Banking Commission Report

Ed Balls Excerpts

Monday 19th December 2011 Commons Chamber

[The Chancellor of the Exchequer (Mr George Osborne)]

The Government are proposing the most far-reaching reforms of British banking in our modern history. Our objective is to make sure that what happened in Britain never happens again, that taxpayers are protected and that customers get a better service. Last year, the Business Secretary and I set up the Independent Commission on Banking to look at what has been called the British dilemma—that is, how Britain can be home to one of the world’s leading financial centres without exposing British taxpayers to the massive costs of those banks failing.

In the years leading up to the financial crisis, a failure of regulation contributed to the build-up of a debt-fuelled boom. Banks borrowed too much and took on risks they did not understand. When the bubble burst, these banks turned out to be too big to fail, and the last Government had to spend billions of pounds bailing them out. Of course, major financial institutions in other countries were bailed out by their taxpayers, but the British bail-outs were on a different scale. The Royal Bank of Scotland bail-out was the biggest in the world. The recent report of the Financial Services Authority on the failure of RBS attributed that to

“poor decisions made by the RBS management and Board”

against a backdrop of a regulatory regime that failed to stop them. The politicians responsible are named in the report.

This Government are determined to do better at protecting British taxpayers from the cost of failing banks, while at the same time acknowledging the importance of the financial sector to our country. Britain should remain home to one of the world’s leading financial centres and the home of global banks, but the strength of this industry is also a potential weakness to the economy if not properly regulated.

The sector supports nearly 1.4 million jobs—not just in the City of London but across the whole of the UK. The balance-sheet of our banking system is close to 500% of our gross domestic product, compared to 100% in the US and 300% in Germany and France. So while a European and international regulatory response to the crisis is important, we cannot rely on this response alone to make our banking system safe. We in this Parliament have to take action—and under this Government, we are.

We are putting the Bank of England back in charge of prudential regulation; we have created the Financial Policy Committee to look at risks across the financial system; and I welcome today’s report from the Joint Committee on the draft Financial Services Bill. I wanted proper pre-legislative scrutiny. That has happened, and we will respond in the new year so that we improve the legislation. We have also introduced a permanent bank levy on wholesale funding and we have introduced the toughest and most transparent pay regime of any major financial centre in the world. We also need to address the structure of our banks, however. That is why the coalition Government set up the Independent Commission on Banking. I again want to thank Sir John Vickers and the other members of the commission—Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf—for their impressive report.

The report made three main recommendations: first, that everyday high-street banking services should be separated from wholesale and investment banking activities, and that this be done via a ring fence; secondly, that banks be required to have bigger cushions to absorb losses without recourse to the taxpayer; and thirdly, that competition in the banking sector be strengthened by increasing the number of banks on the high street and the power of customers to switch accounts. When the final report was published in September, I made it clear that I welcomed these recommendations in principle and would return to the House by the end of the year. Today, I fulfil that commitment. Let me set out in detail how the Government plan to respond, and invite further views before we publish a White Paper next spring.

First, the Government will separate retail and investment banking through a ring fence. It is important to know that this ring fence will not prevent banks from failing, but it does mean that if banks get into trouble, those elements of the banking system that are vital for families, businesses and for the whole economy can continue without resort to the taxpayer, so the following will be in newly ring-fenced banks: the deposits of individuals and their overdrafts, and the deposits and overdrafts of small and medium-sized businesses. They will all be kept separate from riskier wholesale and investment banking, which will have to be outside the ring fence. Larger corporate deposits and lending and private banking can be either in the ring fence or outside. The ring-fenced bank will be legally and operationally independent; it will be able to finance itself independently and have its own board; and there will be limits on the amount it can lend to the rest of the group. The commission’s interim report proposed a de minimis exemption for small banks that were clearly not systemic, and we invite opinion on whether to proceed with that. Our objective is clear. We want to separate high-street banking from investment banking to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail.

Secondly, we will make sure that banks have bigger cushions, so they are better able to withstand losses. The international Basel III requirement, which the UK was instrumental in negotiating, requires banks to hold minimum equity capital of 7%, and there is a top-up for systemically important banks. We will go further. Large ring-fenced retail banks will be required to hold equity capital of at least 10%, and there will also be a minimum requirement for the loss-absorbing capacity of big banks of at least 17%. This requirement will apply to the UK operations of British banks, and will also be applied to the non-UK operations of UK-headquartered banks unless they can demonstrate that they do not pose a threat to the UK taxpayer.

