Regulatory and Banking Reform

Lord Hollick Excerpts

Thursday 16th June 2011 Lords Chamber

[Lord Sassoon]

My noble friend’s first question was about whether this is twin peaks, triple peaks or whatever. I have always found that a somewhat stale way to analyse the issue because over the past decade constant comparisons were being made between single peaks, twin peaks and so on, so I am reluctant to be drawn into characterising what we are now proposing as any number of peaks. All I can say is that it is emphatically not a triple-peak solution in that the macroprudential and the micro in the PRA are going to be in one body in the Bank of England. So although characterising it as twin peaks is closer to the models that have been analysed by academics and others over the last few years, it gets us back to language that I am not sure is entirely helpful. However, it is certainly not a triple-peak solution.

On the questions around separation and permeability of the ring-fence, the Government will be guided by the independent commission’s final report. But it is also important to recognise what the ICB’s interim report did and did not say. To put it simply, it certainly was not a division between retail and investment banking. The commission acknowledged that a balance has to be struck between imposing very high costs on an important sector and the degree of safety. The point of firewalling is not to eliminate all risk, but to minimise the risk and cost to the taxpayer should a bank fail. The ICB is now focused on these issues between now and September. The principal issues to be looked at by the Government and the Bank of England will be the powers to manage the collapse of any investment bank, were that to happen in the future. As I hope was clear from my honourable friend’s Statement, one of the principles in establishing the ring-fence is to make sure that the taxpayer is not exposed on either side of it. Therefore, getting rid of the risk of moral hazard is at the centre of the construct that we are looking to put in place.

[Lord Hollick]

My Lords, I, too, welcome the Government’s endorsement of the requirement for high-street banks to be better capitalised. However, I share the concerns of the noble Lord, Lord Higgins, about the efficacy and efficiency of ring-fencing, as opposed to total separation. As the Minister will know from his time in the City, banking groups are funded and the Treasury is run on a group basis. To separate the groups and deal with permeability will be extremely difficult. A legal separation would reduce, if not eliminate, the risk of inter-group contagion. It would also allow the risks of the high-street bank and the investment bank—or whatever the Minister chooses to call it—to be properly priced. This would benefit the ordinary consumer. The lower cost of borrowing that a better capitalised high-street bank paid could then be passed on to the borrower.

The second issue that arises on this is, again, a welcome commitment to apply this right across the banking industry. However, many of our banks are headquartered in other countries. Have the Government had any discussions with the Governments of, for instance, the United States and Spain? Do they share the Government’s enthusiasm for this approach? Will the Government also ensure that the lead regulator—whether in the United States or in Spain—will follow the same path?

[Lord Sassoon]

My Lords, there are many questions wrapped up in all that. I am conscious that we have four minutes to go. I repeat myself, but we have set up the independent commission with a suitable group of experts and resourced with a secretariat that is now grappling with precisely these questions. Legal separation has, in the history of the US and Glass-Steagall, proved itself to be an incomplete answer to this. We have to find the best answer. We have set out the Government’s perspective, which is to endorse the principle, and set down the standards by which we shall judge the solution that the commission comes up with. I am sure it will listen to the ideas that are put forward here this afternoon, as well as to all the other submissions that it receives. It is not an easy challenge for the commission, but it is made up of the best people to carry it out.

On the international side, one of the standards by which the Government will judge the solution and decide whether to endorse it is compatibility with the international rules. That is the minimum. That is not what the noble Lord went on to say. As to whether other people will come with us, all I can say is that there has been a high degree of interest in what the commission has come up with in its interim report. People around the world are studying it. We shall see in time whether they will follow it. All I know is that the eyes of the world are very much on the continuing work of the commission.