Financial Services (Banking Reform) Bill

Debate between Lord McFall of Alcluith and Baroness Noakes

Wednesday 23rd October 2013 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I agree with much of what my noble friend Lord Blackwell said—in fact, I probably agree with all that my noble friend Lord Blackwell said—but I would like to pick up something that my noble friend Lord Lawson said when he intervened on my noble friend Lord Blackwell, that the issue was who was to decide on the leverage ratio.

The amendment before us says that the direction, which is the Treasury’s direction,

“may specify the leverage ratio to be used”.

The key issue with this amendment is not who potentially decides on the amount of the leverage ratio but the timing of the leverage ratio. People have been clear, and it is going to be a requirement of CRD IV, that there will be a leverage ratio, and the current international timing is to be 1 January 2018. As I understood it, that timing was going to drive the Government’s decision on what leverage ratio to introduce, given that they have the power to include it within the macroprudential toolkit under the legislation that has already been passed. We should not rush into a leverage ratio because there is still much work to be done on understanding how these leverage ratios, which have not been used much recently, actually work in practice.

My noble friend Lord Lawson also pooh-poohed the idea that the difference in practice between the US and the UK was significant. Some analysis done by the British Bankers’ Association has identified that on any given balance sheet the difference can be 3% under CRD IV and 5.3% under the current US rules. So we potentially have quite a significant difference, and the BBA talks about different leverage ratios as well. We also need to understand the impact of any given level of leverage ratio once the definitions are sorted out.

Mark Carney, who is chairman of the Financial Stability Board as well as Governor of our own Bank of England, has been clear that this is to be a backstop measure and that it is important to calibrate it so that the risk-weighted asset calculation of capital bites before the backstop method. Unless we are very clear when we introduce the leverage ratio about what the impacts will be, we potentially lay ourselves open to the unintended consequences of positively driving the capital requirements of the banks or, more likely, their lending capacity.

It is important that we let the current timetable for the development of the leverage ratio proceed and let the calculations be done properly. Banks are already disclosing leverage ratios to the regulators and will be disclosing considerably more information as time goes on, so there can be much more of a public debate about the impact of different leverage ratios on banks and other financial institutions.

[Lord McFall of Alcluith]

I support the amendment moved by the noble Lord, Lawson, which stands in my name as well. As the noble Lord said, the amendment is, quite simply, about who is doing it. Whatever they do at some future stage, we will let them get on with it, because it is about authority. There are two issues here: learning the lesson, and the authority.

On learning the lesson, I noted the comments of Adair Turner, former chairman of the FSA, when he said:

“We allowed the banking system to run with much too high levels of leverage, inadequate levels of capital, and we ignored the development of leverage in the financial system … That was a huge mistake”.

I had never gone back to basics and asked, “Why do we allow banks to run with 30, 40, 50 times leverage?” Neither had anyone else, funnily enough; so it is about time that somebody asks that question and keeps it in their mind on a daily basis. My point is that politicians—Chancellors, Prime Ministers or whoever—will not keep that in their mind on a daily basis. We learnt that from the financial crisis before. If we set up a new organisation we should give it the authority. I noted the comments made by Lawrence Tomlinson, who was brought in to BIS recently as an “entrepreneur in residence”. He questioned why the British Bankers’ Association needed,

“60 people working full-time lobbying”,

when the Government owned majority stakes in two of the banks, Lloyds and the Royal Bank of Scotland. As he said:

“We already own the banks. Why are Lloyds and RBS paying the BBA to lobby us? They can just get lost! … It’s amazing we let RBS spend tens of millions advertising its services with 80% of our money”.

I mention that because the banking sector is the best sector in the country for lobbying. The banking sector, unlike any others, gets direct access to No. 10 and No. 11 Downing Street. That happened with the previous Government and it is happening with this one. If you do not allow the proper authority—the FPC—to have this leverage ratio, you are weakening its authority in an instant. I suggest that the institutional memory of a Chancellor or a Prime Minister is much less than the institutional memory of the Financial Policy Committee.

In terms of the leverage requirements, we have had the Vickers commission, the Parliamentary Commission on Banking Standards, and the interim Financial Policy Committee asking for that leverage to be handed over. The Government have refused. If the Government do not want to be accused of playing politics, it is important that that is put to the Financial Policy Committee.

Let us look at leverage even today. I looked at Barclays, which has been,

“the poster child for excess leverage. Its balance sheet is roughly the size of the UK’s GDP. It funds 1.5 trillion pounds of risk-taking with 97.5 per cent debt and 2.5 per cent loss-absorbing equity … The average hedge fund trades with less than 3 times leverage … Barclays has chosen to operate with 45 times leverage … So Barclays deploys gearing 15 times that of most hedge funds. If the bank’s assets eroded in value by a mere 1.5 per cent, it would be 100 times leveraged. How confidence inspiring is that?”.

