We have had an interesting and thoughtful debate, which has concentrated on detail, but I think it is worth putting it into context. Despite the banks triggering, as we all know, the biggest economic crisis since the 1930s, with the Government having to provide nearly £1 trillion in loans, guarantees and asset protection schemes to ailing banks, it has taken five years to reach this point of proposing reform—and even then, by any standards, this Bill is woefully short of what is urgently needed to prevent a recurrence of financial collapse and to produce a safe and desirable finance sector. I have a lot of sympathy with my hon. Friend the Member for Bassetlaw (John Mann) when he said, “Is this it?”
First, the Bill’s central mechanism—ring-fencing between the investment and retail arms of the banks—is all too likely to be subverted by the Machiavellian skills of the City in regulatory arbitrage. The Minister mentioned that, but rather slithered over it, I thought, by saying that he had confidence that it would work. The only evidence he quoted in favour of that was the opinion of Sir John Vickers. Since it was his proposal, it is not surprising that he believes it will work. Historically, however, all the evidence is that Chinese walls will be circumvented.
Let me deal with the Parliamentary Commission on Banking Standards. One has to ask, as has been asked a number of times already in this debate, why after five years of delay this Bill is being rushed through just a few months before the Government’s own appointed commission actually reports? The Tyrie banking commission has made it very clear that it strongly advocates electrification of the ring fence. The Chancellor initially rejected that until the commission’s chair, the highly respected hon. Member for Chichester (Mr Tyrie), and Lord Lawson threatened to table amendments to force the Chancellor’s hand to ensure that the full sanction of separation remained in the Bill. Finding his hand forced, the Chancellor then made the absolute minimum concession he could get away with, namely giving regulators the power to dismantle an individual bank that tried to undermine the ring fence, but not a more general power to apply full separation across the industry. Even after that, dubiety remains because the Bill does not say what precisely is to be ring-fenced. Savings, for example, can certainly be placed in a variety of exotic securities.
The Government have also succumbed to the banking lobby in permitting banks to locate simple derivative products within their retail operations. As my hon. Friend the Member for Nottingham East (Chris Leslie) pointed out, that can be, and indeed already has been, uncomfortably extended. The Government’s retreat can only have the effect of opening the door to other forms of speculative activity to nest inside retail banking.
There are other uncertainties. Let me give just one example. Let us suppose that funds are transferred from a ring-fenced to a non-ring-fenced entity via a foreign subsidiary or affiliate in a place where there is no such separation. Is that a breach of the ring fence? How does anyone actually know? I presume that we will not rely on the good intentions of bankers.
The real problem with the Bill, however, is that it does not deal with the fundamental causes underlying the reckless and destructive banking that has done so much damage. It is preoccupied with investment banking, and it offers no relief from those suffering from the abuses in retail banking. As many people have mentioned, payment protection insurance, money-laundering, the fixing of endowment mortgages and interest rates, and pension mis-selling are just some of the rackets that have been run by retail banking. Nothing in the Bill offers any reform.
Many of those abuses, on not only the investment but the retail side, are fuelled by the incessant stock market demands for higher short-term returns, as well as the profit-related pay of executives and traders. Even when the European Union tried to limit the latter by means of bonus caps, the Chancellor went out of his way to stop it without managing to secure a single ally in any of the other 26 member states. I can only say that the banks certainly do not provide half the annual donations to the Tory party without expecting a very big return.
However, even more important than the ring fence and the ambiguities relating to the status of so-called simple derivatives, which are anything but simple—for example, there is the obvious question of whether currency hedges can be sold to small businesses from within the ring-fenced operations—is the leverage ratio. As has been mentioned, the Vickers recommendation was for capital of 4% with a lending ratio of 25:1. The Chancellor, in yet another very big concession to the banks, dropped that to 3%, opening up a 33:1 ratio. In its interim report published today, the Tyrie commission—rightly, in my view—rejected that as being wrong-headed and unnecessarily risky, precisely because of the excessive size of the finance sector in our economy, relative to the size of those in other economies and, indeed, absolutely. I think that that unwise concession ought to be overturned in both Houses.
This is not, I think, a great Clark-Javid Bill. It is a mini-Bill which, unforgivably in my view, entirely ignores the wider banking framework. The big four—and this, surely, is the background to the Bill—have let Britain down badly. We need to transform the whole banking culture, and end its present obsession with property, overseas speculation, offshoring and tax avoidance. By being too big to fail, the big four exacerbate moral hazard; because of their size and weight they choke competition and new entrants to the market; and they have manifestly failed to keep adequate funding flowing to business. They should be broken up, initially by a clean break between the investment and retail sides—on the basis of all the historical evidence, I think that a ring fence is highly unlikely to work—and beyond that by a wider restructuring.
What the country really needs is a national investment bank supported by a range of smaller specialist banks, focusing on infrastructure development, science and
technology, small and medium-sized enterprises and a low-carbon economy—to mention only some—together with a regional spread of banks along the lines of the German Mittelstand. The other essential requirement is the regaining of public supervision of the money supply. As the Minister mentioned in his opening speech, the total gross lending of the banking sector has been about £7 trillion a year, five times as much as GDP. What the Minister did not say, however, is that only about 8% of that has gone towards productive investment. The banks have used their virtual monopoly over domestic credit creation—amounting to some 97%—largely to fuel successive property booms and speculative foreign ventures. That is a basic reason for the fact that the country now has a fast-rising and unsustainable deficit in traded goods, which last year amounted to more than £100 billion —7% of GDP.