My Lords, I begin by echoing the noble Lord, Lord Eatwell, in welcoming my noble friend Lord Bridges to this area of his responsibilities, and we look forward to the further debates that we may have in the future. I am also grateful to my noble friend for his kind remarks about the Parliamentary Commission on Banking Standards, of which I was a member, as were others who will be speaking in this debate.
The hour is late, for reasons that we are all aware of, so I shall be very brief and refer simply to two areas, one of which has already been spoken about this evening; the other one has not.
The one that has been spoken about already is personal responsibility, and the noble Lord, Lord Eatwell, even went so far as to quote me on it. It is something to which I attach the first importance and I do not think that the change to the burden of proof affects it. Personal responsibility is important, and indeed the Parliamentary Commission on Banking Standards had other proposals to nail it. It is absolutely vital that there is personal responsibility. It is not banks but bankers who commit wrongdoing. If we are to deter bankers from committing wrongdoing, they have to be held personally responsible. What happens if it is not clear who is personally responsible? I hark back to my time in the Navy many years ago. Then, if a ship ran aground, the captain was court-martialled. There was always personal responsibility and there was no way in which it could be escaped.
Currently, too often when the authorities discover wrongdoing, they fine the banks. That is, if anything, counterproductive. Not only does it enable those who are personally responsible to escape scot free but very often it is harmful for the banks to have their capital ratios adversely affected by heavy fines. That is not in the public interest. Furthermore, at the end of the day
the people who suffer are the shareholders, who have done nothing wrong, and those who have done something wrong are completely immune from any punishment. Therefore, we have to take personal responsibility seriously. It has to be front and centre of the business of disciplining and supervising those in the banking system.
My second point, which has not been referred to, concerns the ring-fence. We on the banking commission took very seriously the need to separate out deposit-taking and high-street banking from investment banking and merchant banking or whatever. Indeed, we did not think that the Government had been strong enough and we recommended that the ring-fence should be strengthened or, to use a term of jargon, electrified. What has happened now is that some, but not all, of the big banks have been campaigning and lobbying very hard for the Government to back down on the ring-fencing. That has happened so much so that Martin Taylor, a member of the Financial Policy Committee in the Bank of England, was moved to make a very outspoken speech attacking the banks for trying to prevent the ring-fencing coming about.
Ring-fencing is essential for a number of reasons. First, as noble Lords taking part in this debate are well aware, banking is of particular importance to the economy as a whole. Therefore, there is an implicit taxpayer subsidy, which is, in my judgment, inescapable when it comes to the deposit-taking banks. However, it is quite wrong that investment banks, which often undertake a lot of risky trade of one kind or another—including proprietary trading, where there are no clients at all; they are just doing it for themselves—should be able to benefit in any way, however remote, from the taxpayer subsidy. That subsidy is there because of the need to prevent deposit-taking banks, which are not just retail banks but also finance SMEs, from folding.
There is another reason why there has to be a separation. One thing that was clear was the importance of the culture of banking when things went wrong. The culture of deposit-taking banking and that of investment banking are completely separate. It is very difficult to see how we can have two quite separate cultures in one organisation. All too often, the high-risk-taking or go-go culture of the investment banks takes over what should be the prudent, risk-averse culture of the deposit-taking banks.
However, the banks that are complaining do have a slight point about one thing. They say that this curious thing, which came out of the Vickers commission and which has not been tried anywhere in the world, is unworkable for governance reasons. It is very difficult to see how the governance of two quite separate, ring-fenced banks could work. But they have a remedy; the remedy is in their own hands. They could separate completely, and then all the governance problems would be gone. I believe that complete separation is the right answer and have been publicly arguing that for more than six years now. Nothing that I have seen has persuaded me that that is not the case.
The Government have said that they will monitor the ring-fence to see how it is working in practice. If individual banks are gaining from the system—as some, but not all, will try to do—the Government will
move from ring-fencing to complete separation. I would like the Minister to confirm that it is still the position that not only are the Government not going to give way to this lobbying, which Martin Taylor spoke out about, but furthermore that they are monitoring the ring-fence very carefully and will, if that ring-fence is bringing gains in any way, move to complete separation.
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