I can also confirm that the Government will introduce the principle of depositor preference: in other words, the principle that unsecured lenders to banks, who are better placed to monitor the risks that banks are taking on, should have to take losses ahead of ordinary depositors. We seek further views on the best way to implement this principle. This comes on top of the guaranteed protection offered by the Financial Services Compensation Scheme, which covers 100% of eligible deposits up to £85, 000.

Those proposals on loss absorbency will also strengthen the European single market. One of the greatest distortions to the single market in banking is the perceived implicit taxpayer guarantee for all European banks. Through these proposals, the UK is setting out a plan to remove that distortion for UK banks. The European Commission has indicated that it plans to consider what it can do to reconcile it at EU level. I welcome that, and the UK will engage actively in the debate.

This House and other member states have objected to the European Commission's proposals to impose maximum standards for bank capital. These proposals undermine efforts that we and others are making to improve financial stability and the single market, and bodies such as the International Monetary Fund believe that they also water down the international Basel III agreement, giving exemptions to globally active banks in certain European countries. Along with others, we will seek changes to ensure that the EU faithfully implements international agreements.

Thirdly, the Government will take action to increase competition in the banking sector. As a result of the disappearance of banks such as Bradford & Bingley and the last Government’s decision on the merger of Lloyds and HBOS, the banking sector is dominated by a handful of large banks. Last year, just four banks took 70% of the market share. We need new banks to enter the market and provide consumers and businesses with more choice. Last month the Government announced the sale of Northern Rock to Virgin Money, which creates a new competitor in our retail banking sector. In the coalition agreement we made it clear that we wished to foster diversity in financial services, including the promotion of mutuals. We welcome last week's announcement that Lloyds has identified the Co-op as preferred bidder for the divestment of more than 600 branches, which will create a strong challenger in the high street.

We will also make it easier for people to switch their current accounts. This recommendation from the Commission has received less attention from the media, but could be of huge benefit to millions of customers. The idea is that individuals and small businesses can switch to another bank within seven days, and all the direct debits and credits will be switched for them at no cost. The Government have secured the banking industry's agreement that it will implement these proposals by September 2013.

We will support the Treasury Committee's proposal to bring the Payments Council within the scope of regulation, and I can confirm that our financial services legislation next year will specify that one of the objectives of the Financial Conduct Authority is to promote effective competition in the interests of consumers. A new statutory competition remit will provide the FCA with a clear mandate for swifter, more effective action to address competition problems in financial services. Within months of the ICB report, legislation will be introduced to bring the change into force.

That brings me to timing. Some have questioned whether the Government will seek to delay implementation of these reforms—such questions come from people who never even contemplated reform when they were in office. In fact, the reverse is true. On the advice of Sir John Vickers and others, I will introduce separate legislation to implement the ring fence. The Government intend implementation to proceed in stages, with the final changes relating to loss absorbency fully completed by the beginning of 2019 in line with the Basel agreement, but I can confirm that primary and secondary legislation relating to the ring fence will be completed by the end of this Parliament in May 2015, and that banks will be expected to comply as soon as practically possible thereafter. The Government will work with the banks to develop a reasonable transition timetable.

Of course, there are both costs and benefits to these reforms. The Government estimate the total costs to UK banks to be between £3.5 billion and £8 billion, broadly in line with the commission’s estimate. Much of this reflects the cost to them of removing the subsidy that comes from any perceived implicit taxpayer guarantee, which is precisely what we intend. The cost to GDP is estimated by the Government at just £0.8 billion to £1.8 billion, slightly lower than the commission’s estimate. These are far outweighed by the benefits of the ICB’s recommendations. Even a relatively modest reduction in the likelihood or impact of future financial crises would yield an incremental economic benefit of £9.5 billion per year, such is the cost of financial crises to the economy. Since the wholesale arms of non-UK banks would be unaffected by these reforms and the principal recommendations relate to UK retail banking, the competitiveness of the City of London as a location for international banking will not be affected.

We are fixing the banking system to protect taxpayers in the future, but we also need to clear up the mistakes of the past. I have already mentioned Northern Rock and Lloyds, but the biggest call on the taxpayer was the bail-out of RBS. The Financial Services Authority’s recent report was a damning indictment of all that went wrong in this crisis, and those responsible are clearly identified in it. We need to deal with the mess they created. Despite promises from the previous Government that taxpayers would profit from the RBS bail-out, the Government’s shareholding is now worth around £27 billion less.

We are already reforming the regulatory structures that allowed these catastrophic failures to occur. Bonuses are a fraction of what they were four years ago. Early this year we placed a limit of £2,000 on cash bonuses for RBS and Lloyds. We have made it very clear that the bonus pool next year must be lower again, and more transparent. We are also clear that, at a time like this, the Financial Policy Committee’s advice should be followed: bank earnings should be used to build capital levels, not pay out large bonuses.

