Party Conference, which took place from 13-17 Sept in Bournemouth. A summary of our event on the credit crunch follows below. This information was provided by DeHavilland Public Affairs Monitoring Service. For more information about DeHavilland services please visit www.dehavilland.co.uk or email firstname.lastname@example.org.
A Foreign Policy Centre and KPMG event
Liberal Democrat Fringe - 'The credit crunch: Can Europe make a difference?'
Tue, 16 September 08 | DeHavilland Report - Event
International financial authorities including the Bank of England had been 'far more sanguine' about the threat of a banking crisis than they had cause to be, Liberal Democrat shadow Treasury Minister Colin Breed has today claimed.
Speaking at a fringe event at the Liberal Democrat conference entitled 'The credit crunch and EU regulation', Mr Breed was joined by MEP Sharon Bowles and Professor Richard Werner of the University of Southampton. The event was chaired by Adam Hug of the Foreign Policy Centre.
In his opening remarks, Mr Breed claimed that after visiting New York with the Treasury Select Committee, its members had been left with the feeling that regulators were too complacent about the threats to financial sector. When the Committee investigated the stance of the Bank of England, they had found the same attitude prevailed, he said.
Turning to the collapse of Northern Rock, Mr Breed argued that the Financial Services Authority (FSA) had not maintained clear oversight in key areas, most notably in tracking the bank's liquidity. The Liberal Democrat spokesperson called for clarity as to what was regulated and how this was carried out.
He warned that current regulatory systems were too bureaucratic to respond to the fast pace of change in a modern banking crisis, adding that the FSA needed to do more if it was to enjoy credibility within the City.
Sharon Bowles compared the current crisis to 'financial pollution', noting that like its physical counterpart it did not respect borders and thus required an international response.
She was critical of the irresponsible behaviour of those who had designed new financial instruments, but added that some of the blame must be placed on credit rating agencies, investors and the regulators.
International accounting standards which required marking-to-market created a pro-cyclical effect which further depressed share prices, Ms Bowles observed. She also highlighted concerns about off-balance sheet accounting and sought greater transparency in the trading of over the counter products.
However, Ms Bowles rejected the Government's argument that EU rules had made it impossible to aid Northern Rock discreetly. She pointed out that the German government had been able to provide funds for troubled banks without making these transactions public.
Turning to possible responses, Ms Bowles explained that the EU was looking to tighten capital adequacy requirements for riskier instruments. Furthermore, she suggested that issuers of riskier products could be made to retain a portion of them on their own balance sheets, aligning the interests of both the buyer and seller.
Greater transparency was needed on the methodology and assumptions of the credit rating agencies, Ms Bowles continued, noting that there was no professional body for these firms as there was for accountants and auditors.
On the subject of an EU-wide banking regulator, the MEP said that she would not support the creation of a new tier of bureaucracy, especially given the current shortage of capacity and differing practices across member states.
However, Ms Bowles was willing to countenance such a body if it evolved out of the present Lamfalussy arrangements.
Professor Werner argued that banking crises were a product of unproductive speculative lending. He described how central banks had once monitored this to prevent the formation of bubbles, but observed that this was no longer the case.
This was due to the fact that the Bank of England had only one target - consumer price inflation - which was too narrow a view, the professor contended. In the current situation, the Bank was moving to control inflation even though its actions could be detrimental to the wider needs of the economy, he suggested.
Warning that the current crisis would hit the UK harder than the US due to Britain's exposure to the housing market and financial services, Professor Werner suggested that the Bank of England could restore liquidity in a simple manner.
He proposed that the Bank buy bad debts from the financial institutions, thus freeing them to lend once more. Professor Werner suggested that this move would result in a return of liquidity and not cost the taxpayer anything as the transactions were largely notional.
In the question session that followed, the panel were asked for their view on the Conservative proposal to place banking regulation in the hands of the Bank of England.
Mr Breed claimed that the Bank did not want this responsibility, observing that it would get in the way of its relationship with other banks. He called on the FSA to work more closely with the central bank, but acknowledged that there was a need for a separation of functions between the lender of last resort and the regulator.
The Treasury spokesperson criticised the existing tripartite arrangements, painting them as cumbersome and lacking clear lines of responsibility.
Mr Breed assured the meeting that the current financial problems only affected a small part of the industry and warned against knee-jerk responses.
Ms Bowles called into question the independence of the FSA, maintaining it was too subject to political interference from the Treasury. Furthermore, she argued that the Authority should not be beyond the law when it came to negligence and pointed to the Equitable Life case by way of example.
Finally, Mr Breed claimed that it was nonsensical to consider abolition of the council tax - as advocated by the Liberal Democrats - without instituting some other form of tax on property.
© DeHavilland Information Services
Download FPC Fringe Programme - Liberal Democrat Party Conference (120 kilobyte PDF)