Financial Services (Banking Reform) Bill

Debate between Lord Desai and Lord McFall of Alcluith

Tuesday 15th October 2013 Lords Chamber

[Lord McFall of Alcluith (Lab)]

My Lords, the noble Lords, Lord Eatwell and Lord Sharkey, have done the Committee a service by raising this issue. Four years on from 2010, when the Government came into office, we have much less competition: banks are bigger; the cost of capital, as the noble Lord, Lord Higgins, said, is more expensive; and SMEs’ credit is still drying up. The problem is that British banking lacks a “spare tyre”, as Adam Posen of the Monetary Policy Committee said. I remember a conversation that I had with Stephen Hester when he was chief executive of the Royal Bank of Scotland. He said, “If you have new entrants into the banks, all they will do is replicate the business model that already exists. You need a Google, a Yahoo or a Facebook to have that disruptive technology”, as the noble Lord, Lord Turnbull, described.

I was of the opinion that, as a commission, we should have a referral to the Competition and Markets Authority straight away because this is an area in which, when talking about change, we are talking about years and possibly decades. If we do not get on to this straight away then we will see very little improvement at all in five or 10 years’ time. As the noble Lord, Lord Eatwell, said, if we are talking about establishing regional banks—an aspiration which the most reverend Primate the Archbishop of Canterbury articulated—we need a secure structure. We have to understand how small banks failed. People say, “Well, small banks are just the same as large banks”. I have a quote here from February 2006 in which an individual said,

“we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management ... These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries”.

So, the system is safer. The individual who said that was a certain Tim Geithner, whom the President of the United States then appointed as the United States Treasury Secretary. Mr Geithner had a great knowledge of individual institutions but Mr Geithner, like the IMF and others, was clueless about the interconnectedness of the banks, which is why the banks went down. Whether we are talking about large investment banks or small regional banks we must turn our attention to that area of risk if we want a better system.

My noble friend Lady Liddell mentioned the Airdrie Savings Bank. I was privileged to give the 150th anniversary address there. To re-emphasise what she said, the non-executive directors there were local and unpaid. The Airdrie Savings Bank was a fly on the back of the elephant that was the Royal Bank of Scotland. However, the Airdrie Savings Bank prospered and the Royal Bank of Scotland went under. The Chancellor at that time, Alistair Darling, said that he got a call in the morning from Tom McKillop, the chairman of the Royal Bank of Scotland, saying that it would be out of business in the afternoon if the Government did not step in. Surely there are lessons to be learnt there from the small banks.

I do not accept the proposition that small and regional banks are not on. A chief executive of a very large bank said to me in private that we should look at retail banking in the United Kingdom as utilities—as predictable and boring activities. That is the way we should be looking at our banks. I think a referral to the Competition and Markets Authority would be wise at the moment because we will be talking about this issue for 10 or 15 years to come. If we do not look at the structure of retail banking in the United Kingdom, we are simply going to replicate what we have at present. There is an opportunity for innovative thinking. These amendments offer the Government that opportunity and I hope that the Minister in replying will indicate that this is a fertile area and we can get on to looking at a new structure for our banking.

[Lord Desai (Lab)]

My Lords, I support the amendment in the name of my noble friend Lord Eatwell and want to comment a little on the amendment from the noble Lord, Lord Sharkey, and my noble friend Lord Glasman. The key is what the noble Lord, Lord Higgins, said. Where are the economies of scale in banking from? Why are large banks more successful in surviving and, as it were, swallowing up smaller banks here than they are elsewhere? We had smaller regional banks for a number of years in the 19th century and later. Then we had the concentration of only five large clearing banks left and then even fewer. One question that the competition authority ought to ask is, “Are the economies of scale technological, or is it just that larger banks can borrow money on the money market at a more favourable rate than small banks can? Or are we as authorities putting serious restrictions in the path of small banks to stop them starting and prospering? Are we imposing extra costs on the small banks so that the large banks get away with lower costs than small banks?”. Those are the questions that we ought to examine.

I do not particularly mind whether these are regional banks—what we need is more diversity in banking. Regional and local banks may have failed not because there is something wrong with being local or regional but because there was a storm of cheap credit available and people decided that even if you were a local bank you could still get into the American subprime mortgage market to make money. That is what ruined people; it was not being regional. In a globalised market you have access to buying and selling assets all over the world. German local banks got into subprime mortgage markets in America and lost out.

We really ought to nail down where the economies of scale are and encourage and increase diversity by removing the non-competitive restrictions that currently help large banks to dominate, rather than creating small banks that would have special competitive advantage—as it were, some kind of subsidy—which may be desirable in some larger sense but is not economically efficient. We have to ask whether large banks are surviving because of a competitive advantage and whether they will fail again, costing us a lot of money. Should we look for diversity and a level playing field among large and small banks?