RBS itself has also made significant changes since 2008, including reducing the size of its investment bank by half, but I believe RBS needs to go further, and the management agree. We are the largest shareholders. Let me set out our view. RBS has already announced that it will further shift its business strategy towards its personal and SME customers and its corporate banking business which serves UK and international companies. We believe RBS’s future is as a major UK bank, with the majority of its business in the UK and in personal, SME and corporate banking. Investment banking will continue to support RBS’s corporate lending business, but it will make further significant reductions in the investment bank, scaling back riskier activities that are heavy users of capital or funding. RBS should emerge a stronger, safer bank able to maintain lending to businesses and customers, and which in time can be returned to full private sector ownership.

The British people are angry about what happened in our banks, and angry at the politicians who let it happen. This coalition Government see two parties working together to clear up the mess of the past and to create a banking system that protects taxpayers and serves customers better. Today we present the most far-reaching changes to banking in our modern history so that we can build an economy that works for everyone. I commend this statement to the House.

[Ed Balls (Morley and Outwood) (Lab/Co-op)]

Let me start by thanking the Chancellor of the Exchequer for advance notice of his intention to give a statement but, as with the autumn statement, it is deeply disappointing that the statement, and the 75-page document, arrived with us only eight minutes before the Chancellor entered the House of Commons. One has to ask: do the Chancellor and the Business Secretary have something to hide?

I have a number of questions for the Chancellor. We have not had time to read the report so I hope he will make an effort to answer our questions today, but let me thank him for agreeing, at least in part, to our recommendation back in September that he produce an implementation plan for the Vickers commission by the end of the year. It is vital that the Government now implement these important banking reforms without foot-dragging or back-sliding or watering them down.

So will the Chancellor now agree to our second request, also made in September, and ask the Vickers commission to come back in 12 months’ time and publish an independent report on the progress that has been made in implementing its report?

Labour Members are determined to play their part in implementing these proposals in, as far as is possible, a cross-party spirit—taxpayers, customers and businesses, angry at banking recklessness which forced a multi-billion pound bail-out, will expect nothing less. We have apologised for the part that the last Government played in this global regulatory failure. In that same cross-party spirit, perhaps the Chancellor would like to take this opportunity to apologise too: for the role his party played in opposition, and he played as shadow Chancellor, in complaining of “too much regulation”, and for the then Leader of the Opposition calling, as late as spring 2008, for “lower taxes” and “less regulation” for the City. We all made mistakes and perhaps this Chancellor, who opposed financial regulation legislation, who opposed the nationalisation of Northern Rock, RBS and Lloyds, and who opposed Bank of England independence, should show a little more humility as well. If he does, I will, in a cross-party spirit, commend him for that.

I join the Chancellor in commending the excellent work of the pre-legislative scrutiny Committee on the draft Bill and of the Treasury Committee. We will study those reports in detail, and we will approach the Bill and the Chancellor’s reforms to the machinery of financial regulation with an open mind. However, like those Committees, we are concerned that his reforms could make decision making both more complicated and less transparent in future. There is a serious and still unanswered question as to whether there is sufficient accountability to match the massive new powers that the Chancellor plans to delegate to the Bank of England. His so-called “simplification” actually increases the number of deputy governors of the Bank of England from two to three.

Our fear is that he is replacing the tripartite system with a de facto quartet system—the Treasury, the MPC, the FPC and the PRA—with the FCA on the outside. Given that complexity—I can explain the acronyms; they are all different autonomous agencies in the Bank of England—can the Chancellor tell the House why he has still not published the promised memorandum of understanding between the Treasury and the different Bank agencies? I hope it is obvious to the Chancellor that the memorandum of understanding must specify that in any crisis the Chancellor must always hear the direct advice of all three deputy governors—alongside that of the Governor—most importantly that of the deputy governor who is also the chief executive of the independent regulator responsible for ensuring the stability of the banking system. In my view, that is essential if this new, more complex quartet system of financial regulation is to work in an effective and transparent way.

In responding to the Vickers commission, Labour set out three tests that will guide our view of banking reform—let me deal with them in turn. First, to protect taxpayers, we, too, support the commission’s radical reforms on ring-fencing and regulatory standards. Rather than delay, could the Chancellor explain why he is not at least making a start with reforms in the current financial regulation Bill, which will come before the House next year? Can he clarify to the House whether it is his intention to implement, in full, the Vickers recommendation on depositor preference? On the requirement on the biggest UK global banks to have the ability to absorb losses equivalent to between 17% and 20% of risk-weighted assets, can he explain why he is deciding to water down the Vickers proposal by not applying this rule to their full global balance sheets? Is he sure that this will not leave the taxpayer exposed?

