Credit Institutions and Investment Firms

It is a pleasure to follow my hon. Friend the Member for West Worcestershire (Harriett Baldwin). I agreed with practically every word she said. I want to focus on subsidiarity in relation to the bank capital requirements. It seems to me that those capital requirements must rest with the lender of last resort, because the organisation that will be best informed about the requirements of banks within its system will be the bank to which they report. This regulation might therefore be an area where it is suitable for the eurozone to have a single regulation, but where those outside the eurozone ought to have regulations referring to their own currencies and central banks. That works both ways. There has been much concentration on the need to raise bank capital rates when an economy is booming, as part of efforts to calm down an economic expansion, and that is obviously true: had bank capitalisation rates been raised during the last boom, the effects would have been lessened, the degree of gearing, particularly in the Royal Bank of Scotland, would have been lower and the problems that followed would have been less. However, it is equally important, when an economy is turning down, that bank capital requirements might need to be lowered, and that might well be the case now. When banks face large amounts of bad loans and write-offs, we might need our central bank to say, ““Well, at this point, we cannot enforce a high bank capital adequacy ratio because, if we do, our banks will not be able to continue in business, or they will not be able to make loans to good-quality borrowers now coming forward.”” The key argument of subsidiarity, therefore, is that bank capital adequacy regulations have to relate to the currency at issue, and that comes back to the central bank at issue—in our case, of course, the Bank of England. Those ratios must be flexible beyond international agreement, because if the lender of last resort is willing to lend to a bank with low capitalisation in a time of crisis, that is a decision for that central bank and its risk-taking decision makers; it does not need to be decided at an international level. My final point is the one made by my hon. Friend the Member for Stone (Mr Cash): there is a danger, under the qualified majority voting system, of regulations entirely suitable for the eurozone being passed through for the whole of the EU. Her Majesty's Government need to be alert to that and to make every effort to prevent such regulations from being forced upon us. I hope, therefore, that this motion, when passed, will be taken seriously by the EU, and that we will be allowed to regulate our banks in our way, as appropriate.