Independent Commission on Banking

Lord Griffiths of Fforestfach Excerpts

Thursday 15th September 2011 Lords Chamber

[Lord Griffiths of Fforestfach]

My Lords, in taking part in this debate I declare my interest as a vice-chairman of an investment bank based in London, not a universal bank—we do not take regular deposits so it is less relevant in that sense to this debate—and a subsidiary of a bank based in New York. I, too, appreciate the noble Lord, Lord Myners, initiating this debate, not simply because of the publication of the Vickers report but because that report has to be seen in the context of what will happen in the coming days, weeks and months in continental Europe and in the eurozone, which is very relevant to what Vickers is talking about.

Contrary to some, I think the report is a first-class piece of work. It shows a very good mind, it is tightly argued, well written and very thorough. I would have thought that there could be complete agreement on its objectives; namely, to protect taxpayers from the consequences of mismanagement by banks and at the same time to create a competitive banking system. I strongly support the objectives of Vickers. Our regulatory system was clearly not fit for purpose when the financial crisis came and it needed to be changed.

However, I think that the noble Lord, Lord Myners, was a little hard on what it said about competition. I first wrote on the subject and specialised in it when teaching at the LSE in December 1970 and, calling for an end to the banking cartel. As I look at the diagnosis of what is wrong in terms of insufficient and misdirected competition, concentration of barriers to entry, lack of transparency and, problems of switching, I think that it has gone about as far as it could. The commission tried to make recommendations to deal with that and, short of saying that you should break up the banks into smaller entities, I am not sure that it could do much more. Ever since we had a more competitive banking system, starting in the early 1970s, I do not think that, as a country, we have had a great record of competitive banking. The authorities could take more action and I think what they propose, especially in terms of the potential recommendations of the Office of Fair Trading inquiry into personal current accounts, is on the right lines.

A more difficult problem relates to creating greater financial stability through ring fencing retail banking, increasing equity in the system and strengthening the ability of banks to absorb losses. As I read the report, which I found quite tough going as it is very densely argued, I found myself asking more questions than were being answered. I suddenly realised that that was because I was making two assumptions. The first is that the reforms being proposed are a major reconstruction of the UK banking system of a kind not seen in living memory. I cannot think of any changes as major as this since Lloyd George required the banks to finance the First World War and said that in exchange they could have a banking cartel. You almost have to go back that far to see something as significant as this because it is creating new institutions, new rules, new governance and so on and doing so at the same time as we are creating two new regulatory agencies. We are really facing enormous uncertainty. In addition, the commission very honestly says that the cost is considerable, being up to £7 billion a year. The second assumption that I realised I was making was about unintended consequences. In the past 50 years, we know that international banking has been highly competitive and highly innovative, and when you have regulatory changes you have unintended consequences. In the 1950s, when the Federal Reserve introduced regulation Q in the US, we had the growth of the euro dollar market offshore in Europe. When the UK Government placed restrictions in the late 1960s and early 1970s on bank lending, we had the growth of the secondary banking system. In the years immediately preceding the financial crisis, when there was a glut of global saving and very low interest rates—very low margins in banking—we had the growth of the shadow banking market. So change creates uncertainty

Reading the report, It was quite easy—if we want more equity and we want separation, the authorities could simply say, “we need more equity and we will totally separate the activities of banks”. That is one possibility, Vickers produces another and a third would be to remain as we are. I found that the following problems were posed by Vickers. First, are we really sure that if we have a ring-fence and we have another financial panic that, if a number of banks really look as if they are going under, they will be allowed to fail if they are outside the ring-fence? Secondly, this becomes very detailed and complex, but what activities do we put in the ring-fence and what do you keep outside? That seems to me to be an issue which will create enormous controversy. Thirdly, there is the very important point raised by the noble Lord, Lord Myners, to do with the loss absorbers; namely, long-term unsecured debt and so on, contingent capital and bail-in bonds. We do not have markets of any depth in these at present and yet these are critical to the recommendations of Vickers.

There is also uncertainty as to whether UK banks will redomicile, either entirely or in part, and there is also the point raised by the noble Lord, Lord Lawson, that European banks could get under the wire at present and we could have a very curious structure there. Finally, there is the question of how the proposals of Vickers relate to what is happening at present in Europe, which I think is very important, because the stress tests of the EBA found that British banks are much more interconnected with continental European banks than we imagine. Altogether, I feel that there are great uncertainties in these proposals and that to rush things and go straight into legislation would be a great mistake. We need to probe and stress-test Vickers much more. It would be a great mistake to legislate too soon, because we would have the problem that they have in America with the Dodd-Frank legislation; namely, that they have general legislation with all the detail having to be worked out and nobody really knowing what the terms of doing banking are.

I welcome the fact that we have eight years before this huge potential change to the UK banking system takes place. It would be far better to take time to get it right than to rush it, threaten one of the key sectors of our economy and attempt to pick up the pieces later.