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Banking Commission Report

Volume 537: debated on Monday 19 December 2011

The Government are proposing the most far-reaching reforms of British banking in our modern history. Our objective is to make sure that what happened in Britain never happens again, that taxpayers are protected and that customers get a better service. Last year, the Business Secretary and I set up the Independent Commission on Banking to look at what has been called the British dilemma—that is, how Britain can be home to one of the world’s leading financial centres without exposing British taxpayers to the massive costs of those banks failing.

In the years leading up to the financial crisis, a failure of regulation contributed to the build-up of a debt-fuelled boom. Banks borrowed too much and took on risks they did not understand. When the bubble burst, these banks turned out to be too big to fail, and the last Government had to spend billions of pounds bailing them out. Of course, major financial institutions in other countries were bailed out by their taxpayers, but the British bail-outs were on a different scale. The Royal Bank of Scotland bail-out was the biggest in the world. The recent report of the Financial Services Authority on the failure of RBS attributed that to

“poor decisions made by the RBS management and Board”

against a backdrop of a regulatory regime that failed to stop them. The politicians responsible are named in the report.

This Government are determined to do better at protecting British taxpayers from the cost of failing banks, while at the same time acknowledging the importance of the financial sector to our country. Britain should remain home to one of the world’s leading financial centres and the home of global banks, but the strength of this industry is also a potential weakness to the economy if not properly regulated.

The sector supports nearly 1.4 million jobs—not just in the City of London but across the whole of the UK. The balance-sheet of our banking system is close to 500% of our gross domestic product, compared to 100% in the US and 300% in Germany and France. So while a European and international regulatory response to the crisis is important, we cannot rely on this response alone to make our banking system safe. We in this Parliament have to take action—and under this Government, we are.

We are putting the Bank of England back in charge of prudential regulation; we have created the Financial Policy Committee to look at risks across the financial system; and I welcome today’s report from the Joint Committee on the draft Financial Services Bill. I wanted proper pre-legislative scrutiny. That has happened, and we will respond in the new year so that we improve the legislation. We have also introduced a permanent bank levy on wholesale funding and we have introduced the toughest and most transparent pay regime of any major financial centre in the world. We also need to address the structure of our banks, however. That is why the coalition Government set up the Independent Commission on Banking. I again want to thank Sir John Vickers and the other members of the commission—Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf—for their impressive report.

The report made three main recommendations: first, that everyday high-street banking services should be separated from wholesale and investment banking activities, and that this be done via a ring fence; secondly, that banks be required to have bigger cushions to absorb losses without recourse to the taxpayer; and thirdly, that competition in the banking sector be strengthened by increasing the number of banks on the high street and the power of customers to switch accounts. When the final report was published in September, I made it clear that I welcomed these recommendations in principle and would return to the House by the end of the year. Today, I fulfil that commitment. Let me set out in detail how the Government plan to respond, and invite further views before we publish a White Paper next spring.

First, the Government will separate retail and investment banking through a ring fence. It is important to know that this ring fence will not prevent banks from failing, but it does mean that if banks get into trouble, those elements of the banking system that are vital for families, businesses and for the whole economy can continue without resort to the taxpayer, so the following will be in newly ring-fenced banks: the deposits of individuals and their overdrafts, and the deposits and overdrafts of small and medium-sized businesses. They will all be kept separate from riskier wholesale and investment banking, which will have to be outside the ring fence. Larger corporate deposits and lending and private banking can be either in the ring fence or outside. The ring-fenced bank will be legally and operationally independent; it will be able to finance itself independently and have its own board; and there will be limits on the amount it can lend to the rest of the group. The commission’s interim report proposed a de minimis exemption for small banks that were clearly not systemic, and we invite opinion on whether to proceed with that. Our objective is clear. We want to separate high-street banking from investment banking to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail.

Secondly, we will make sure that banks have bigger cushions, so they are better able to withstand losses. The international Basel III requirement, which the UK was instrumental in negotiating, requires banks to hold minimum equity capital of 7%, and there is a top-up for systemically important banks. We will go further. Large ring-fenced retail banks will be required to hold equity capital of at least 10%, and there will also be a minimum requirement for the loss-absorbing capacity of big banks of at least 17%. This requirement will apply to the UK operations of British banks, and will also be applied to the non-UK operations of UK-headquartered banks unless they can demonstrate that they do not pose a threat to the UK taxpayer.

