Independent Commission on Banking

Lord Lawson of Blaby Excerpts

Thursday 15th September 2011 Lords Chamber

[Lord Lawson of Blaby]

My Lords, the whole House is greatly indebted to the noble Lord, Lord Myners, for enabling us to debate the important subject of the report of the Independent Commission on Banking in the week in which it came out. He said that he did not want to engage in party politics. None of us here does; that goes without saying. In the spirit of agreement, I point out one particular area where I agree with him. As far as I am aware, this is not something which has been raised before he raised it today, but I hope the Government will agree to it—that once the proposals recommended in the Vickers report are implemented, the bank levy should be abandoned. That makes excellent sense and I hope that the Government will respond positively to it.

However, it is remarkably quixotic of the noble Lord to have raised this subject—although I and the whole House are delighted that he did—because, of course, the Government of whom he was a member produced the most disastrous and dysfunctional system of bank regulation imaginable—I absolve him completely from it; it was in place before he took Gordon Brown’s shilling—and are therefore highly culpable. They are not uniquely culpable. I agree with the noble Lord’s comments about causes. The root cause is the greed and folly of all too many bankers. Most of us are subject to greed and folly. The problem with bankers is that the temptations are greater and the consequences are graver. However, that is all the more reason to put in place a really effective system of bank supervision and bank regulation. I deeply regret that the previous Government tore up the greatly improved system of bank supervision and bank regulation which I put in place in the Banking Act 1987, and, as I say, put in place something which was completely dysfunctional.

Incidentally, I hope that we can have an assurance that the legislation will be separate and discrete and not something tacked on to some other piece of financial legislation.

What is important, however, is that the Vickers report, although not perfect, is actually rather better than the noble Lord, Lord Myners, indicated. There are some omissions. I have not read every word of the report but I regret, for example, that there is, as far as I can see, no discussion of the Board of Banking Supervision which I created under the 1987 Act and played an important role in by, in short, enabling some poachers to become gamekeepers—some recently retired investment bankers and commercial bankers who would give extremely good advice to the Bank of England, which had responsibility for this area. They had a duty to give that advice. That arrangement was destroyed by Mr Brown and it should be resuscitated. I do not see anything about that in Vickers.

Nor do I see anything about the role of bank auditors, which is very important. Again, one of the things that I introduced in the 1987 Act was a regular and important dialogue between the bank auditors and the bank supervisors, whereby each could inform each other, to create a more effective system and be more aware of when things were going wrong. Again I say to the Government, a recommendation on this front came unanimously from the most recent report of the Economic Affairs Committee of this House. I hope that we will have an opportunity to debate it in, I stress, this Chamber at a reasonably early date.

What Vickers did was be extremely tough on capital requirements and loss-absorbency requirements. It is right to be as tough as that. However, the timing is important and, bearing in mind the state of the economy, it should be phased in gradually, although the Government must commit clearly to doing it and not let the banks erode it at the edges or anywhere else.

However, the most important issue to which I should like to address most of my remarks is the structural separation proposal in the Vickers report—the separation between what it calls retail banking and investment banking. Retail banking is a bit more than retail banking, but nevertheless that is the jargon. I have to admit that I did not do that in the 1987 Act, but the reason I did not is that, at that time, there was a de facto separation which had been there for ever. All of us can remember that we had the so-called joint stock banks and investment banks which in those days were known as merchant banks. They were completely separate organisations with separate cultures. Very often the merchant banks operated on a partnership basis, which is an important difference. There were two different sorts of institutions and cultures, and that worked extremely well. We now have to introduce that by law.

I return to the noble Lord, and what happened when he was a Minister. It is now two and a half years since I first wrote a piece in the Financial Times calling for this separation. The noble Lord was the Minister responsible. Did he respond to that? Not at all. He is now keen on separation, as far as I can make out, but he was totally uninterested when I proposed it in March 2009.

