Banking (No. 2) Bill [HL]

My Lords, standing here in this Chamber, it is impossible not to be struck by a great sense of history. I hope that I am not about to create history of my own by being the first maiden speaker to be booed. Noble Lords will understand my concern: I began life as an accountant; I moved into banking; I was in private equity; I moved into fund management, although not pyramid schemes; and I am now the chairman of an energy supply company. So clearly my careers adviser at school did not factor popularity strongly into the advice that he gave me. However, it is to the industry in which I spent the majority of my career—banking—that I want to direct my observations today. The Banking Bill, which noble Lords are considering, contains several measures aimed at promoting stability in the banking sector. Stability is undoubtedly what is needed in these institutions, which I guess until recently most of us believed were run very prudently for depositors and borrowers. The keystone of stability in the banking system is confidence, and confidence has been shaken. Small savers and borrowers lost confidence in their high-street banks. Small and medium-sized businesses lost confidence in the availability of lending. The confidence of even large corporations has been undermined in an attempt to roll over existing debt, and at the base of this pyramid of uncertainty is a loss of confidence between banks themselves. That situation could have profound consequences for every one of us, and there may still be bad news to come. This Bill and other regulation should play a role in restoring confidence. I welcome initiatives such as the loan guarantee scheme, the monitoring of lending, deposit protection and so on. However, there are other things that we can do, such as reducing complexity and increasing accountability. Warren Buffett, who is probably the world’s most successful investor, says: "““The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do””." As an aside, I know that that should be ““forgive them””. Some sophistication and complexity is necessary, but the UK taxpayer is now suffering because of decisions taken at institutions where risk was not truly understood. Perhaps I may give noble Lords an example that baffles me as a banker who cut his teeth in an earlier era—that of collateralised debt obligations, and in particular CDOs whose underlying asset is a pool of sub-prime mortgages. To get a feel for the complexity of CDOs, the prospectus for a typical mortgage-backed security stretches to 300 pages. To create a CDO, you take a tranche of those mortgage-backed securities and add 50 more tranches from other mortgage-backed securities. To understand that CDO, you have to read 50 times 300 pages, which amounts to 15,000 pages. This is not prescribed reading over the holiday period, but if you look at the notes to the balance sheets of the 2007 accounts of the major banks in this country, you will read against some large numbers the legend ““CDO squared””. I will leave it to the mathematically minded to decide how many pages you need in order to understand such an instrument, yet these products are, in part, what have laid low many of the world’s biggest banks. Why has that happened? It has happened because the banking environment of the past decade or so has allowed it. Financial innovation in products such as CDOs is very profitable, and it chimed easily with the reward system that existed for senior management in some of the banks and other financial institutions. However, it was also validated by an investor community looking for strong returns and by politicians, commentators and customers who were all looking for wider share ownership and more available credit. When the sun was shining there was no real incentive to ask, ““What’s in these products we’re buying?””. Profitable businesses are good news for all of us and in recent years the City of London has built a great global story of success. However, banking has an unwritten ““licence to operate””. It has much more of a social function than many other businesses. That is why governments and regulators around the world, through taxpayers’ money, have recognised that these are businesses that cannot be allowed to fail. As a good Scottish chartered accountant, which, I hope, is tautology and not seen as an oxymoron, my instinct tells me to follow the money. When a banking system has become too complex to achieve that, then something has gone badly wrong. Tackling this is down to corporate governance and strong people. Several years ago, I chaired a Financial Reporting Council group tasked with giving advice to audit committees. Our recommendations, which are now part of the Combined Code on Corporate Governance, had a strong underpinning theme: the quality of the people on the committees and the boards of the companies. Shareholders rely on company boards and governance structures to protect their investment and third parties depend on them too. That means people who are brave enough to ask the simple question at the right time. I suspect that that has not happened at a number of companies in the past couple of years. In some cases, it is clear that bank boards have failed to ensure that the risk and complexity have been fully understood and evaluated. To conclude, I have been fortunate towards the end of my business career to be involved in working with young adults in employment, education and training. Their attitude is quite different from mine at their age. I was looking for a reasonable salary and promotion prospects. This generation is far more caring. They bother about how a company behaves and about whether a company shares the values that they share. What they see now are huge businesses suffering because, in essence, they have lent money to people who cannot afford to pay it back. Stripping away the complexity that was described earlier, that is exactly what has happened. Stability will come back to our banks, but in return for taxpayers' indulgence, they owe it to the next generation to grow again by behaving responsibly and with relative simplicity.