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 no 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.