Independent Commission on Banking

Viscount Trenchard Excerpts

Thursday 15th September 2011 Lords Chamber

[Viscount Trenchard]

My Lords, I, too, congratulate the noble Lord, Lord Myners, on introducing this debate. It is certainly to be welcomed that your Lordships’ House has an opportunity to discuss the Vickers report during the week of its publication but the other side of that is that not all noble Lords have had time to read every word of the report yet. I am afraid I count myself among that number. Like other noble Lords, I congratulate Sir John Vickers and his colleagues on their hard work in addressing the very complicated task set for them by the Government.

I must declare an interest in that I am employed by Mizuho International plc, the investment banking and securities subsidiary of the Mizuho Financial Group of Japan. I have been a banker for 38 years. I joined Kleinwort Benson in 1973, at which time it was what my noble friend Lord Lawson called a merchant bank. However, it actually combined both a significant commercial banking business and an emerging securities business, which was developed further after we bought the stockbroker Grieveson Grant and bond and equity underwriting and fund management businesses, so that part of what we did was—in Vickers parlance—ring-fenced and part was not. At that time, there were not in place the ring-fencing restrictions of the kind now being proposed. Even though I am a banker, I would not wish to argue that nothing needed to be done in response to the financial crisis and the collapse of several leading banks. However, in proposing the unilateral adoption of a strict ring-fencing of retail businesses and significantly higher capital requirements than internationally agreed levels, Vickers surely underestimates the damage to London's position as the world’s principal financial centre.

I entirely agree with what the noble Lord, Lord Myners, said about governance and the need to concentrate more on it. The report is somewhat thin on that and I think it is also true that Vickers does not adequately address the reasons for the banks’ failures. They were somewhat different in each case, while the banks that failed were not like each other in any particular regard. It is absolutely not necessary or desirable to introduce these additional reforms, certainly at present given the economic background with the euro situation and other things. The effects of the already increased capital requirements, the bank levy, restrictions on remuneration and stricter regulations have already completely changed the environment in which banks operate.

It is absolutely right to set up a framework which minimises the risk that the taxpayer will again be required to bail out our banks. However, I fear that the gold-plated additional capital requirements, over those internationally agreed in the Basel III framework, together with a very cumbersome proposed regulatory system and the ring-fencing proposals mean that the greater risks which the taxpayer faces today are very different from those from which Vickers seeks to protect him. International banks’ perception of London's attractiveness has already changed for the worse. The problem with our regulation is not that we did not have enough but that the FSA did not do what it was supposed to do—and did not work effectively with the Bank of England.

Several major banks are already booking more business in other centres, and new businesses that would have been set up here are now not going to be. There are already fewer banking jobs and reduced income tax revenues from bankers, in spite of the 50 per cent tax rate. I welcome the Chancellor's decision to launch an inquiry into whether it is a net contributor. If our banks are so encumbered, with too much detailed prescriptive regulation and unnecessarily large capital buffers, they will cease to be competitive compared with their international peers. They will lend less to smaller companies and their margins will have to be higher. This will restrict growth in the economy. That will prevent the Government from restoring our former competitive tax rates, which played a part in establishing London’s leading position.

If the banks are broken up as proposed, that will have a serious adverse effect on the price and the timing of the Government’s intended sale of shares in RBS and Lloyds. Furthermore, the ring-fenced retail banks will not find it easy to issue the additional equity and debt securities that they will be required to under the proposals.

I welcome the report’s recommendations to make account-switching easier, but I rather wonder what will be the point of doing so if every Vickers-style retail bank is identical, offering the same products probably on identical terms. I would rather that the customer had real choice of what type of bank he switched to. For example, he might see a significant difference between RBS with its significant investment banking business and Lloyds with very little.

I refer noble Lords to the article by Sir Martin Jacomb in yesterday’s Financial Times. As noble Lords will know, he is a distinguished banker. He was a vice-chairman of Kleinwort Benson when I joined and went on to be chairman at BZW and, later, the Prudential. As he argues, when Governments decide that retail depositors must not lose money and that some banks are too big to be allowed to fail, regulation becomes essential and the importance of sound management is diminished.

My noble friend Lord Lawson argues for a return to the separation of banks and investment banks. I think that I have heard him on a previous occasion advocating the introduction of a Glass-Steagall Act in the United Kingdom. As Sir Martin points out in his article, though, Glass-Steagall was abolished because customers want the services that universal banks can provide. In any event, the purpose of Glass-Steagall was completely different from that now sought by the ring-fencing proposal.

I do not believe that ring-fencing is the answer or that the lack of it was the cause of the bank failures. Neither do I think it likely that any other country with a significant financial market will introduce it. Even in a Vickers-style ring-fenced retail bank, there will still be some risk. We should beware the paradox that a system to limit risk invariably increases it.