Last July, immediately after its creation, the Parliamentary Commission on Banking Standards was asked by the House to undertake pre-legislative scrutiny of this Bill. In other words, in addition to fulfilling its terms of reference it was asked to examine the Government’s proposals for the implementation of large parts of the Vickers review. We have worked very hard to do what the House has asked of us, and I particularly wish to thank all my colleagues on the commission; all the commoners are in the Chamber today and although I cannot see any of the five peers up in the Gallery, their work has been not inconsiderable—as has been pointed out, they are a formidable bunch. I also wish to thank the Treasury Committee, which has continued to participate in aspects of this debate in our inquiries and the vast majority of whose members—nine, I believe—are also in the Chamber.
The first report from the Parliamentary Commission on Banking Standards, published in December, welcomed the Government’s decision to implement the Vickers ring fence, but we also argued that the ring fence had to be made much more robust if it was to have a good chance of enduring. We suggested that the level of innovation in financial services, the lobbying power of the banks, and the short memories of regulators and politicians all pointed to the need to reinforce the ring fence. That is why the commission recommended that the ring fence be supported by a reserve power, subject to final Treasury approval, to enable the regulator to impose full separation on a bank that attempted to game the ring fence. The Government have now accepted the merits of that recommendation and the Bill will be amended to provide for the reserve power, which is very welcome news.
In their response to our report, however, the Government did not accept a number of other proposals, so we produced a second report. It was published today and it seeks to do three simple things. First, for the convenience of the House, especially those Members who will serve on the Committee, it provides draft amendments to support all our proposals that might need statutory backing. As far as I know, that is an innovation for a Select Committee or Joint Committee and I hope that it will be of some use and perhaps set a precedent for how such Committees operate. The amendments have been prepared with the help of a former senior parliamentary counsel.
Secondly, an annex juxtaposes our recommendations against the Government’s response to enable the House to see clearly what has been accepted and what has been rejected.
Thirdly, the report examines the arguments made by the Government for rejecting a number of our recommendations. We were able do that on the basis of further evidence gathered from, among others, Sir John Vickers, the Governor of the Bank of England, the deputy governors and the chief executives and chairmen of most of the major banks. We have concluded that much more work is needed to improve the Bill and I shall linger briefly on only two areas. Much of what needs to be said is in the report and I hope that colleagues will find time to read it.
The first area is leverage. The parliamentary commission has not heard a convincing argument for blocking, as the Government seem determined to, the Financial Policy Committee of the Bank of England from setting the leverage ratio. We have concluded that the ratio is likely to be too low—that is, that banks are likely to remain overleveraged—but we also think that that judgment should rest with the financial stability regulator, the Financial Policy Committee, and not with the Chancellor. We argue that the regulator will want to consider long transitional arrangements, particularly for building societies—the Minister mentioned his concerns about this—as some problems particularly apply to those with large mortgage books. In our first report, paragraph 295 and the paragraphs preceding it go into the issue in some detail.
We also argue that the Bank of England should provide an annual assessment to Parliament on risk-weighting. It is clear to anybody who has considered the
composition of risk-weightings and how they are derived, including the fact that they are based on modelling by the banks themselves, that to rely on risk-weighting alone would be a perilous task. It is vital that that should be supported by a robust leverage ratio, as risk-weightings are not a good measure, on their own, of overall balance sheet risk.
The Government have rejected all those suggestions and, frankly, I find it surprising that they cling to the line, which we heard again today, that we should wait for Basel—that is, that we should wait for other countries to decide. As many witnesses have said, it is for us to sort out what is best for Britain. We need to work out what is right for our industry, rather than waiting for a lowest common denominator decision from the Basel group. I was a little disappointed to hear more in that tone from the Government today.
From time to time, the Government even remind us, as they did today, that the transfer of the power to the Financial Policy Committee, if and when it happens in 2018, should occur only after it has been reviewed. In other words, it is possible that the Government might conclude that it should not be transferred at all. I think that would be a grave mistake. Getting leverage right is crucial to the future of the banking industry. With twin peaks in place and the financial policy up and running, it must be right to give that power to the FPC.
A second major outstanding area of disagreement is the Government’s rejection of a second reserve power for industry-wide separation. Our first report made it clear that this should be exercisable only after a fully independent review, after a recommendation from the regulator, and with Treasury approval. Not only did the Government reject the second reserve power, but in their first published response they even rejected the case for an independent review after a few years to assess the effectiveness of the ring fence.
On that last point—the need for a review—when the Chancellor came before the Committee about a fortnight ago, he appeared to be a little more flexible and he said he would consider it, and I noted the more emollient tone that we heard from the Minister today. I very much hope this presages some action on that point. I hope the Chancellor will give very careful consideration to the two points that I have raised here and that we raised in the report, both on leverage and on general separation.