Although I do not have time to go into them, the important points are laid out in Vickers, which states quite clearly why this is necessary. The question is whether the ring-fence will be adequate or whether complete structural separation is needed. I fear that the ring-fence will not prove adequate. You will not get the two different cultures, which is absolutely vital. There is the idea that different boards will make all the difference. For a time in the early 1990s, I was on the board of Barclays Bank. It is not the boards that can ensure that this happens; it is the management that are important, not least because it is they who get the bonuses. If you have one top management, you will effectively have one culture. There is also only one group of shareholders if there is not complete separation. Therefore you will not get the benefits we seek.

Complete separation may well be seen to be necessary. I therefore hope that the Government, while implementing ring-fencing and doing it without delay, will monitor it very carefully. If there is any sign that the measures are inadequate they should seize the opportunity to go further, and make it clear in advance that they will do so. The arguments against it are weak in the extreme, as the noble Lord said. Why is the idea of the one-stop shop so important? One thing that it does is reduce competition; but the Vickers report was meant to promote competition. It is completely absurd. The report says something very darkly about there being legal impediments to complete separation. I assume that it must be referring to EU law, but that is an avenue and whole new dimension that I do not have time to address.

In conclusion, I should like to make to the Government one practical suggestion that relates to the Royal Bank of Scotland Group, mentioned by the noble Lord, Lord Myners. This was the biggest disaster area of all the disaster areas in British banking, as a result of which the Government on behalf of the taxpayer have the largest stake. As the proprietor of the Royal Bank of Scotland, the Government now have a great opportunity, which does not need legislation, to separate out the retail banking from the investment banking within the group and to have two separate companies. I am not talking about privatisation; that will come later. At this stage there should be two separate entities with a separate board and management on the retail and small business side—the old joint stock banking side—that will provide the money that small and medium-sized enterprises need at present. You will then have an entity that has no other raison d’être but that.

--- Later in debate ---

[Lord Davies of Abersoch]

I declare a range of conflicts, as I work with a number of companies in the financial services industry. Until I became a Minister in the Government, I had been a career banker—I should perhaps lower my voice at this stage. I love the industry, which may be an unfashionable thing to say, and found it to be an industry with huge integrity. In fact, I was going to thank my noble friend for introducing this debate until he described the bankers as either thieves or pimps operating in a shallow money trench—I shall pass over that quickly.

I was lucky enough in my career to become a chief executive of a bank and a chairman. I served more than 12 years on the board of Standard Chartered in Asia and London. So many factors affect running a bank; it is, after all, the risk business. This is a business where you need trained professionals who operate within a strong culture. Culture and values are just as important as balance sheets. If you have the wrong culture in an institution, you will go bust. It is also important to have checks and balances. We have touched on auditors. Auditors were missing in the run-up to the financial crisis. They were not mentioned in the report; they should have been.

This morning’s announcement of UBS’s losses of $200 billion highlighted yet again that this is an industry which has the capacity to shock. You cannot have an autocratic style in a bank. You need pragmatism and caution; you also need a balance between risk and reward. So much of running a bank is about the board of directors and the relationship that the executives have with the board. It is also about having individuals and the blend of experience and skills to govern a bank. In a number of the British institutions, we did not have the right mix and we paid the penalty.

Banks and financial companies are complex and operate with sophisticated products. We should never forget—I know because I was a chief executive—that the shareholders of the companies were pushing CEOs to grow faster and expand more aggressively.

Every crisis, whether it is dotcom, Russia, the Asian crisis or even the tulip crisis many moons ago, has taught us that bubbles occur, that markets collapse and that management has to scenario-plan and think through the downsides. Culture, values and skills are all key ingredients, supplemented with proper supervision. There was insufficient supervision.

