Financial Services Bill

I believe that what the noble Lord was saying was that it would actually be in its interests to do that, which is a novel way in which to look at the matter. I have to correct the noble Lord, Lord Hamilton, on the issue of Greece. It was not an issue of Goldman Sachs buying Greek bonds but selling credit default swaps and complex optional derivative contracts, which apparently made a contribution to helping Greece meet its indebtedness targets before joining the EU. Perhaps it is now buying Greek bonds; we will have to see. On the points made by the noble Lords, Lord Higgins and Lord Stewartby, as well as the issues raised by the noble Lord, Lord Blackwell, at Second Reading, we must ensure that banks can fail. I spoke on this matter at a Smith Institute lecture earlier this week. A system in which banks cannot fail is a poorly performing system that will produce sub-optimal outcomes, because the consequences of failure, salutary as they should be, will not be there, so the incentive effects to avoid failure will not be in place. That is the role of recovery and resolution plans, or living wills. They will address, together with other mechanisms, the issue that my noble friend Lord Desai raised of ensuring that the taxpayer never again has to step in and support failing banks or place capital at risk. Recovery and resolution plans are an area on which the UK leads and on which the FSA is already doing significant work with some of our leading banks. I was talking to the CEO of one of our largest banks last Friday about how they are progressing with preparing the recovery and resolution plan and was much encouraged by what I heard. The plans need to be complemented by some form of price to pay for the implicit support that the taxpayer ultimately provides against any possibility of bank failure. I suggested earlier this week that the banking industry through this implicit guarantee, which it has enjoyed for many decades and for which it has paid no premium, has actually enjoyed greater state aid than any industry in Britain, including the defence industry and agriculture, to which we normally refer when we talk about state support for industry. So the combination of recovery and resolution plans and some form of internationally agreed levy to cover the cost of failure is a necessary action to strengthen the system in future. I agree with the noble Lord, Lord Stewartby, and my noble friend Lord Haskins that it is not simply an issue of too big to fail but also too big to manage. I remember being seated at dinner with the chief executive of one of America’s largest banks, in San Francisco in August 2008, before the crisis really hit. I spent an hour asking him what he did. It was quite clear to me in the end that, because of its size and complexity, it was not a business he was able to manage. Therefore, I should be very surprised if the Council for Financial Stability did not regularly address some of the issues of complexity, interconnectedness, size and management challenge which lie at the heart of the points that have been raised by noble Lords today. The noble Viscount, Lord Trenchard, referred to subsidiary structures within a group. My experience has been that it is sometimes easier to deal with another company’s subsidiary than your own, although that had quite a lot to do with a deontology of separating conflicts of interest. In the future we will see much more use of subsidiarity rather than branch structures. That in itself will be within the necessary requirements of a viable resolution approach. Finally, in response to the noble Lord, Lord Hodgson of Astley Abbotts, I look forward with great interest to reading the Financial Times editorial today.