If we do not allow the FPC to look at these issues on a daily basis, when No. 10 and No. 11 Downing Street will not be looking at them, we will find ourselves in trouble in the future. As mentioned by the noble Baroness, Lady Noakes, Dr Carney said that it is,

“essential to have a leverage ratio as a backstop to a risk-based capital regime”.

We are saying that, if we have appointed Dr Carney with all the thrills and frills of a Chancellor’s appointment, we should give him that authority so that he can get on with the job straightaway and we can keep it away from the hands of the politicians.

Financial Services Bill

Debate between Lord McFall of Alcluith and Baroness Noakes

Monday 12th November 2012 Lords Chamber

[Baroness Noakes]

My Lords, I am grateful to the Government for the amendments that they have tabled, commencing with Amendment 32, in regard to the PRA practitioner panel. However, as the noble Baroness, Lady Hayter, said, that is not the solution that the industry wanted and it is a rather narrow solution. Therefore, I have considerable sympathy with what the noble Baroness said in relation to the need for the PRA to listen to a broad spectrum of views, including that of the consumer panel. In particular, I am more attracted to her Amendment 37ZB, which would require the PRA to have some sort of dialogue with each of the panels which are being set up for the FCA: that is, the practitioner panel, the smaller business practitioner panel, the consumer panel and the markets practitioner panel. Each will have their own particular issues which would be usefully communicated to the PRA in certain circumstances.

Notwithstanding the fact that there will now be a practitioner panel for the PRA, I continue to have concerns that the PRA’s concept of consultation is a narrow one when it should be a broad one based on regular dialogue and feedback loops with the industry. Therefore, I have very great sympathy with what the noble Baroness, Lady Hayter, has said.

[Lord McFall of Alcluith]

My Lords, I support the amendment and the proposition of the noble Baroness, Lady Noakes. If we look at the history of prudential regulation and consumer interest, we find that prudential regulation has trumped conduct of business for a number of years. I suggest that the PRA will be a more enhanced body than the FCA and therefore will win out all the time. Therefore, what the noble Baroness is saying about a broader range of opinion is extremely important. We need to look at the history of the representation of consumers in the financial services industry over a number of years. I lobbied the FSA for years to get a consumer representative on board. It came back to me very excited one day and said, “We have someone on board”. However, one out of 12 or one out of 13 is inadequate. It is very important that we redress the asymmetry of knowledge that is at the centre of selling because we have to restore trust and confidence in the industry, and to do that we have to balance the needs of the industry with those of the consumer. Therefore, I could not agree more with the need to have broader representation. That would put the status of the PRA at one with that of the FCA so that they served the interests of the industry and the consumer.

Financial Services Bill

Debate between Lord McFall of Alcluith and Baroness Noakes

Tuesday 6th November 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I agree with my noble friend on this issue. Anyone with experience of the Court of the Bank of England would say that its impact has been less than useful over past years. Given the powers that we have given to this Governor for an eight-year period, it is important that the sentiments expressed in the other place as regards accountability are satisfied, because, paradoxically, if that is not the case, it will make the role of the Governor even more political and members of the court will come under pressure.

I had personal knowledge of this during the height of the financial crisis. My concern at that time was to ensure both the political and the financial stability of the situation. It is therefore important that that is adhered to. There needs to be, as the Treasury Committee said, proper records of the court’s proceedings. If transparency is not available, the accountability element will not be pursued. The Government are making a big mistake by establishing what is, in effect—although some people may disagree—a multinational corporation with one person at its head, with little corporate governance best practice.

There needs to be a stage at which the Government can listen to Parliament on this, make the Bank truly accountable to Parliament and ensure the best outcome for the country. We have the Financial Policy Committee and the Prudential Regulation Authority, but there is no doubt that there will be conflicts of interest there. There will be one individual responsible, while the Government and Parliament are spectators and bit players. That should not be the case, and the Government really need to think very clearly and seriously about this issue.

[Baroness Noakes]

My Lords, as a former member of the court, I feel slightly under attack this afternoon, but I was long gone before the financial crisis. In the context of the previous amendment, my noble friend Lord Flight pointed out that the important way to express accountability is on an ongoing basis, not at the point of appointment. The most important thing, going forward, is whether or not the new oversight committee will do its job and who will make sure that it is held to account. It seems to me that it should be the Treasury Select Committee in another place and it is not something for which we need to legislate. The Treasury Select Committee is well apprised of the need to ensure that there are proper accountability mechanisms to act as a counterweight against significant additional powers for the Governor of the Bank of England; and that there are proper checks and balances within the Bank of England and then from the Bank to Parliament.