It is important to highlight that is an unusual industry because you are playing with other people’s money. You are selling products that you want back, perhaps after 40 years in the case of a mortgage, in arguably better condition than when you sold them. If you get it wrong, the consequences for society generally are catastrophic. Contrary to the “casino” image that goes around, most banks facilitate trade and support their consumer and corporate customers—with foreign exchange, trade, term loans and mortgages. During the past few decades we have seen the world become a smaller place. Companies today source from Bangladesh and Shenzhen. They sell online; they sell in the high streets of all the UK. We are living in a true global economy. Banks such as Barclays, HSBC and Standard Chartered typically operate in more than 50 countries. They may be British, but they are multinationals, like Coca-Cola, Unilever and Vodafone. They cannot operate with 50 different regulatory approaches. The Vickers report may have some great recommendations, but we are part of a global economy.

I turn to another issue. London, through focus, through its timeline and through a clear strategy, has become a top-three world centre of excellence, particularly in insurance, foreign exchange and wholesale trading, et cetera. Now is the moment to learn from our mistakes. We have to yet operate within the global economy; we have to keep London’s top-tier position; yet we have to protect the consumer and the taxpayer, and we have to be balanced—something that so many banks got wrong. That is the nature of the dilemma that we are facing today.

The regulators, as I said earlier, missed it. Boards missed it. The shareholders and owners missed it; they were nowhere. A very large bubble burst and nations have paid a huge cost. Now, as we talk about the Vickers report, we have another European crisis to add to our worries. The one thing that the report does not mention is that all these crises have one characteristic, which is the shortage of liquidity. When you run a bank, so much of your conversation is making sure that you have the right liquidity—the right funding. Northern Rock did not have it and neither did some of the other banks, and they collapsed.

This is a global, international industry and political leaders at this moment have to be just that: leaders. We need a global standard, not a set of British, Indian, Singaporean or even American initiatives. The regulatory arbitrage that will result from the implementation of the Vickers report if the US, Hong Kong and other places go with a different model will result in a much bigger unintended consequence—lower lending and a major global slowdown.

[Lord Lawson of Blaby]

The noble Lord speaks with immense authority and therefore it is important to tease out one particular point that seems to be emerging. Is he actually suggesting that we do nothing in this country along the lines of the Vickers report or whatever until we have a global agreement, which might take goodness knows how many years and might never be attainable?

[Lord Davies of Abersoch]

No, not at all. This is the moment in history where we use the Vickers report and the European crisis and in the next six months we come and agree a global accord for liquidity and capital. We must not end up with a system whereby we impose the separation of retail and investment banking on an HSBC or a Barclays when Jamie Dimon—the chief executive of one of the largest banks in America, JP Morgan Chase and Co—made it very public when he said in the FT:

“I am not sure that we should achieve even Basel III regulations in America. They are too strict”.

If one of the key competitors of an HSBC, Barclays or Standard Chartered is saying in America that it is not even going to comply with Basel III, we will have a major regulatory arbitrage in the world. Long term, that is a big mistake.

If you are a chief executive or are on the board of the bank, you have to ask which centre you should have your head office in. The amounts of capital required are extraordinary. The Vickers report has huge implications. I have great sympathy with separating retail and investment banking. They are fundamentally different businesses. But let us truly understand the amounts of capital that will be required to fund the investment banks with the capital ratios that are being suggested before we rush to a law.

We need to be very aware of the political anti-banker bashing. We have had that and we need to move on. We need to move into an era where the G7, G8 and other applicable countries come together, learn the lessons and in the next six months agree a regulatory framework.

Autocratic leadership, reckless lending abroad with the wrong make-up, a disastrous acquisition coupled with shareholders who seemed to egg the bank on—that is the story of RBS. It was not actually about capital: it was so much about the culture of the board. I am concerned about a move to saying that the answer to all the banking problems is just capital. It is not.

The important thing about banking is that retail banking is all about small loans and a huge volume of customers. The other thing that the Vickers report misses is that it is increasingly difficult to fund a retail bank without wholesale deposits. That is the fundamental issue for the future of banking.