My Lords, I am particularly happy to follow the excellent speech of the right reverend Prelate the Bishop of Birmingham, not least because he stressed the importance of changing the culture of banking. That is accepted across the board. It is certainly accepted in the United States and it is accepted by everybody in this country. Indeed, when the Parliamentary Commission on Banking Standards was set up—like my noble friend Lady Kramer, I was a member of that commission—the Prime Minister said that we needed to address standards and culture. That is a problem that I was concerned about.
Unlike the right reverend Prelate the Bishop of Birmingham, I do not have the ability to preach, so we had to decide how to change the culture by legislation. It was not so easy, but we tried a whole battery of proposals that we hoped would do something to help change the culture. I will mention one or two specific things during the course of my remarks. In speaking about the Parliamentary Commission on Banking Standards, I shall say some things that are slightly critical of my noble friend Lord Deighton. I was sorry that he did not find time to pay tribute to our chairman, our honourable friend the Member of Parliament for Chichester, Andrew Tyrie. It was an extraordinary effort. We produced an enormous number of recommendations in a large number of reports. Incidentally, my noble friend Lord Deighton said that the commission produced some important recommendations in its report last month. We produced five reports and there were important recommendations in most of them. I am sure that that is what he meant to say. We all worked quite hard, including incidentally the most reverend Primate the Archbishop of Canterbury. He, too, worked very hard, despite the fact that he also had a day job. Nobody worked harder than Andrew Tyrie. It has a lot to do with him that, with all parties represented, we managed to secure a unanimous report. That gives it much greater weight than would otherwise be the case.
I shall focus on certain areas, some of which, although not all, have already been discussed in the debate. One of them that has not been discussed explicitly, on which we made a recommendation and which has on the whole been accepted by my right honourable friend the Chancellor of the Exchequer, George Osborne, concerns the split of the Royal Bank of Scotland Group into a good bank and a bad bank. He has agreed to set up an inquiry, which will report very soon. I very much hope that it will come to the right conclusion. That is very important indeed to our economy in its present condition.
The idea of a good bank/bad bank split is not at all new. It was done in the case of Northern Rock recently; and it has been done on other occasions in this country and in other countries overseas. It is the classic answer to the sort of problem we are facing. It is particularly important in the case of the Royal Bank of Scotland Group. It is the biggest bank in our country that supports, or is meant to support, small and medium-sized businesses—SMEs. However, there is a problem with SME lending to which my noble friend Lord Deighton referred. It is one of the reasons why our emergence
from the present recession is so slow. There is a real problem with lending to SMEs, which is inhibited by the fact that the banks have a huge amount of bad debts on their books—far more than they would ever admit. They are very nervous of lending because it might increase the amount of their bad debt. They already have more than they say they have and they are exercising what is known in today’s jargon as forbearance. They need to be strong. They will not lend unless they are strong. We hold between 81% and 82% as a taxpayer stake in the Royal Bank of Scotland Group. We should use that power to split the bad assets and put them into a bad bank. Then we would have a good bank with good assets which could help by lending to SMEs in order to help our economy. That is the most important single thing that the Government can do at the present time.
I very much hope that that will be done. I know that my right honourable friend George Osborne wishes that he had done that at the start. It is not too late; better late than never, and we should do it now. Our newest recruit to your Lordships’ House, the noble Lord, Lord King of Lothbury, better known as Mervyn King, former governor of the Bank of England, said:
“Formal accounting conventions should not be allowed to get in the way of what is best for the economy in general and for the SME sector in particular”.
That is the issue here. I very much hope that that will be done. I agree incidentally with my noble friend Lady Kramer and others who have spoken about reforms in the banking system, in the sense of having more banks and more competition, being necessary, but that cannot happen overnight. However, this could be done virtually overnight and it would do enormous good.
I shall now refer to the so-called ring-fence. I was very happy with what my noble friend Lord Deighton said. Let me back-track a bit. I have been arguing for the best part of five years for complete separation between what used to be known as high street banking and investment banking. To call it retail banking is slightly misleading because it is also SME banking. We always used to have that in this country. I have been a close observer of the City of London ever since I wrote the LEX column for the Financial Times more than half a century ago. For most of the time we had the high street banks and the merchant banks. They were completely separate and we did not need legislation to keep them separate; they were separate by custom and practice. I know the people at the top of both kinds of bank. They were different kinds of people with different cultures. The system worked and served this country very well.
The Vickers commission accepted the problem and thought that the ring-fence would be the solution. We on the commission were concerned that the ring-fence would not be robust enough. There are all sorts of problems with the ring-fence. I shall mention three quickly, if I may. One of them, which is perhaps the least of the problems, but which has been put to me by a number of senior bankers, is that the governance structure is impossible. There has to be two totally separate governances of a single entity, which would have an overall holding governance with another governance with responsibility to the same group of
shareholders. Many bankers have said that that cannot possibly work. The other problems, which are perhaps more fundamental, are that it is likely to be gamed; there will be a huge incentive to game it if it is in the interests of the bank concerned to find ways around the ring-fence. The third problem goes back to what the right reverend Prelate the Bishop of Birmingham was saying. The cultures of high street banking and the cultures of investment banking are totally different. It is very difficult, with the best will in the world, to see how we can have two totally separate cultures in the same organisation.