I can also confirm that the Government will introduce the principle of depositor preference: in other words, the principle that unsecured lenders to banks, who are better placed to monitor the risks that banks are taking on, should have to take losses ahead of ordinary depositors. We seek further views on the best way to implement this principle. This comes on top of the guaranteed protection offered by the Financial Services Compensation Scheme, which covers 100% of eligible deposits up to £85, 000.

Those proposals on loss absorbency will also strengthen the European single market. One of the greatest distortions to the single market in banking is the perceived implicit taxpayer guarantee for all European banks. Through these proposals, the UK is setting out a plan to remove that distortion for UK banks. The European Commission has indicated that it plans to consider what it can do to reconcile it at EU level. I welcome that, and the UK will engage actively in the debate.

This House and other member states have objected to the European Commission's proposals to impose maximum standards for bank capital. These proposals undermine efforts that we and others are making to improve financial stability and the single market, and bodies such as the International Monetary Fund believe that they also water down the international Basel III agreement, giving exemptions to globally active banks in certain European countries. Along with others, we will seek changes to ensure that the EU faithfully implements international agreements.

Thirdly, the Government will take action to increase competition in the banking sector. As a result of the disappearance of banks such as Bradford & Bingley and the last Government’s decision on the merger of Lloyds and HBOS, the banking sector is dominated by a handful of large banks. Last year, just four banks took 70% of the market share. We need new banks to enter the market and provide consumers and businesses with more choice. Last month the Government announced the sale of Northern Rock to Virgin Money, which creates a new competitor in our retail banking sector. In the coalition agreement we made it clear that we wished to foster diversity in financial services, including the promotion of mutuals. We welcome last week's announcement that Lloyds has identified the Co-op as preferred bidder for the divestment of more than 600 branches, which will create a strong challenger in the high street.

We will also make it easier for people to switch their current accounts. This recommendation from the Commission has received less attention from the media, but could be of huge benefit to millions of customers. The idea is that individuals and small businesses can switch to another bank within seven days, and all the direct debits and credits will be switched for them at no cost. The Government have secured the banking industry's agreement that it will implement these proposals by September 2013.

We will support the Treasury Committee's proposal to bring the Payments Council within the scope of regulation, and I can confirm that our financial services legislation next year will specify that one of the objectives of the Financial Conduct Authority is to promote effective competition in the interests of consumers. A new statutory competition remit will provide the FCA with a clear mandate for swifter, more effective action to address competition problems in financial services. Within months of the ICB report, legislation will be introduced to bring the change into force.

That brings me to timing. Some have questioned whether the Government will seek to delay implementation of these reforms—such questions come from people who never even contemplated reform when they were in office. In fact, the reverse is true. On the advice of Sir John Vickers and others, I will introduce separate legislation to implement the ring fence. The Government intend implementation to proceed in stages, with the final changes relating to loss absorbency fully completed by the beginning of 2019 in line with the Basel agreement, but I can confirm that primary and secondary legislation relating to the ring fence will be completed by the end of this Parliament in May 2015, and that banks will be expected to comply as soon as practically possible thereafter. The Government will work with the banks to develop a reasonable transition timetable.

Of course, there are both costs and benefits to these reforms. The Government estimate the total costs to UK banks to be between £3.5 billion and £8 billion, broadly in line with the commission’s estimate. Much of this reflects the cost to them of removing the subsidy that comes from any perceived implicit taxpayer guarantee, which is precisely what we intend. The cost to GDP is estimated by the Government at just £0.8 billion to £1.8 billion, slightly lower than the commission’s estimate. These are far outweighed by the benefits of the ICB’s recommendations. Even a relatively modest reduction in the likelihood or impact of future financial crises would yield an incremental economic benefit of £9.5 billion per year, such is the cost of financial crises to the economy. Since the wholesale arms of non-UK banks would be unaffected by these reforms and the principal recommendations relate to UK retail banking, the competitiveness of the City of London as a location for international banking will not be affected.

We are fixing the banking system to protect taxpayers in the future, but we also need to clear up the mistakes of the past. I have already mentioned Northern Rock and Lloyds, but the biggest call on the taxpayer was the bail-out of RBS. The Financial Services Authority’s recent report was a damning indictment of all that went wrong in this crisis, and those responsible are clearly identified in it. We need to deal with the mess they created. Despite promises from the previous Government that taxpayers would profit from the RBS bail-out, the Government’s shareholding is now worth around £27 billion less.

