I am grateful to the noble Lord for delving into the algebra in the formula of “i” over “el” times “py”, which we all know arrives at the answer of the funding that is required. Before dealing with the explanation for that, I will deal with some of the points raised by the noble Baroness, Lady Kramer. She mentioned the consultation. The Treasury ran an informal consultation between 20 December and 15 January, contacting all the eligible institutions. A relatively small number of institutions contributed; 19 responses were received on that part. When it went into the public realm, between 8 and 9 March, three responses were received. One should not be surprised; it is a highly technical measure, as the noble Lord, Lord Tunnicliffe, said. Those were the points raised.
There was a point about what was being done to improve efficiency. There were changes to the way the Bank was to work. Cost-savings measures include a comprehensive programme of cost-containment and
reprioritisation, coupled with an increasing amount of transparency, so we can track what is being spent at the Bank. Those elements are commendable.
The total tax burden on banks and building societies from the bank levy is significant. In 2016-17, £3 billion was raised from the Government bank levy above the £1.6 billion from the bank corporation tax surcharge. Those are significant sums contributing to the Exchequer.
The noble Lord, Lord Tunnicliffe, has been, as always, assiduous in the way he has delved into the detail of the Explanatory Memorandum and the order, and raised a number of pertinent points. He says: why not just have a levy, rather than an alternative means of funding that involves this level of complexity? The review considered a range of mechanisms by which the Bank’s monetary policy and financial stability functions could be funded, in particular whether a move to a fee-based model or levy would be appropriate. The review concluded that:
“Such a proposal was not possible within the scope of the existing legislation and in the current CRD review period. A fee-based model would require more in-depth analysis, starting from first-principles in terms of how costs could be apportioned in a fair and efficient way”.
The noble Lord also asked about the formula: what drives the variables and the weightings attached to them? There are different weightings in the order, which reflect the Bank’s long-term gilt holdings and investments over time. The long-term gilt holdings make up 55% of the total pool, hence the weighting of 55% is applied in the formula. Gilts that would be purchased in the coming months make up to 42% of the pool. Additional gilts that would be purchased over the remainder of the scheme to replace those that have matured amount to 3% of the portfolio.
He then asked: what happens if the Bank’s costs are below those expected? Do banks and building societies get their money back? That is a good question. The budget to be recovered by the scheme over the next five years is fixed and reflected in the order. Any surplus generated by the scheme as a result of underspend by the Bank will be retained by the Bank and will build up its capital base. This will in turn support the Bank’s monetary policy operations. Proposed amendments to the scheme seek to ensure that the Bank’s income profile is smoother over the next five-year period. That should ensure that a surplus or deficit does not arise under the scheme. Once again, I thank noble Lords for their questions and support on this. I commend this order to the Committee.