The Business Secretary told the BBC yesterday that the Vickers report was being implemented in full, but what we have here is not an implementation report; it is a consultation paper before a White Paper in the spring. Already we learn that the Chancellor is not implementing the Vickers recommendations in full. Will he tell the House whether he really intends full implementation, or have the Liberal Democrats been sold a pup yet again?

On the second test of securing international agreement, given the Prime Minister’s decision 10 days ago to walk away from the negotiating table without securing any protections at all for financial services in those discussions, will the Chancellor tell the House whether he is confident that he can do a better job? In particular, is he confident that he will be able to get the necessary EU-wide agreement, which means a qualified majority vote, to implement the Vickers capital requirement proposals?

On the third test of delivering a banking system that supports the wider long-term interests of the economy, may I ask the Chancellor about competition and the supply of credit? On competition, we argued back in September that any delay or backsliding on competition would leave consumers and small businesses to pick up an unfair share of what he has confirmed is a multi-billion pound bill for tougher capital and regulatory standards. Developments since September have not been encouraging.

On Northern Rock, will the Chancellor reassure the House that his rather hurried trade sale will deliver over the coming years—in two, three, four and five years—a new challenger bank that will compete in the small business and mortgage markets? Will he assure the House that that will be the outcome? Will he confirm that it is as a result of widespread concern that the taxpayer will not get value from his loss-making sale that the National Audit Office has launched an investigation into that decision?

On the sale of Lloyds branches to support a new challenger bank, will the Chancellor explain to the House—perhaps he could explain it to the Business Secretary, too—why he has decided not to implement in full Vickers’s proposals to increase the size of branch sales from Lloyds on divestiture? Why has he not taken the advice of the Vickers commission on competition? Is it not overwhelmingly clear, as we argued back in September, that rather than waiting until 2015 the Chancellor should now commit to a review in 2013—two years’ time—of the impact on competition of these proposals?

The fact is that none of these long-term reforms can address the two immediate threats to the supply of credit and the stability of our already fragile economy and banking system. First, here in Britain, with rising unemployment and a flatlining economy depressing confidence, thousands of small businesses are now struggling—as Members on both sides of the House know and as I heard for myself in Leigh on Saturday—to access the credit they need to survive and grow, with net bank lending to businesses not rising but falling. Alongside the long-term reforms, will the Chancellor tell the House why, rather than cutting taxes for the banks, he is not acting now to ensure that UK banks start to act now to increase their lending to small businesses?

Secondly, finally and most gravely of all, the failure of all our political leaders across Europe to solve the euro crisis and in particular to get the European Central Bank to start doing its job as lender of last resort is now the biggest threat to banks in Britain, businesses in Britain and jobs in Britain. Ten days ago, the Prime Minister walked away. Will the Chancellor reassure the House that he has not walked away, too? Are he and the British Treasury seriously engaged in trying to solve what is now the gravest threat to prosperity in our country in this generation? Is anyone in the rest of Europe listening to the Chancellor any more?

[Mr Osborne]

First, I apologise if the right hon. Gentleman did not get the statement far enough in advance for him to read it. I am merely following the procedures that he laid down when he was at the Treasury.

Let me deal specifically with the points he raises in detail. First, on the financial services Bill which we will introduce in Parliament early in the next year, I did not talk about it in the statement because we will have the Second Reading debate, I hope, shortly after we come back in January, but it is an important part of what we are doing. I mentioned it in passing. It is about changing the regulatory system to put the Bank of England in overall charge of monitoring levels of debt and systemic risk in our economy—a responsibility that I believe should never have been taken away from the Bank of England back in 1997—and at the same time giving it the powers that it needs to act as a prudential regulator, without which it would not be able to identify those systemic risks.

The reason why I have not produced the memorandum of understanding is that I was waiting for the Joint Committee—the pre-legislative Committee—that has been looking into the Bill. I thought it would be completely inappropriate to produce the MOU before it had reported so, as I explained to the Committee, I was going to wait until I had its report. The report is only being published today and I hope fairly shortly to be able to produce that MOU, having taken into account what both it and the Treasury Committee say.

The right hon. Gentleman says this is all rather complicated. There is a simple principle, which is that the Bank of England is in charge of monitoring risks in our financial system—

[Ed Balls]

This plan is dangerous.

