My Lords, this amendment, which I hope will become a new clause in the Bill, is probably the most important in the Bill. It defines whether we are really serious. If we are not serious, we will reject the idea of having a leverage ratio as one of the armaments of the FPC. If we are serious, the Financial Policy Committee must have this tool.
As the noble Lord, Lord Lawson, has argued, risk-weighted assets have been discredited as a measure of risk within the banking system. It is regrettable that so much legislation both here and in some of the discussions in Basel and in the European Union still use this discredited measure as a means of devising appropriate regulatory measures.
The leverage ratio is simple, it is clear and it provides a protection to the overall stability of the financial system; it provides protection for a resolution regime; and it provides protection for depositors because, with the regulatory determination of the amount of capital relative to the asset base of the bank, that regulatory determination pursuing those goals will have the effect of reducing an important component of systemic risk. It is not me who makes that argument; the Government did so in the Financial Services Act 2012. In defining systemic risk, that Act defines one of the characteristics of systemic risk as “unsustainable levels of leverage”.
If the Financial Policy Committee is supposed to be managing systemic risk and a component of systemic risk is unsustainable levels of leverage, why cannot the
Financial Policy Committee have the tools to do anything about it? At the moment the Government are telling us that they will review whether the FPC should be given this particular tool in 2017. They will review it: we are not even sure that the Financial Policy Committee will receive the ability to manage the leverage ratio in 2017-18.
By the way, even if it does appear in 2018, the Financial Policy Committee and the Governor of the Bank of England will be given this tool just as Mr Carney gets on the plane back to Canada. We have managed to secure someone who the Government tell us—and I think is generally acknowledged—is a highly skilled central banker and we are not giving him the tools to do the job which he is asked to do in the 2015 legislation. I notice that it was said in the Commons Public Bill Committee that:
“The Financial Policy Committee cannot be expected to work with one hand tied behind its back”.—[Official Report, Commons, Financial Services (Banking Reform) Bill, 26/3/13; col. 207.]
Not giving the Financial Policy Committee this particular power ties both its hands behind its back because it is, as I have already said, required to take account of unacceptable levels of leverage and yet it has no tool to do anything about it. The amendment of the noble Lords, Lord Lawson and Lord Turnbull, and of my noble friend Lord McFall, achieves that goal. Surely this is what is necessary if we are serious and are not overwhelmed by the lobbying of the banks.