My Lords, the amendment concerns an issue of critical importance. As was said in the previous debate, the regulatory and supervisory system clearly failed badly. The regulators were not primarily responsible; the bankers were primarily responsible—but the regulatory and supervisory system performed badly, as did the auditors. We are all of us seeking to prevent that sort of problem from occurring again, and part of that endeavour is to have a supervisory regime that requires the banks to be more prudent than they were in the years leading up to the disaster of 2008.
This subject was considered by the Independent Commission on Banking—the Vickers commission—and one of its conclusions was that basing the regulatory requirement on what are known as risk-weighted assets was unsatisfactory. That is, incidentally, also the considered view of the Bank of England and the PRA. One of the reasons why that is unsatisfactory is that the amount of risk with which one weights particular assets is to a large extent subjective. It is done by the banks, using their own models. The Basel people set a test for a whole lot of different banks. They gave them all the same portfolio of assets and asked the banks to risk-weight them. The difference between the risk weighting of the overall package in one bank was getting on for three times that of another. Indeed, for particular classes of assets, the difference between the risk weighting of the banks was eight times. To a large extent, the banks were able to use whatever risk weighting they chose.
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The Vickers commission, the Bank of England and the banking commission concluded that a more robust and reliable basis for ensuring that banks are prudent would be to lay down a leverage ratio—as our American
friends call it. It is simpler and more straightforward; it is the ratio between the capital of a bank and the assets on its books. The Basel committee said that the capital should be at least 3%, which is a very low level. That is why it is not surprising that the Vickers commission, the Independent Commission on Banking, said that it should be a little over 4%. The Government rejected that on grounds which I and, I think, the commission found inadequate. It is striking to note that in the United States, looking at the major banks where there is a potential for systemic risk, the ratio varies between 5% and 6%. When this was pointed out at Second Reading, my noble friend the Minister replied that the Americans work it out differently. I looked into this carefully and consulted the Bank of England, and am assured that the difference in practice is trivial.
This is an important and potentially dangerous area. However, we did not say what we think the leverage ratio should be. What we said was that it should not be set by politicians. It should be set by the Financial Policy Committee of the Bank of England, which would look at this objectively and decide what is necessary. Again, there is a read-across with the United States because the responsibility for setting the leverage ratio there does not lie with the Treasury, but with the Federal Reserve as the supervisory authority. We have said that in this country it should not be for the Treasury or the politicians, who are heavily lobbied by the banks—we all know about that—it should be for the FPC to decide what the ratio should be and then to lay it down. That is why the amendment states simply that the importance of the leverage ratio is such that it should be left to the FPC to decide. I beg to move.