Independent Commission on Banking

Earl of Caithness Excerpts

Thursday 15th September 2011 Lords Chamber

[The Earl of Caithness]

My Lords, I am very grateful to the noble Lord, Lord Myners, for introducing this debate. It is very appropriate that we are having the debate on the third anniversary of the collapse of Lehman Brothers. I tried to get a debate on the interim report but it was not welcome, so I am even more grateful that he has got his debate today.

The noble Lord said it was the management and governance of banks that caused our present economic crisis. I disagree with him fundamentally. It is the banking system itself that is corrupt and dishonest, as I have been saying since 1997. One actually cannot blame greedy bankers for exploiting the existing system; it is the system that is wrong. My right honourable friend the Chancellor of the Exchequer, in welcoming the Vickers report, said the commission had,

“come up with an answer to the question of how Britain can be the home of successful international banks that lend to families and businesses without exposing British taxpayers to the massive costs of those banks failing. Frankly, it is a question that should have been asked and answered a decade ago”.—[Official Report, Commons, 12/9/11; col.757.]

I posed that question. In fact, I introduced a Bill in 2008 called the Safety Deposit Current Accounts Bill, but it was summarily dismissed in the House, as the noble Lord, Lord Davies of Oldham, will know because he spoke for the Government at the time. Therefore, I have been quite used to being in a minority of one in this House. However, today I see that I have more friends on my side than I have had for some time.

The report recommends that large retail ring-fenced banks should have equity capital of 10 per cent of risk-weighted assets and that retail and other activities of large UK banking groups should have loss-absorbing capacity of 17 per cent to 20 per cent of risk-weighted assets. Unfortunately in the report there is no definition of risk-weighted assets. Perhaps my noble friend on the Front Bench will tell us what he thinks Vickers meant by risk-weighted assets. I have googled it and there are various options. That ratio means that 90 per cent of large retail ring-fenced banks’ risk-weighted assets will still be exposed, as will 80 per cent to 83 per cent of large UK banking groups’ risk-weighted assets. Herein lies the rub. If one digs a little deeper into the report one discovers that risk-weighted assets represent only 50 per cent of total bank assets. Therefore, between 90 per cent and 95 per cent of deposits will remain exposed. That is why I call the recommendation of the ICB a partly secured current account.

In his Statement, my right honourable friend the Chancellor also reminded us that we are in,

“a decade-long, debt-fuelled boom that ended in a dramatic financial crisis, a deep recession and a debt overhang that is still holding back our economy”.—[Official Report, Commons, 12/9/11; col.757.]

In the light of this observation, I find it difficult to understand both his recommendations and those of the ICB. There is no doubt that the economy needs investment stimulus and that it needs it now. We can all agree on that. From where will the money for investment come? The banks legally own all the money deposited in them. That, of course, is all the money not in circulation. Therefore, most people and businesses that need money turn to the banks to raise it. However, banks provide money through the creation of new debt. Banks lend money. Yet we propose a solution that, by definition, produces new debt. Bank lending increases the level of debt. That is totally illogical.

Now that we all seem to agree that there is an overhang of debt that is holding back our economy, surely the last thing we need is yet more debt. The economy needs investment but it needs to be equity investment, not further debt. Equity investment stays in a business and remains its life-blood. Businesses need capital. Capital is an asset, debt is a burden. Contrary to popular belief, banks do not provide capital; they provide only debt. Unfortunately, the consequences of the judicial decisions of 1811 and 1848 mean that banks own all the money deposited in them; it no longer belongs to the depositors. Indeed on the day the Statement was read, on I think Monday, the noble Lord, Lord Elystan-Morgan, questioned whether that contravened the Theft Act. I wonder whether my noble friend would like to comment on that.

Therefore, access to most of the money in the economy is only through bank lending. That is what the ICB and the Chancellor should have addressed. I believe they both missed the mark by not dealing with this blockage to the flow of capital into the economy. Banks’ total ownership and control of all the money they hold allows that blockage. Ownership of the money in a bank rightfully, if not legally, belongs to those who earned that money and deposited it in the bank in the belief that it would be stored safely for them and paid out according to their instructions. Current accounts hold people’s family budgets and business budgets. It is their life-blood and should not be put at any risk. Banks often say they invest savings. That is misleading. They also use current account deposits for making loans and all loans have some risk.

The remit of the ICB was to ensure that there could not be another bailout of banks by the taxpayer, yet it recommends only a partially secured deposit system. Between 85 per cent and 90 per cent of deposits will remain at risk under the partially secured system that they propose. It is too little and it is too late. Such a system is doomed to failure. Parliament needs another option. I will retable my Bill, which I have amended slightly, and that will be an alternative for your Lordships to consider. If your Lordships think you have witnessed a banking crisis, I believe you have seen nothing yet. Under the present banking system it is bound to happen and it is not very far away.