Regulatory and Banking Reform

My Lords, I welcome overall this Statement and the speech last night made by the Chancellor on related matters. In many ways, the Chancellor’s speech spelt out what he intended rather more clearly than was done in the Statement today. However, I am very glad that he is sticking to his plan A for the economy, which was so clearly endorsed by the IMF recently. In response to the question of whether it was time to adjust macroeconomic policies, it gave the clearest possible answer—no. As to regulation, it must be right that the Chancellor is scrapping the tripartite agreement which had such disastrous consequences. The position was not quite clear from my noble friend’s reading of the earlier Statement. My understanding is that what is being proposed is what the IMF calls a triple peak arrangement; that is, a new prudential regulator, a new financial conduct authority and a new macroprudential authority. Am I right in thinking that there are three bodies rather than two? I turn to the other question in relation to regulation and to the question of ring-fencing. Personally, I would have preferred the more radical solution of complete separation. I realise the arguments about cost of capital, competition and so on, but after all, American banks did survive quite successfully for a long time under the Glass-Steagall arrangements. But when we come to the question of ring-fencing between the investment part of a bank and its retail part, I am not clear whether it is intended that the ring fence should have holes in it or whether there is to be a complete ban on capital flowing from one side of the ring fence to the other. There seems to be some discussion at the moment which suggests that the ring fence would not be as solid as perhaps some of us would wish it to be. The other thing that is not clear about whether something is too big to fail is whether, following the establishment of the ring fence, the part of the bank concerned with investment banking, no matter how large, would be allowed to fail, but the retail side would not. In other words, there would be an absolute guarantee that the retail part of a bank would be protected by the Government. If that is so, it raises very serious questions of moral hazard. The extent to which the retail banking section has not been devoid of the recent problems arising from risk-taking creates a real problem. Obviously, we will be much clearer about this when we see the White Paper and the pre-legislative scrutiny which takes place. But perhaps my noble friend would clarify precisely what is meant by ring-fencing in this context.