We decided that we should give the Vickers ring-fence a chance but make sure that it was fully electrified—that was the jargon we used. So, if it were seen not to be working in one particular bank, it could go to full separation. If it were seen not to work on a wider scale we would have complete separation for the banking sector as a whole. The Chancellor of the Exchequer and the Government said that they would accept the first part of that but not the second. I think they are wrong on that. Moreover, the voltage which they have put into the electrification of the ring-fence is so lamentably low that it will have no effect at all. I was therefore glad to hear my noble friend Lord Deighton say that they would take it away and come forward with an amendment closer to what the commission recommended.
Incidentally, that points to the fact that this House has an unusually important part to play in this legislation. It has passed through the other place and it falls to us to get it into the shape it should be. I hope—this is not a party political issue—that if the Government do not bring forward the requisite amendments there will be a cross-party agreement which will help the Government to do the job that needs to done.
I was very surprised to hear my noble friend Lord Deighton say that we cannot go to full separation in any circumstances because the Vickers commission, the independent commission on banking, said that it wanted the ring-fence. There are two curiosities in that point. First, we are saying that we should go to full separation only if the ring fence fails. I am quite sure that the Vickers commission does not want a failed ring fence, it wants a successful one. I hope it is successful, but if it fails we will have to go to full separation.
Secondly, my noble friend implied that the Vickers commission was a holy writ and we must do as it says. However, when it said that 3% leverage is totally inadequate, the Government said that they did not agree and that they were going to stick with 3%. This is the despite the fact, as the noble Lord, Lord Eatwell, pointed out, that the United States has decided to go for 6%, although only for the larger banks. However, that is all that matters because it is only a failure of the larger banks that poses a systemic threat.
The Americans have quite rightly said that leverage set at 3%, to which we are apparently meant to stick, is totally inadequate and that it must be 6%. They have left it to the Fed to decide and impose. We said the same. We did not say that a particular number—whether it was four, five or six—was the right leverage ratio. You have to have a leverage ratio and we have said that
that should be for the Financial Policy Committee of the Bank of England to decide. It should not be for politicians to decide. The Government have rejected that and have said that it should be for the politicians to decide. That is profoundly mistaken. The noble Lord, Lord Eatwell, was absolutely right that the risk-weighted assets are as long as a piece of string. Each bank has its own model and puts into it whatever will produce the risk-weighting that it wants. Studies have shown that to be true. It is not a matter of dispute. Although you should look at risk weighting—you should not throw it in the dustbin—because it tells you something, it is not a robust guide.
Another thing has changed from the medieval times when I had responsibility for some of these matters. We all know how much lobbying of the Prime Minister and the Chancellor of the Exchequer by the banks goes on at the present time. It is thoroughly unhealthy. In my day, this did not happen for a very good reason. The convention was not that the banks could not lobby—of course they could, they were bound to—but they had to lobby the Governor of the Bank of England, who would then represent to the Chancellor of the Exchequer of the day the concerns of the banks. That is a much healthier system and we would do well to get back to it.
Another recommendation the Government have not accepted is that we should look at proprietary training—that is, investment banks trading entirely on their own account, a form of hedge fund activity. I have nothing against hedge funds provided that they are hedge funds, but I am concerned when hedge fund-type activities are conducted within a bank. These issues interrelate. It would not be so bad with a pure investment bank but if you do not do complete separation it will threaten the retail and high street banks.
As noble Lords know, the United States, under the so-called Volcker rule, has decided to ban banks completely from undertaking proprietary trading. We said that within three years the Government and the regulator should watch carefully how the implementation of the Volcker rule is working in the United States—it is a practical example of banning proprietary trading—and, in the light of that, come forward with measures, if necessary, to ban proprietary trading. Not to ban it altogether—this is a free country—but it should be left to hedge funds and not be allowed in regulated banks, with all the great responsibilities that they have.
There is also a cultural dimension to this. What is the cultural dimension? As the right reverend Prelate the Bishop of Birmingham pointed out, it is to some extent the moral standards that we all like to think we apply in our daily lives. However, there are two things in particular that the banks need to have: a culture of caution and prudence, which is what we expect from our bankers, and a culture of service to clients. Proprietary trading is no service to clients because there are no longer any clients. It is a form of speculation. I have nothing against speculation in the right place but it does not sit well with the culture of caution and prudence that we need. You cannot do this by leverage ratios or by what you put on the statute book; it is a culture of the people involved. Those people used to
be the high street bankers. They may have been rather boring but they were extremely cautious and prudent, and that is what is needed.
Finally, let me say a brief word about something that has not been mentioned—the question of remuneration packages. I am opposed to the cap on bonuses imposed by the European Union—as we said in our report, it will be counterproductive. However, the structure of remuneration is very important. We said that bonuses should be deferred for up to 10 years. That does not mean to say that it should always be for that length of time.
In the old days the merchant banks performed very well. Moreover, during this crisis it was the so-called reputable banks which went belly up but very few hedge funds did. Both the merchant banks and the hedge funds today normally have a partnership structure. The top management and directors have their own wealth invested in the company. They have their own skin in the game. That does not make them any less innovative, but it does make them less reckless, because their own wealth is at stake. It is too easy for bankers to construct a deal that is crazy and will turn lousy a few years hence. They collect the bonuses in year one and year two and then it is the poor shareholders and taxpayers who suffer later on when the whole thing goes south. The idea of deferring the payment of bonuses is to get something that approximates more to the partnership structure, which is much healthier.
I am sorry to have gone on for so long. We have a historic role to play in this House. I am very glad to hear the assurance from the Bishops’ Bench that the most reverend Primate the Archbishop of Canterbury will play a full part in Committee in this place. That is extremely helpful. I know that the noble Lord, Lord Turnbull, from the Cross Benches, will be doing the same. We have a very important part to play and I hope that we will discharge our duty.
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