We are already reforming the regulatory structures that allowed these catastrophic failures to occur. Bonuses are a fraction of what they were four years ago. Early this year we placed a limit of £2,000 on cash bonuses for RBS and Lloyds. We have made it very clear that the bonus pool next year must be lower again, and more transparent. We are also clear that, at a time like this, the Financial Policy Committee’s advice should be followed: bank earnings should be used to build capital levels, not pay out large bonuses.

RBS itself has also made significant changes since 2008, including reducing the size of its investment bank by half, but I believe RBS needs to go further, and the management agree. We are the largest shareholders. Let me set out our view. RBS has already announced that it will further shift its business strategy towards its personal and SME customers and its corporate banking business which serves UK and international companies. We believe RBS’s future is as a major UK bank, with the majority of its business in the UK and in personal, SME and corporate banking. Investment banking will continue to support RBS’s corporate lending business, but it will make further significant reductions in the investment bank, scaling back riskier activities that are heavy users of capital or funding. RBS should emerge a stronger, safer bank able to maintain lending to businesses and customers, and which in time can be returned to full private sector ownership.

The British people are angry about what happened in our banks, and angry at the politicians who let it happen. This coalition Government see two parties working together to clear up the mess of the past and to create a banking system that protects taxpayers and serves customers better. Today we present the most far-reaching changes to banking in our modern history so that we can build an economy that works for everyone. I commend this statement to the House.

Let me start by thanking the Chancellor of the Exchequer for advance notice of his intention to give a statement but, as with the autumn statement, it is deeply disappointing that the statement, and the 75-page document, arrived with us only eight minutes before the Chancellor entered the House of Commons. One has to ask: do the Chancellor and the Business Secretary have something to hide?

I have a number of questions for the Chancellor. We have not had time to read the report so I hope he will make an effort to answer our questions today, but let me thank him for agreeing, at least in part, to our recommendation back in September that he produce an implementation plan for the Vickers commission by the end of the year. It is vital that the Government now implement these important banking reforms without foot-dragging or back-sliding or watering them down.

So will the Chancellor now agree to our second request, also made in September, and ask the Vickers commission to come back in 12 months’ time and publish an independent report on the progress that has been made in implementing its report?

Labour Members are determined to play their part in implementing these proposals in, as far as is possible, a cross-party spirit—taxpayers, customers and businesses, angry at banking recklessness which forced a multi-billion pound bail-out, will expect nothing less. We have apologised for the part that the last Government played in this global regulatory failure. In that same cross-party spirit, perhaps the Chancellor would like to take this opportunity to apologise too: for the role his party played in opposition, and he played as shadow Chancellor, in complaining of “too much regulation”, and for the then Leader of the Opposition calling, as late as spring 2008, for “lower taxes” and “less regulation” for the City. We all made mistakes and perhaps this Chancellor, who opposed financial regulation legislation, who opposed the nationalisation of Northern Rock, RBS and Lloyds, and who opposed Bank of England independence, should show a little more humility as well. If he does, I will, in a cross-party spirit, commend him for that.

I join the Chancellor in commending the excellent work of the pre-legislative scrutiny Committee on the draft Bill and of the Treasury Committee. We will study those reports in detail, and we will approach the Bill and the Chancellor’s reforms to the machinery of financial regulation with an open mind. However, like those Committees, we are concerned that his reforms could make decision making both more complicated and less transparent in future. There is a serious and still unanswered question as to whether there is sufficient accountability to match the massive new powers that the Chancellor plans to delegate to the Bank of England. His so-called “simplification” actually increases the number of deputy governors of the Bank of England from two to three.

Our fear is that he is replacing the tripartite system with a de facto quartet system—the Treasury, the MPC, the FPC and the PRA—with the FCA on the outside. Given that complexity—I can explain the acronyms; they are all different autonomous agencies in the Bank of England—can the Chancellor tell the House why he has still not published the promised memorandum of understanding between the Treasury and the different Bank agencies? I hope it is obvious to the Chancellor that the memorandum of understanding must specify that in any crisis the Chancellor must always hear the direct advice of all three deputy governors—alongside that of the Governor—most importantly that of the deputy governor who is also the chief executive of the independent regulator responsible for ensuring the stability of the banking system. In my view, that is essential if this new, more complex quartet system of financial regulation is to work in an effective and transparent way.

