Financial Services (Banking Reform) Bill

Stewart Hosie Excerpts

Monday 8th July 2013 Commons Chamber

[Chris Leslie]

Most of the debate we have had in the short time available has pressed for firm action to be taken towards a sector that—let us not forget—brought down the economy, created massive deficits in our public finances, and required rescue by the taxpayer because of a blurring of the lines between issues that affected ordinary households up and down the country and high-risk investment banking activities that needed strong safeguards. Simply saying that we will have ring- fencing with no means to enforce or police that—no “electrification”, as it has been termed—would make that concept totally redundant. That is why members of the Parliamentary Commission on Banking Standards were surprised that the Government always seemed to take the path of least resistance—“Let’s not upset the banks too much; let’s try and go back to business as usual”—and are not learning the lessons of history.

We have re-tabled amendment 18 not just to have a specific firm-by-firm back-stop power for separation in case ring-fencing fails, but to have sector-wide powers as a back-stop in reserve should ring-fencing not work. We have the capability for full separation, but the Government have stubbornly refused to put that on the statute book—“Oh well, if we have such circumstances we can always legislate further down the line”—as if passing a Bill on such matters can be done quickly or effectively in any way.

[Stewart Hosie (Dundee East) (SNP)]

I thank the hon. Gentleman for the tone he is using on giving ring-fencing a chance and full separation being a back-stop power, or plan B, to be used only in certain circumstances. Amendment 18—the general requirement of separation and industry-wide potential for that—would clearly mean an end to universal banking, ring-fenced or otherwise. What consideration have he and his hon. Friends given to that issue, and particularly the transfer of cash between the two and the impact that might have on lending to the now retail sector, or lending for investment in business?

[Chris Leslie]

Those issues were covered pretty substantially by the commission in its first and second reports, and this was the conclusion it reached. Nobody wanted to go for full separation if it could be avoided; we wanted to ensure that ring-fencing arrangements could be upheld and made to work. There are some arguments in favour of that universal model, and therefore it was felt preferable to have such a power in reserve, but in the Bill. It is no wonder that the banking sector breathed a heavy sigh of relief today, when it saw the Government’s response on this and other issues. The markets judged that the banking sector got off lightly, and that there was nothing tough or difficult for the sector. That is why we have seen the market reaction today. The notion of business as usual seems to be back on the table.

I want the House to recognise that this is not an amendment that Labour has come up with in a partisan way. We are simply tabling an amendment that was drafted by the commission after days, weeks and months of deliberation and careful cross-party thought by Members of both Houses, but thrown back in the face of the commission by the Government today. It is important to have this on the statute book. A back-stop power will incentivise the banks to comply with ring-fencing. If the Government are correct in believing that ring-fencing will be adequate, the amendment will do no harm to the policy. It will sit dormant on the statute book. But if the Government are wrong, and this backstop power is not in place when it is needed, serious consequences could arise. It is nonsense for the Minister to ignore this risk, especially as the other place will want to come back to this issue. He may be forced to concede if we get into parliamentary ping-pong at some point.

I do not want to take up too much more time because many other hon. Members have spent a lot more time on this issue than I have, but I wish that the Government would listen to them and to the commission.

--- Later in debate ---

Leverage ratio powers need to be taken in the Bill, and phased in before the EU plans for the end of the decade. That was one of the main conclusions of the Vickers report. Not legislating for leverage restraint is a significant omission from a Bill that the Chancellor claimed would reset the banking system.

[Stewart Hosie]

I am very supportive of the notion of legislating now for the leverage provision, but in his new clause, the hon. Gentleman discusses

“a target for the overall leverage of the…system, to encompass…the activities of foreign financial institutions and non-bank originators of credit”—

or shadow banking. Although that might be taken into consideration in the calculation, the FPC would have no power to implement a leverage ratio in the shadow banking sector, so is there not an unintended consequence that leverage ratios may be too high in the formal banking sector to compensate for what the report found?

[Chris Leslie]

I am delighted that the hon. Gentleman has taken the trouble to look at the new clause, because it is our second attempt to cajole or persuade the Government to look at this issue. In Committee, we took a different approach to the question of leverage, and tried to clarify that there was a clear power for the Government to act. I hope in the spirit of consensus and trying to move the arguments forward, the Minister and the House will accept that we have taken a new approach, thinking about leverage as it affects the UK economy as a whole. Leverage—and I shall come on to make this argument—is part and parcel of the way in which an economy works, and in the new clause we have looked at a particular design that would encompass other institutions. I do not want to be misinterpreted: we mention foreign banks, for example, but I do not intend any extra-territorial reference in the new clause. It simply makes it clear that the provision has to encompass effective leverage on the UK financial services sector as a whole.

I have referred to the Vickers commission, and it is important that we do not forget the work that it did, and that we pay tribute to it. It said that

“a leverage cap of thirty-three is too lax for systemically important banks, since it means that a loss of only 3% of such banks’ assets would wipe out their capital.”

The commission recommended a 25:1 ratio—a 4% ratio—but the Chancellor dismissed that concern. It is essential that the ring fence is supported by tougher capital requirements, as well as by a leverage ratio.

The parliamentary commission said that it was not convinced by the Government’s decision to reject the Vickers recommendation to limit leverage in this way. The parliamentary commission said that it

“considers it essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3 per cent minimum required under Basel III. Not to do so would reduce the effectiveness of the leverage ratio as a counter-weight to the weaknesses of risk weighting.”

Sir Mervyn King, the former Governor of the Bank of England, said that the leverage ratio turned out to be

“a far better predictor of the institutions that failed in the crisis”

than measures of risk-weighted assets. I could go on; a great deal of debate has taken place on this issue.

Our new clause seeks a way of ensuring clarity on the powers and what sort of process would take place. We suggest that the powers of the Financial Policy Committee in the Financial Services Act 2012 should be amended to make it clear that a target should be set by the Treasury for the overall leverage of the United Kingdom’s financial system to encompass all the activities of those institutions that are originators of credit.