My Lords, as did the noble Lord, Lord Lawson, I begin by expressing my gratitude to the Government that they have listened to the speeches of many noble Lords and my PCBS colleagues on the need for a full and independent review of the ring-fence. I hope that they will realise
that the amendments that have been tabled today are the final pieces of the puzzle in this regard. This work, combined with the vast improvements that we have seen to the electrification of the ring-fence—what is officially known as the first reserve power—is most welcome. The noble Lord, Lord Eatwell, put the case very clearly, not only for them but for the second reserve power. The Government’s approach to that is so far disappointing.
The Minister said that he believed that a robust ring-fence will work, and so do we, as the commission. It is just that we do not think that it is robust—that is the problem. The point of the second reserve power is to make the ring-fence sufficiently robust that it will carry the day if the first one is over a period of years overwhelmed.
The swirling floods unleashed in 2008 with the banking collapse continue to cause eddies all over our economy, particularly in the most vulnerable parts, which so many of us on these Benches are so deeply involved in supporting. Both the ICB and the PCBS concluded that the most appropriate way in which to reform the structure of the industry today is to have the ring-fence within a parent company. It is experimental —we hear the arguments, and we know so. This partial structural separation, with the added provision of ring-fence, should create a disincentive for banks to attempt to test the limits or game the ring-fence, but “should” is not sufficient.
The advantage of the second reserve power and the first reserve power together, in addition to the ones that the noble Lord, Lord Eatwell, put so eloquently, is that they give a second shot to the gun. If the first reserve power fails, and a bank or two has been forced into full separation but the whole industry is still gaming the system, then you have still got the second reserve power. It appears that the Government’s policy on this is to have only one shot and then to say, following that, “We’ll do something. As yet, we know not what. But we will do something, and it will be something very, very serious”.
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This, however, is a structure that has to last for the next 30, 40 or 50 years. We do not want to be repeating this. We have sat here long enough over the past year. The pain of the 2008 crisis has already begun to dull. I heard a few days ago from a senior manager of a major bank that 70% of his dealers had taken up their occupation since the crash. The corporate memory will fade very rapidly. Within 10 years there will not be one at all.
That brings us to the second reserve power. This amendment does not include the appropriate split for the full separation power in the Bill. We recognise that it has already been said, and I agree with that point, by Lord Flight, that what is appropriate now may not be appropriate in five years’ time. We cannot tell exactly what will be necessary. That is why the review should be a broad-based review that includes the possibility of a full separation.
The Government have argued, and will argue, that full separation is something of a game changer and that such change should and can only come through
primary legislation. The threat of action, however, against the industry gaming the ring-fence must be greater than the current perception, which appears to be one, as far as the banks are concerned, of “Well, if we have gamed the system universally, if there is the political will and the legislative time, and our lobbying efforts fail, then the Government might produce a Bill, and then we might be in trouble”.
The inclusion of full separation in the inquiry provides a certain measured, proportionate and existential threat which makes it clear that gaming the ring-fence will be a serious mistake for the banks to make. We have already heard that, in doing this, we create an added incentive of a self-regulating and self-policing atmosphere within the banking industry. The idea that banks do not watch each other is, as the noble Lord said, incredible.
When I was in the banking business 35 years ago, the first thing I learnt from my Norwegian boss was, “These banks, they are like sheeps. They all follow each other”. His English was perfect except that he could not handle the plural of “sheep”. I remember that and remember observing that, like all good competitors, if they saw a good thing they moved into the same space. It is how the industry works and how we want it to work.
The second reserve power is a vital component in the structural reform of our banking sector. I urge the Minister to look again at this recommendation of the PCBS. They have gone so far. Surely to add the possibility of full separation in the review is only a further small step and a very reasonable one. Recognising that we are trying to build a banking system for the next half century, not for the next five years, I urge the House to support these amendments.