Regulatory and Banking Reform

Lord Eatwell Excerpts

Thursday 16th June 2011 Lords Chamber

[Lord Eatwell]

My Lords, I am most grateful to the noble Lord, Lord Sassoon, for repeating the Statement made by the Financial Secretary to the Treasury in another place. The Financial Secretary begins by commenting that the tripartite regulatory system failed. That is obviously true, and indeed a variety of other regulatory structures around the world also failed. In order to help us to establish a clear historical time line to understand what actually happened, will the noble Lord, Lord Sassoon, tell the House in which speeches prior to 2008 the Financial Secretary, the Chancellor or the noble Lord himself called for a tightening of regulation? Hindsight is a wonderful thing.

Continuing the theme of the rewriting of history, at the end of the Statement the Financial Secretary states that when the coalition Government came into office, questions were asked about the future of banking and regulation, but they had not been answered. I remind the noble Lord that domestically the most important road map for reform—the Turner review—was published in February 2009, and that the G20 conference that set the framework for international reform was held in September 2009. Far from there being no answers, most of the economic and financial analysis on which the Government’s proposals today are based was done before the election.

I turn to more substantial matters. The Statement fails to make it clear whether the financial policy committee will have any powers. What will it actually be able to do? Will it, for example, have the power to impose leverage collars or loan-to-value ratios to calm a bubble? Will it have the power to impose pro-cyclical levies on banks? Given that the committee will be the focus of macroprudential regulation, what will its relationship be to the more general formation of macroeconomic policy? It is now obvious to everyone that fiscal policy can be a source of macroprudential risk, so what role, if any, will the committee have in the formulation of fiscal policy, even, let us say, at an advisory level?

The Financial Secretary states very emphatically that the prudential regulatory authority will focus on microprudential regulation. Does not this division between microprudential and macroprudential issues repeat the institutional rigidities and errors of the past? Given that the regulation of individual firms will require macro issues to be taken into account, what exactly is the difference between the risks that create macroprudential problems and those that create microprudential problems, and how will anyone know in advance of a crisis which is which?

The Financial Secretary states that the financial conduct authority will have new powers to ban the sale of toxic products. This really is very odd. Since in the recent crisis the toxicity of products was related to the macroprudential risks they created, how is this power invested in the arm’s-length FCA to be related to the management of macro risk by the Bank of England?

I now turn to the future structure of the banking industry and the work programme of the Independent Commission on Banking, as covered in the Statement. First, we on this side heartily endorse the principles for reform set out in the Financial Secretary’s Statement. We would, however, add a further principle: that the failure of a bank should not destabilise the real economy.

Secondly, the Statement endorses in principle the ICB proposition that there should be a ring-fence around high street banks. That sounds sensible and clear until one asks: what exactly is a high street bank? Does the Financial Secretary refer to banks that base their business only on high street deposits—the deposits of households and firms? Or, would it be acceptable for high street banks to have interbank lending, repos and other wholesale funds on the liability side of their balance sheet, given that it was the failure of these markets in commercial paper that was a major factor in the financial crisis? Will that ring-fencing apply to all banks offering retail services in the UK, whether they are British companies, subsidiaries of foreign companies or branches of foreign companies? Will it also apply to banks passported into the UK from other EU jurisdictions?

We welcome the possibility that Northern Rock may be returned to the private sector as a mutual. I echo the question asked by the noble Lord, Lord Lawson, on Monday: in the model chosen for the privatisation of Northern Rock what weight will be given to the implications for future financial stability? Would not mutualisation be an important buttress of stability?

In the Statement the Financial Secretary also voices his support for the Basel III accord. As the noble Lord will be aware, at the centre of that accord is the increase in the minimum capital that banks are required to hold relative to risk-weighted assets. Is the noble Lord aware that the capitalisation of the banks in Ireland prior to the crisis exceeded the new limits proposed in Basel III? Why are the Government supporting such a feeble standard?

We welcome the publication of the White Paper and the draft Bill, and indeed the Government’s agreement to pre-legislative scrutiny. We also note that many of the institutional structures to be given legal legitimacy by the Bill are already in place. There was a reference to the financial policy committee meeting today. Given that the Financial Services and Markets Bill, the predecessor of the Financial Services and Markets Act, underwent major changes, including institutional changes after the pre-legislative scrutiny by the committee chaired by the noble Lord, Lord Burns, is not the establishment of these structures, prior even to a Second Reading in another place, somewhat premature?