Independent Commission on Banking

Baroness Kramer Excerpts

Thursday 15th September 2011 Lords Chamber

[Baroness Kramer]

My Lords, in congratulating the noble Lord, Lord Myners, on achieving this debate, perhaps I may say that as I listened to him, I indeed thought of the Chinese meal that he described. He clearly got to the end, opened the fortune cookie and found a fortune that said, “Vickers has given you all that you asked for”. Then, given his position on the Benches opposite, he felt that he had to attack it for not dealing with every financial and banking problem nationally and globally. Vickers is just part, albeit a crucial and important part, of resolving our economic banking and financial crisis. We should be welcoming this with enthusiasm.

For my sins, for 15 years I was in the banking trade, primarily in the United States and in central and eastern Europe. One of the consequences is that I am a cynic. In my time I saw banks decline on the back of at least two devastating collapses in real estate markets, following the collapse of heavy industry in the north-eastern United States. I joined the Continental Illinois bank on 5 July 1982. On that morning it was the most prestigious bank and the largest lender worldwide to businesses. By that evening it was clear that fraud and incompetence in oil and gas lending had utterly destroyed the institution. But all that could be dealt with in that period because, essentially, the failure was contained. There were rescue plans, acquisitions, mergers and restructurings, but the banking system as a whole did not tumble as a consequence.

That is the change that we face today. The crises will not end, but we now live in a world of interconnectedness. That started out as a mechanism by which banks could manage risk, but essentially, through structured finance and derivatives, and the layering of transaction upon transaction on the back of an individual initial loan, a situation has been created where, rather than just the bank that directly made a stupid or fraudulent loan finding itself at risk, the whole system can be pulled down after it. What I so appreciate about Vickers is that it takes a sword and strikes right through that interconnectedness. Surely that has to be essential in what we do. The deep structural change being proposed is also, I would suggest, very hard to erode. I said that I am a cynic, and as a consequence of that, I do not believe that regulation, supervision or even living wills can, by themselves, eliminate or enable us to deal with systemic risk in our system.

Noble Lords might think that the regulators had no way of knowing in 2008 that we were entering a financial and banking crisis. Indeed, the noble Lord, Lord May, described the absence of various forms of systemic analysis that he is now hoping to introduce. But, frankly, if you ignored the top bankers and talked to the people I know—I have certainly never been a top banker or a board member—one person after another could have told you that the loan books were going wrong, there was bad stuff in them, there was a lack of transparency and a crisis was coming. The noble Lord, Lord McFall, is no longer in his place, but he was chair of the Treasury Select Committee on which I served briefly. We were in the United States in January 2006 and we talked extensively with investment bankers. Again and again they would say to us quite casually, “You understand that there are storm clouds gathering and a major crisis is coming in 18 months to two years off the back of some of the ridiculous home mortgage lending that has been happening in the United States”, and they mentioned various other problems. Trying to tell the Treasury about it was absolutely impossible. Trying even to tell the Americans via the British embassies in the United States was impossible. There was a sort of dewy-eyed belief in the investment banking system, and the regulators caught the same disease. It strikes me as something that is inherent at the top levels of the banking system. I noted when reading Alistair Darling’s memoir that the arrogance tends to come through. However, it is not the case for everybody.

Banking is an industry in which structural barriers have to be put in place. You cannot rely on regulation and supervision, not just because of the frequent absence of common sense but also because I think that we can guarantee that the leaders of our various banking institutions will, within 36 months, be back in through the door of the regulators and the Treasury trying to persuade everyone to go back to a much lighter touch. It is far harder to change structural division than it is to constantly amend regulation at the fringes. That is why it is absolutely crucial.

Many noble Lords have talked about the increased costs involved in separating the banks, and I fully accept that. However, there are some counterweights, and I again recall my own time in banking. When there was separation of companies which by culture and by customer focus essentially did not belong together, both received a new lease of life. Retail banks are suddenly free to be genuine retail banks, with different training and corporate structures, and can look at their customers in a different way. They should become far more competitive and responsive, and much more competitive in terms of price than one might think given the difference in their capital ratios and the additional costs that fall on them. Indeed, we might even see some new excitement and innovation in the investment banks when they no longer find that everything they do is masked by the pool of retail deposits. When they have to face that reality, I suspect that they will be equally innovative. That is one of the reasons why I am happy to say to the noble Baroness, Lady Valentine, that I am not afraid for London’s pre-eminent position. The artificial intermingling of two very different kinds of institution has been demonstrated in other industries to do no one any good, so I do not think that we are going to see the kind of damage which many have been afraid of.

I have two final comments. The first is that it would be interesting to have an opportunity to focus much more on the whole range of measures that are being used to deal with our financial and banking crisis. I was struck by the concerns expressed by Donald Kohn, an external member of the Financial Policy Committee, about the lack of transparency and,

“the re-emergence of complex instruments with chains of counterparty exposures that are not transparent or well understood”.

We have talked in this House about “dark pools”. There are a lot of issues that have to be dealt with alongside because we have highly fragmented financial markets. We are also seeing relatively little in terms of international co-ordination at the moment. If one thinks in terms not just of Vickers but of Basel III, the EU capital requirements directive IV, the Dodd-Frank Act in the United States, the EU insurance industry Solvency II rules, one sees myriad things happening. I should love to hear from the Government that we are seeing some co-ordination among all this, because fragmentation makes decision-making difficult.

The noble Lord, Lord Sawyer, was one of the few noble Lords who spent a lot of time talking about the change in the competitive environment for retail banks. I am going to take this chance to make one last plea: that one of the considerations for the bank that comes in and joins our high street is that it will service micro and very small businesses and economically disadvantaged individuals who are of no interest to our mainstream banks. If we could kill those two birds with one stone, I would find Vickers to be something close to a perfect report.