Independent Commission on Banking

Debate between Baroness Garden of Frognal and Lord Wood of Anfield

Thursday 15th September 2011 Lords Chamber

[Lord Wood of Anfield]

My Lords, I thank my noble friend Lord Myners for making this debate possible. I am grateful to him, the noble Lord, Lord Lawson, my noble friend Lord Davies of Abersoch and others for their expertise and insight. It has been a real treat and has given me serious food for thought. Unlike many noble Lords, I have no particular expertise. The only interest that I should declare is that I have a current account and a joint savings account with First Direct.

Like many noble Lords, I would have liked Vickers to have gone further. I support, though I will not repeat, many of the concerns of my noble friend Lord Myners, the noble Lord, Lord Lawson, and others. However, I am also aware that the best should not be the enemy of the reasonably good and that, contrary to some of the views that we have heard from people in the banking industry over the past few days, time is pressing.

I want to make some points about the importance of ensuring both that the recommendations of the commission on banking are implemented swiftly and that we do not make the mistake of thinking that the set of issues addressed by the commission, crucial in protecting taxpayers as they are, somehow completes the task of addressing the full range of problems related to our banking sector that were thrown up by the financial crisis, the ensuing recession and the continuing economic slowdown.

It is good to hear strong support for the proposals of the commission across the political spectrum. There is widespread recognition that the two key proposals in the final report—the requirement for the ring-fence to protect individuals and small business and the stipulation of minimum capital requirements—are tough as well as right. They offer the prospect of much more effective protection for ordinary depositors, small businesses and taxpayers alike. They are serious proposals, which are commensurate with the seriousness of the structural problems in our banking industry revealed by the crisis. The primary challenge now is for the Government to show decisiveness in response to the commission, not simply by welcoming it—although I am glad that they have done that—but by legislating sooner rather than later. Acting swiftly should not be tendentiously misinterpreted as acting rashly.

The magnitude of these changes requires that they are made in collaboration with the banks. The structural changes to banking operations need to be planned and tailored to each bank, as Vickers notes. Minimal capital requirements cannot be introduced overnight. All this is understood. However, an early and swift move to legislate is crucial, first, because the banking industry itself and its shareholders and customers need certainty to plan ahead. Secondly, we need to send an unambiguous signal that the period of lobbying to contest both the basic approach and the provisions of reform is now over. We have all noted the noises off, as well as some noises on, from the banking industry over the past few days, as well as some of the thin praise uttered though gritted teeth by others. However, I hope that our leading banks recognise that the Vickers recommendations will be implemented and co-operate in making that happen promptly and smoothly.

The Government have a role to play here, too. If they allow a mood music of reticence, foot-dragging and uncertainty to emerge after the publication of the report, they may give false hope to the small—we hope—minority in the banking community who want to turn a period of reflection on how to implement Vickers into a period of rethinking whether the recommendations should be implemented at all. That is why I join the noble Lord, Lord Newby, and others in urging the Government to get on and legislate in the near future, and to agree that the upcoming financial services Bill is the best vehicle to do as much of the work as possible in laying the legislative groundwork for these reforms.

Secondly, I hope the Government remain robust, both privately and publicly, in rebutting the criticisms that have been lodged against these recommendations. Some have said that the reforms will damage the competitiveness of British banks, penalise shareholders and lead to an increased cost of credit. However, underlying these criticisms is a slightly false choice between the competitiveness of our banking sector and the stability of the banking system as a whole. We cannot afford to base the banking industry on inadequate regulatory standards that cost the British economy more in the long term and—in times of economic crisis, as we have realised in the past few years—sometimes in the very short term, too. The aim of these reforms is to protect the long-term stability of the banking system and the taxpayers who have in the past few years been called upon to guarantee its health, in a way that is consistent with maintaining the banks’ competitiveness and improving their services to depositors and businesses. The important issue is not whether there are some trade-offs in the short term between some of these objectives—there probably will be—but whether the recommendations as a whole are right for a sector that has been through such turmoil and caused such turmoil for millions of ordinary people.

The recommendations of the commission are important, and it is important that the Government act swiftly to get the ball rolling on making them a reality and hold the line against those who want to derail this process. It is equally important to recognise that there is a set of related issues around the activities of our banks and their relationship to the wider economy that cannot and should not be parked, but requires action in parallel with implementing the commission’s recommendations. I agree with the noble Baroness, Lady Kramer, that Vickers cannot answer all the issues surrounding our banks and the problems that we have experienced. My concern is that these other issues are addressed—and addressed in parallel.

First, as many noble Lords have said, the commission has some good recommendations on competition in the banking sector, particularly on greater divestiture of Lloyds branches, account switching and the case for a new challenger bank, although detail on how to achieve some of these is a bit slight. However, I am puzzled as to why the commission has backtracked on its interim report recommendation that the Financial Conduct Authority should have a primary duty to promote competition, to saying simply that the duties of the FCA should go in a more pro-competition direction. I hope that this is not a prelude to a weak rather than a strong competition role for the FCA. In addition, the recommendation that the Government should wait a full four more years before even considering a Competition Commission reference two years after these reforms should have come into effect, seems a bit lax and not to reflect the importance of ensuring greater competition as soon as possible.

Secondly, the Chancellor said on Monday that one reason for his caution in progressing quickly with the Vickers recommendations was that he did not want to,

“damage credit supply in the short term”.—[Official Report, Commons, 12/9/2011; col. 770.]

I welcome the Chancellor’s early and clear support for the report as a whole. However, I think that many people will be surprised that concerns about the weak supply of credit lurk behind some of his scepticism about the banking commission’s reforms, when at the same time the Government have done so little to get credit flowing from our banks to our small and medium-sized businesses over the past year and a half. This is, of course, in part a consequence of a policy choice of a contraction in economic policy during a period of prolonged stagnation. But more specifically, I hope that the Government now take up the Governor of the Bank of England’s idea of instructing UKFI to require state owned banks to increase lending now.

Thirdly, the Vickers proposals on structural reform of our banks are intended to protect taxpayers’ interests in the event of future bailouts. We all understand that but we must remember that the financial crisis threw up other activities and practices that undermined the stability of the banking system as a whole, and on which Vickers’ report says not as much. In particular, we know from the past decade the risks of activities such as proprietary trading where banks essentially develop internal hedge funds and trade using their own rather than their clients’ money—activities which were associated with the crises at Drexel, Barings, Salomon Brothers and others. We know that proprietary trading can lead to concerns about conflicts of interest that undermine confidence and increase the fragility not only of individual banks but of the banking sector as a whole. In the United States there is a strong debate going on in Congress and elsewhere about how to respond to this problem. Opinions differ on that, but there is a recognition that there is an issue that needs to be addressed. I hope that in the coming months the Government set out what their thoughts are on this important area of financial regulation. Perhaps the Minister might say something about his thoughts on that.

The ICB’s report has already succeeded in commanding authority and respect in the academic and policy communities, and in creating a cross-party consensus. It should be applauded for that.

[Baroness Garden of Frognal]

My Lords—

[Lord Wood of Anfield]

I am sorry. I have just one or two more sentences. The key message here is that the ball is now in the Government’s court. I hope the House will agree that if we want British banks to be not only world-leading, secure and efficient but also the servants of ordinary depositors and of businesses whom we rely on for jobs and prosperity, we need to maintain the level of ambition and urgency that this report demonstrates.