Financial Services (Banking Reform) Bill

Debate between Lord McFall of Alcluith and Lord Turnbull

Tuesday 15th October 2013 Lords Chamber

[Lord Turnbull (CB)]

My Lords, I, too, am grateful to the noble Lord, Lord Sharkey, for giving us the opportunity to debate this issue, although, as I will make clear shortly, I have come to a slightly different conclusion. When we get to Amendment 103 next week, we will be talking about the RBS good bank/bad bank issue. The Parliamentary Commission on Banking Standards, which more or less in the same paragraph talked about that issue, also recommended that the Government should examine the scope for the disposal of any RBS good bank as a multiple entity. I think that these studies were called for by the end of September. We have now gone beyond that point and I hope that the Minister will be able to tell us when we can expect those reports. To some extent, the amendment in the name of the noble Lord, Lord Sharkey, seeks to pre-empt the conclusion. I should like to wait to see what the Government have to say on this and then take the matter on from there.

There are also other concerns. As well as trying to increase competition faster than would be achieved under RBS’s current plans, we should always be seeking to return RBS to its position as a fully effective lender, particularly to SMEs. We are asking it to reconstruct itself so that it gets back into the private sector and becomes a ring-fenced bank and a non-ring-fenced bank. My concern is that if we also ask it to start work on a regional agenda now, that will simply overload the system and not get it to the point of becoming an effective lender, which is the main priority in the short term.

It is not clear to me that the regional agenda will necessarily be an effective model, particularly when it is created by taking clones of existing bank networks—by simply breaking up the existing banks into smaller bits and trying to run them on the same lines, with much of the same culture and same technology. I wonder whether that will work and whether the future doe not lie in a more disruptive technology that will grow up from below. I wonder why, for example, we are keen on switching. Why will people want to switch from one kind of a bank to another kind of bank if it is just a smaller version of the same kind of bank? I am beginning to think that the real future lies not so much in the break-up of the existing model but in a disruptive technology, with someone doing to banking what Amazon has done to retailing.

It is inevitable that there will be a full market investigation reference to the Competition Commission. Again, I would not start that now, while so much else is going on, but begin somet ime after 2015. My preference would be to fold this regional debate into that, rather than pursue it now.

[Lord McFall of Alcluith (Lab)]

My Lords, the noble Lords, Lord Eatwell and Lord Sharkey, have done the Committee a service by raising this issue. Four years on from 2010, when the Government came into office, we have much less competition: banks are bigger; the cost of capital, as the noble Lord, Lord Higgins, said, is more expensive; and SMEs’ credit is still drying up. The problem is that British banking lacks a “spare tyre”, as Adam Posen of the Monetary Policy Committee said. I remember a conversation that I had with Stephen Hester when he was chief executive of the Royal Bank of Scotland. He said, “If you have new entrants into the banks, all they will do is replicate the business model that already exists. You need a Google, a Yahoo or a Facebook to have that disruptive technology”, as the noble Lord, Lord Turnbull, described.

I was of the opinion that, as a commission, we should have a referral to the Competition and Markets Authority straight away because this is an area in which, when talking about change, we are talking about years and possibly decades. If we do not get on to this straight away then we will see very little improvement at all in five or 10 years’ time. As the noble Lord, Lord Eatwell, said, if we are talking about establishing regional banks—an aspiration which the most reverend Primate the Archbishop of Canterbury articulated—we need a secure structure. We have to understand how small banks failed. People say, “Well, small banks are just the same as large banks”. I have a quote here from February 2006 in which an individual said,

“we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management ... These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries”.

So, the system is safer. The individual who said that was a certain Tim Geithner, whom the President of the United States then appointed as the United States Treasury Secretary. Mr Geithner had a great knowledge of individual institutions but Mr Geithner, like the IMF and others, was clueless about the interconnectedness of the banks, which is why the banks went down. Whether we are talking about large investment banks or small regional banks we must turn our attention to that area of risk if we want a better system.

My noble friend Lady Liddell mentioned the Airdrie Savings Bank. I was privileged to give the 150th anniversary address there. To re-emphasise what she said, the non-executive directors there were local and unpaid. The Airdrie Savings Bank was a fly on the back of the elephant that was the Royal Bank of Scotland. However, the Airdrie Savings Bank prospered and the Royal Bank of Scotland went under. The Chancellor at that time, Alistair Darling, said that he got a call in the morning from Tom McKillop, the chairman of the Royal Bank of Scotland, saying that it would be out of business in the afternoon if the Government did not step in. Surely there are lessons to be learnt there from the small banks.

I do not accept the proposition that small and regional banks are not on. A chief executive of a very large bank said to me in private that we should look at retail banking in the United Kingdom as utilities—as predictable and boring activities. That is the way we should be looking at our banks. I think a referral to the Competition and Markets Authority would be wise at the moment because we will be talking about this issue for 10 or 15 years to come. If we do not look at the structure of retail banking in the United Kingdom, we are simply going to replicate what we have at present. There is an opportunity for innovative thinking. These amendments offer the Government that opportunity and I hope that the Minister in replying will indicate that this is a fertile area and we can get on to looking at a new structure for our banking.