Financial Services (Banking Reform) Bill

Viscount Thurso Excerpts

Monday 11th March 2013 Commons Chamber

[John Thurso (Caithness, Sutherland and Easter Ross) (LD)]

I begin by apologising to the Chair and to Members on the Front Bench; due to the vagaries of snow at Aberdeen and the fact that the plane I was on was not de-iced on time, I missed my connection and therefore arrived to hear only the latter part of the Minister’s speech. However, judging by the tone of the debate, I think that I have a fairly good idea of what he must have said.

The second point I would like to make at the outset relates to the staff of the Parliamentary Commission on Banking Standards. My hon. Friend the Member for Wyre Forest (Mark Garnier) made the good point that the Chair of the commission, my hon. Friend the Member for Chichester (Mr Tyrie), has done a sterling job, but we have also been extraordinary lucky in having staff of such high quality. The preface to our report lists the staff and shows the amount of resource that has been available to us. The staff who have been available to the commission are of an extraordinarily high quality. We have therefore been able to produce work of an extraordinarily high quality. I say that at the beginning because, whatever my poor remarks, I very much hope that those on the Front Benches will take note of the work that has been done to date.

I think that the next banking crash will happen some time between 2078 and 2088, with a couple of small wobbles between now and then. If one looks back to the dawn of banking, when an Italian moneylender first sought to made a buck or two, one sees that crashes have happened ever since. One of the best pieces of work I have read recently was a commission staff note setting out exactly how often crashes have taken place and the fact that they are pretty much identical. They all start with over-exuberance and an asset bubble, which is followed by a collapse, and on each occasion, going back several centuries, the Bank of England has intervened and the country has had to rescue the financial system.

The Bill sets out not to prevent those sorts of crashes from happening in future, but to try to make them survivable, in particular by making banks resolvable. If we are to have risk and reward, there will be problems in future. The Bill, and the recommendations of the parliamentary commission in relation to it, set out to try to make those situations less systemic and less of a risk to the country and the taxpayer. At this stage, the Bill is necessarily rather more about structure than it is about some of the other points that have been raised. I welcome the Bill and want to comment on one or two of the things that are not in it and to urge the Government to listen to the points that the parliamentary commission has set out in our report. When I have done that, time permitting, I would like to look at some of the wider points.

On the question of process, it is a matter of regret that the Bill is unlikely to have sufficient time in Committee to allow the House to consider all the issues. Once again, the unreformed other place will have the duty of sorting that out. I am particularly concerned about the fact that, should the important areas of standards, culture, competition and remuneration require any action in legislation—we have yet to deliberate on whether they might—the Bill will almost certainly have passed through this House by the time the parliamentary commission completes its final work.

Let me turn to the points that I wish to make. First, on the question of leverage, the key is risk-weighting assets. Much of the academic work has shown that, broadly, the banks that had better leverage ratios were the ones that survived. It is a very simple fact. The risk weighting of assets does not actually assist terribly much in that process. Andy Haldane made that point remarkably forcefully in evidence to both the Treasury Committee and the parliamentary commission. Therefore, the simple test of the leverage ratio is extremely important. Vickers came up with 4% and the Government have gone for 3%. I am convinced that 3% is not enough, but perhaps 4% is too much. Certainly, as the report we have published makes clear, we should be looking at that. There is a problem for Nationwide and for building societies, but we really cannot let that tail wag the dog when it comes to sorting out the banks’ part of it.

Secondly, there is the question of industry-wide separation, which a number of Members have referred to. I want to be clear about what we are setting out to do and what we have recommended. The electrification of the ring fence is by means of allowing the regulator a power to separate an institution. The institution is observed by the regulator to be burrowing, tunnelling, climbing over, powering through—however it is done and whether it is a tiger, fox, wolf or whatever—and the regulator then makes a decision for that one institution, saying, “You’ve tried your luck too far. That’s it: your institution is separate.”

The wider power seeks to address the fact that we are not going to have another crack at this for a good few years and that in all probability, in five or six years’ time, things will be recovering and people might say, “Well, the punch bowl is not there yet so we don’t have to pull it away. Let’s all just leave it be”. We are saying that the Bill should permit secondary legislation if necessary. There should be a review—I cannot remember whether we agreed that it should be every three years or every five years—at which time the Financial Stability Committee could recommend, were there an attempt to undermine the system, that the Government bring in secondary legislation to effect a total separation. That is an immense number of barriers between the placing of the possibility in a Bill and the actuality of it happening. I really hope that the Government will accept the argument that allowing for such a power in the Bill would stand as a potential encouragement to the banking system not to seek to undermine the ring fence.

Ever since I started to study this in the last Parliament, when I served on the Treasury Committee with the now Lord McFall, I have been a Glass–Steagaller. I am in favour of full separation. However, I accept the Vickers compromise, because it is where we have got to. I accept it on the assurance that the ring fence is properly electrified and that there is the fall-back power.

My third point relates to the sibling or parent governance structure. The parliamentary commission’s members broke up into panels, and we have now all reported back. I had the honour of chairing a panel on corporate governance. The evidence I saw was not reassuring. If there is a parental relationship, the temptation of the CEO to tell the ring-fenced bank what it should do will, over time, become overwhelming. Therefore, an equal governance structure, which gives proper independence required within the corporate governance of the ring fence, is absolutely essential.

The last point relates to derivatives. When someone defines a simple derivative, will they let me know what it is? I know what a simple product is. When I want to fix my risk by having a fixed-rate loan, I know that there is a derivative product that I am sold. I understand that and have no problem with that product. The problem is this: why on earth does that have to be originated in a ring-fenced bank? Why on earth can it not be sold on an agency basis? It will cost me a little bit more, but I will probably get advice on which is the best one in the marketplace. We have agreed with the Government that simple derivatives should be permitted but, as our report shows, it was pretty well surrounded by caveats.

My final point is that we need to answer the question what are banks for, because it is at the heart of the whole issue of separation. Over the past half century or so we have pushed together various businesses, some of which were never banking and never will be. The problem now is that we talk about bankers as a collective when we are really talking about bankers, financiers, traders, stockbrokers, and all sorts of other people. This makes it difficult when we come to consider regulation of the profession. Pure banking, if I can put it like that, is a profession, can be regulated as a profession, and can have professional standards expected of it, but many other areas should be regulated in different ways; traders should be licensed, and so on. I am sure that we will come on to consider that issue.

My right hon. Friend, if I may call him that, the Member for Wolverhampton South East (Mr McFadden), chaired a panel on small and medium-sized enterprises and I chaired one on Scotland. One of the things that came out of that is that banks have completely failed industry, individuals and commerce. My worry is that this process will be about the political bubble talking to the financial bubble—the Westminster village talking to the City village. At the end of all this, we need a banking system that serves commerce and industry. If that means that we have to start by getting more competition through breaking up RBS or creating a “good bank, bad bank”, then so be it; there is a lot that we need to look at. However, what we must do is ensure the availability of reasonable credit to our constituents and provide a system that is resolvable, so that at least for a couple of generations we can go without a crash.

[Several hon. Members]

rose—