Banking Reform

Lord Tyrie Excerpts

Thursday 14th June 2012 Commons Chamber

[Mr Hoban]

The shadow Chancellor was the Minister who stood by when bank balance sheets ballooned and banks took on these risks. He did nothing to tackle that problem. As the Governor of the Bank of England said in May:

“With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called ‘light-touch’ regulation hadn't prevented any of this.”

Only two politicians were quoted in the FSA’s report on the failure of RBS as champions of light-touch regulation—the shadow Chancellor and the former Prime Minister, the architects and cheerleaders of light-touch regulation at home and abroad. They should recognise the costs that the British Government and economy have borne as a consequence of banking failure— £140 billion between 2007 and 2009. We must recognise the need for a stable banking system to ensure stable and sustainable growth in the UK economy.

As Sir John Vickers proposed, we are ring-fencing retail banking, imposing the higher capital standards required by him and introducing a binding minimum leverage ratio on banks. The shadow Chancellor asked some questions in the mix of his lengthy contribution, but he did not apologise for his role in the banking crisis. However, I shall respond to his tests. First, we have achieved international agreement with our European partners to implement Vickers through capital requirements directive 4 and capital requirements regulation. We have achieved that goal and are working to introduce a binding leverage ratio with international partners. Vickers can, therefore, be implemented through the existing international regulatory framework.

The shadow Chancellor talked about a banking union. Banking union is a product of the requirement for fiscal union and will be needed to promote stability in the eurozone, but that will not flow through to non-eurozone EU member states—an important distinction to make. Banking union is about the sustainability of the eurozone, not the EU.

The shadow Chancellor asked about hedging. Sir John Vickers recognised the need to ensure that retail customers and small businesses could access the hedging products necessary to manage risk on their balance sheets. However, we have gone beyond Vickers in imposing higher and tighter standards on how derivatives can be managed by a ring-fenced bank.

I have set out a clear programme of reform that responds to the mistakes of the previous Government and ensures a stable and sustainable banking system that underpins, not undermines, economic growth.

[Mr Andrew Tyrie (Chichester) (Con)]

The White Paper just published contains an impact assessment, paragraph 104 of which makes clear a point that we heard in extensive evidence—that costs to small businesses will rise as a consequence of these proposals. We also heard evidence that the scale of the rise would depend on the Government’s decision on the design of the ring fence. They have now published a lead option for that design, so what is their estimate of the increased cost of these proposals to small business lending?

[Mr Hoban]

We have considered Sir John’s recommendations carefully, including the cost on banks, the economy and business, but we felt it was in the interest of business to ensure that a wider range of products could be sold within the ring fence, including complex ones such as derivatives. We set out, in our cost-benefit analysis, to look at the cost of the package as a whole, not to break it up into particular areas. I am confident, however, that we will have a more stable banking system in a position to lend to business on a more sustainable basis. Through these reforms, we hope to increase competition in the banking system, which is in the interests of small businesses and will help to improve competition on price. I think, therefore, that this is a good package for businesses and will ensure the stability of the economy.