[Mr Osborne]

Well, we have tried the right hon. Gentleman’s approach and look what happened: the entire banking system collapsed. So with the greatest respect, his advice on what is a dangerous approach to regulation we will take with a pinch of salt.

I turn to the right hon. Gentleman’s other points. On international agreement, obviously it is extremely important that we are able to do this under European law. There has been an argument about this. We have a great deal of support. Countries such as Spain and Sweden have written to the Commission to urge it to allow countries to have their own national regimes that sit on top of the minimum capital requirements, and we are encouraged by the very recent Commission quote which says that “Vickers can be implemented fully in the UK in a way that is compatible with EU law”, but we will continue to make our argument. It is encouraging that both the European Commission and the European Parliament have expressed their keen interest in the Vickers report and are doing their own work on that. It is good to see us leading the international debate on that.

The right hon. Gentleman mentions competition. On Northern Rock, we welcome the National Audit Office investigation. It would be very surprising if the NAO did not do a report into such a financial transaction. It has done reports into all the previous financial transactions by this Government and the previous Government. I think what it will demonstrate is that this was a loss-making bank and the independent advice that we received was that it would go on losing money. The people who should be to blame for losing taxpayers’ money are sitting directly opposite me.

On Lloyds and the Lloyds branches, we have spoken throughout this process to John Vickers. Obviously, he can speak for himself and give his view, but we have kept him closely informed of what we are proposing. I think it is consistent with the intention in the report to create a strong challenger out of the divestment of the Lloyds branches.

Let me turn to the timetable that the right hon. Gentleman mentions. As I say, we will be implementing some of the competition requirements in the Vickers report—for example, the new competition remit for the FCA. That will be part of the financial services Bill that we introduce in January. We considered carefully whether to try and put all the Vickers requirements—the creation of the ring-fenced banks—into the financial services Bill that we are introducing early next year.

We did not think that was sensible. That was also the view of John Vickers, who recommended a separate piece of legislation. That is precisely what we are going to do, but our commitment is clear. We will have all the primary and secondary legislation, which is where quite a lot of the detail will be, through by the end of this Parliament. That is exactly what we want to see.

Finally, the right hon. Gentleman has been going around complaining that we are not doing enough, we are in danger of watering down Vickers, and the like. This is from the people who have opposed structural reform to our banking system. When I was sitting on the Opposition Front Bench as the shadow Chancellor under both the previous Chancellor of the Exchequer, who is in his place, and also under the Chancellor of the Exchequer before, who then became the Prime Minister, they opposed structural reform. They did not want to separate the banks. No doubt they can answer for themselves, but for the former City Minister who was in post when RBS made its bid for ABN AMRO, for the City Minister who was in post when Northern Rock was offering those 125% mortgages, for the City Minister who was in post when HBOS was making all those commercial property loans, for the former City Minister to complain that we are not doing enough is ridiculous. This is the man who advised that Fred Goodwin should get a knighthood and who told his boss to go and open the Lehman Brothers headquarters. That is his record, and his mealy-mouthed apology reminds me of that film “Whoops Apocalypse”—I am sorry, I just brought down the entire British economy; can we all please move on now. That is what he has done. Frankly, he has not made a substantive or interesting contribution to this debate on bank reform. Perhaps in the next few months he will.

--- Later in debate ---

[Mr Osborne]

I have already set out the Government’s view on the Royal Bank of Scotland, and the issue of what to do when we come to dispose of the shares will be one that we can all address at the time.

The document and the process have been a very good advertisement for the coalition Government. The Business Secretary and I have worked incredibly closely on the document, which is a joint one from us both, and people will not have read in the newspapers lots of stories about the “splits between us on the issue”—

[Ed Balls]

That was last week.

[Mr Osborne]

Getting a lecture on “splitism” from the shadow Chancellor, who has been the biggest source of division in the House over the 10 years that I have been in Parliament, adds to his lessons on how to regulate banks properly as something to treasure, but this document is a very good advertisement for the coalition Government and the work that we have done with the Business Secretary.

--- Later in debate ---

[Mr Osborne]

Two of those three politicians are now busy earning quite a lot of money in the financial sector to deal with the fact that they might face a surcharge. Perhaps, with the efforts of my colleagues, we can make sure that the third politician soon follows them.

[Ed Balls]

You wish.

[Mr Osborne]

Actually, we are quite happy for the right hon. Gentleman to stay where he is, so I retract my previous comment.

In response to my hon. Friend the Member for Sevenoaks (Michael Fallon), we are confident that we will be able to do this within the regime of European Union law.