Independent Commission on Banking

Debate between Lord Davies of Abersoch and Lord Lawson of Blaby

Thursday 15th September 2011 Lords Chamber

[Lord Davies of Abersoch]

I declare a range of conflicts, as I work with a number of companies in the financial services industry. Until I became a Minister in the Government, I had been a career banker—I should perhaps lower my voice at this stage. I love the industry, which may be an unfashionable thing to say, and found it to be an industry with huge integrity. In fact, I was going to thank my noble friend for introducing this debate until he described the bankers as either thieves or pimps operating in a shallow money trench—I shall pass over that quickly.

I was lucky enough in my career to become a chief executive of a bank and a chairman. I served more than 12 years on the board of Standard Chartered in Asia and London. So many factors affect running a bank; it is, after all, the risk business. This is a business where you need trained professionals who operate within a strong culture. Culture and values are just as important as balance sheets. If you have the wrong culture in an institution, you will go bust. It is also important to have checks and balances. We have touched on auditors. Auditors were missing in the run-up to the financial crisis. They were not mentioned in the report; they should have been.

This morning’s announcement of UBS’s losses of $200 billion highlighted yet again that this is an industry which has the capacity to shock. You cannot have an autocratic style in a bank. You need pragmatism and caution; you also need a balance between risk and reward. So much of running a bank is about the board of directors and the relationship that the executives have with the board. It is also about having individuals and the blend of experience and skills to govern a bank. In a number of the British institutions, we did not have the right mix and we paid the penalty.

Banks and financial companies are complex and operate with sophisticated products. We should never forget—I know because I was a chief executive—that the shareholders of the companies were pushing CEOs to grow faster and expand more aggressively.

Every crisis, whether it is dotcom, Russia, the Asian crisis or even the tulip crisis many moons ago, has taught us that bubbles occur, that markets collapse and that management has to scenario-plan and think through the downsides. Culture, values and skills are all key ingredients, supplemented with proper supervision. There was insufficient supervision.

It is important to highlight that is an unusual industry because you are playing with other people’s money. You are selling products that you want back, perhaps after 40 years in the case of a mortgage, in arguably better condition than when you sold them. If you get it wrong, the consequences for society generally are catastrophic. Contrary to the “casino” image that goes around, most banks facilitate trade and support their consumer and corporate customers—with foreign exchange, trade, term loans and mortgages. During the past few decades we have seen the world become a smaller place. Companies today source from Bangladesh and Shenzhen. They sell online; they sell in the high streets of all the UK. We are living in a true global economy. Banks such as Barclays, HSBC and Standard Chartered typically operate in more than 50 countries. They may be British, but they are multinationals, like Coca-Cola, Unilever and Vodafone. They cannot operate with 50 different regulatory approaches. The Vickers report may have some great recommendations, but we are part of a global economy.

I turn to another issue. London, through focus, through its timeline and through a clear strategy, has become a top-three world centre of excellence, particularly in insurance, foreign exchange and wholesale trading, et cetera. Now is the moment to learn from our mistakes. We have to yet operate within the global economy; we have to keep London’s top-tier position; yet we have to protect the consumer and the taxpayer, and we have to be balanced—something that so many banks got wrong. That is the nature of the dilemma that we are facing today.

The regulators, as I said earlier, missed it. Boards missed it. The shareholders and owners missed it; they were nowhere. A very large bubble burst and nations have paid a huge cost. Now, as we talk about the Vickers report, we have another European crisis to add to our worries. The one thing that the report does not mention is that all these crises have one characteristic, which is the shortage of liquidity. When you run a bank, so much of your conversation is making sure that you have the right liquidity—the right funding. Northern Rock did not have it and neither did some of the other banks, and they collapsed.

This is a global, international industry and political leaders at this moment have to be just that: leaders. We need a global standard, not a set of British, Indian, Singaporean or even American initiatives. The regulatory arbitrage that will result from the implementation of the Vickers report if the US, Hong Kong and other places go with a different model will result in a much bigger unintended consequence—lower lending and a major global slowdown.

[Lord Lawson of Blaby]

The noble Lord speaks with immense authority and therefore it is important to tease out one particular point that seems to be emerging. Is he actually suggesting that we do nothing in this country along the lines of the Vickers report or whatever until we have a global agreement, which might take goodness knows how many years and might never be attainable?

[Lord Davies of Abersoch]

No, not at all. This is the moment in history where we use the Vickers report and the European crisis and in the next six months we come and agree a global accord for liquidity and capital. We must not end up with a system whereby we impose the separation of retail and investment banking on an HSBC or a Barclays when Jamie Dimon—the chief executive of one of the largest banks in America, JP Morgan Chase and Co—made it very public when he said in the FT:

“I am not sure that we should achieve even Basel III regulations in America. They are too strict”.

If one of the key competitors of an HSBC, Barclays or Standard Chartered is saying in America that it is not even going to comply with Basel III, we will have a major regulatory arbitrage in the world. Long term, that is a big mistake.

If you are a chief executive or are on the board of the bank, you have to ask which centre you should have your head office in. The amounts of capital required are extraordinary. The Vickers report has huge implications. I have great sympathy with separating retail and investment banking. They are fundamentally different businesses. But let us truly understand the amounts of capital that will be required to fund the investment banks with the capital ratios that are being suggested before we rush to a law.

We need to be very aware of the political anti-banker bashing. We have had that and we need to move on. We need to move into an era where the G7, G8 and other applicable countries come together, learn the lessons and in the next six months agree a regulatory framework.

Autocratic leadership, reckless lending abroad with the wrong make-up, a disastrous acquisition coupled with shareholders who seemed to egg the bank on—that is the story of RBS. It was not actually about capital: it was so much about the culture of the board. I am concerned about a move to saying that the answer to all the banking problems is just capital. It is not.

The important thing about banking is that retail banking is all about small loans and a huge volume of customers. The other thing that the Vickers report misses is that it is increasingly difficult to fund a retail bank without wholesale deposits. That is the fundamental issue for the future of banking.