Financial Services Bill

My Lords, like my noble friend Lord Hodgson of Astley Abbots, I am more inclined to favour Amendment 11 rather than Amendment 2. I should like to draw the attention of the Committee to an interesting report prepared by the Congressional Research Service in 1987, which explored the cases for and against preserving the Glass-Steagall Act. The arguments for preserving Glass-Steagall, as written in 1987, are, first, that conflicts of interest characterise the granting of credit—lending—and the use of credit—investing—by the same entity, which led to the abuses that originally produced the Act. Secondly, depository institutions possess normal financial powers by virtue of their control of other people’s money. Its extent must be limited to ensure soundness and competition in the market for funds—whether loans or investment. Thirdly, securities activities can be risky, leading to enormous losses, which could threaten the integrity of deposits. In turn, the US Government insure deposits and could be required to pay large sums if depository institutions were to collapse as a result of securities losses. Fourthly, depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities business. An example of that is the crash of real estate investment trusts sponsored by bank holding companies in the 1970s and 1980s. The Congressional Research Service report continued with the arguments against preserving the Act. It said that, first, depository institutions will now operate in deregulated financial markets in which distinctions between loans, securities and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated and to foreign financial institutions operating without much restriction from the Act. Secondly, conflicts of interest can be prevented by enforcing legislation against them and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms. Thirdly, the securities activities that depository institutions are seeking are both low risk by their very nature and would reduce the total risk of organisations offering them, by diversification. Lastly, in much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learnt from their experience can be applied to our national financial structure and regulation. We have moved on 20 years since then. Sadly, I was abroad at Second Reading. I read the speech made by the noble Lord, Lord Lawson, very carefully. I also noted the Minister’s comments. He said that he was not, ""persuaded that the issue of size was fundamental to failure, nor that the combination of utility, retail, commercial and investment banking activities in one organisation is in itself a cause of weakness"." He preferred, ""the combination of much more capital behind the riskier activities, much more stringent liquidity requirements and better governance".—[Official Report, 23/2/10; col. 1002.]" Twenty years later some circumstances have changed, so I look forward to reading a report which is applicable to the UK.