I agree with the hon. Gentleman, but it would be invidious for us as politicians to try to delve into the specific analysis of bank-by-bank asset or liability, quality and the risk weighting of assets. That is why we have regulators and what their job should be, but it is important that as a body politic, so to speak, we make a judgment about the level of leverage that we should have in the economy as a whole. That is why I raise the issue today.
For us, tackling the leverage question is incredibly important. We should not wait for the European Union to decide these things for us. We sought in Committee to clarify this in part. Rather than put it in the “too difficult to handle” box, as the Government seem to be doing, we should try to move forward constructively. The approach that we have taken is on the amendment paper. First, it is necessary to prevent the banks from over-extending themselves beyond the point of safety.
Ring-fencing does not do that. We think ring-fencing changes should go alongside capital requirements and leverage regulation.
Secondly, we have been hearing arguments recently about the leverage ratio as anathema to bank lending into the real economy. Sometimes it is characterised as one or the other. I do not necessarily agree that there is a seesaw trade-off between the two. Andrew Bailey at the Prudential Regulation Authority has recently made the particularly pertinent argument that capital can be lent onwards in any case, so it should not be a case of one or the other.
For the sake of clarity, in new clause 9 we looked to address this explicitly by framing a leverage target strategy for the system as a whole, which must be constructed in such a manner so as to maintain adequate credit availability to support a growing economy. It is important to recognise that we will always operate with a degree of leverage. That is part and parcel of the way our banking system works, and our constituents rightly want us to focus on getting the economy moving, while preventing excessive risk-taking. In the spirit of constructive engagement, we hope the amendment strikes the right balance.
It is sometimes argued that leverage should be a back-stop rather than a front stop. The argument about what is a back-stop and what is a front-stop can get rather theological. Andy Haldane makes the point in his famous “The Dog and the Frisbee” speech that leverage needs to be brought much further forward as a primary tool for the regulators, and that other capital and risk-weighting issues should be subordinated. The main point is that leverage should be recognised as a key dynamic in our economy and needs to be regulated in a way not dissimilar to the regulation of inflation.
For us, there are three essential elements: set a leverage target for the system as a whole, which is a task for the Government; measure that risk—the threats to whether loans are going to be repaid—more accurately by sector, to determine which sector needs more capital to make it safe if leverage is rising and which could dealt with in a normal way; stress-test to back-test the pressures in those particular institutions to be clear that the choice of the leverage target is correct. The regulator should do that.
New clause 9 would also augment Bank of England independence in relation to operational decisions on monetary policy and take into account the need to supply credit to the wider economy. I am glad that the Building Societies Association and others support it.
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I know that other Members wish to speak and so will not take much more time. It is not good enough for the Government simply to leave this out of the Bill completely, to leave the regulators slightly powerless on this point and to leave the EU to deal with it. There are ways of overcoming the impact that leverage questions might have on non-plc institutions, such as those building societies, and having the regulator make those operational judgments is one of them, but we must have the safeguard in place. We must also eradicate once and for all the concept of a bank being “too big to fail.” I think that action on leverage would certainly be one way of doing that.