In responding to the Vickers commission, Labour set out three tests that will guide our view of banking reform—let me deal with them in turn. First, to protect taxpayers, we, too, support the commission’s radical reforms on ring-fencing and regulatory standards. Rather than delay, could the Chancellor explain why he is not at least making a start with reforms in the current financial regulation Bill, which will come before the House next year? Can he clarify to the House whether it is his intention to implement, in full, the Vickers recommendation on depositor preference? On the requirement on the biggest UK global banks to have the ability to absorb losses equivalent to between 17% and 20% of risk-weighted assets, can he explain why he is deciding to water down the Vickers proposal by not applying this rule to their full global balance sheets? Is he sure that this will not leave the taxpayer exposed?

The Business Secretary told the BBC yesterday that the Vickers report was being implemented in full, but what we have here is not an implementation report; it is a consultation paper before a White Paper in the spring. Already we learn that the Chancellor is not implementing the Vickers recommendations in full. Will he tell the House whether he really intends full implementation, or have the Liberal Democrats been sold a pup yet again?

On the second test of securing international agreement, given the Prime Minister’s decision 10 days ago to walk away from the negotiating table without securing any protections at all for financial services in those discussions, will the Chancellor tell the House whether he is confident that he can do a better job? In particular, is he confident that he will be able to get the necessary EU-wide agreement, which means a qualified majority vote, to implement the Vickers capital requirement proposals?

On the third test of delivering a banking system that supports the wider long-term interests of the economy, may I ask the Chancellor about competition and the supply of credit? On competition, we argued back in September that any delay or backsliding on competition would leave consumers and small businesses to pick up an unfair share of what he has confirmed is a multi-billion pound bill for tougher capital and regulatory standards. Developments since September have not been encouraging.

On Northern Rock, will the Chancellor reassure the House that his rather hurried trade sale will deliver over the coming years—in two, three, four and five years—a new challenger bank that will compete in the small business and mortgage markets? Will he assure the House that that will be the outcome? Will he confirm that it is as a result of widespread concern that the taxpayer will not get value from his loss-making sale that the National Audit Office has launched an investigation into that decision?

On the sale of Lloyds branches to support a new challenger bank, will the Chancellor explain to the House—perhaps he could explain it to the Business Secretary, too—why he has decided not to implement in full Vickers’s proposals to increase the size of branch sales from Lloyds on divestiture? Why has he not taken the advice of the Vickers commission on competition? Is it not overwhelmingly clear, as we argued back in September, that rather than waiting until 2015 the Chancellor should now commit to a review in 2013—two years’ time—of the impact on competition of these proposals?

The fact is that none of these long-term reforms can address the two immediate threats to the supply of credit and the stability of our already fragile economy and banking system. First, here in Britain, with rising unemployment and a flatlining economy depressing confidence, thousands of small businesses are now struggling—as Members on both sides of the House know and as I heard for myself in Leigh on Saturday—to access the credit they need to survive and grow, with net bank lending to businesses not rising but falling. Alongside the long-term reforms, will the Chancellor tell the House why, rather than cutting taxes for the banks, he is not acting now to ensure that UK banks start to act now to increase their lending to small businesses?

Secondly, finally and most gravely of all, the failure of all our political leaders across Europe to solve the euro crisis and in particular to get the European Central Bank to start doing its job as lender of last resort is now the biggest threat to banks in Britain, businesses in Britain and jobs in Britain. Ten days ago, the Prime Minister walked away. Will the Chancellor reassure the House that he has not walked away, too? Are he and the British Treasury seriously engaged in trying to solve what is now the gravest threat to prosperity in our country in this generation? Is anyone in the rest of Europe listening to the Chancellor any more?

First, I apologise if the right hon. Gentleman did not get the statement far enough in advance for him to read it. I am merely following the procedures that he laid down when he was at the Treasury.

Let me deal specifically with the points he raises in detail. First, on the financial services Bill which we will introduce in Parliament early in the next year, I did not talk about it in the statement because we will have the Second Reading debate, I hope, shortly after we come back in January, but it is an important part of what we are doing. I mentioned it in passing. It is about changing the regulatory system to put the Bank of England in overall charge of monitoring levels of debt and systemic risk in our economy—a responsibility that I believe should never have been taken away from the Bank of England back in 1997—and at the same time giving it the powers that it needs to act as a prudential regulator, without which it would not be able to identify those systemic risks.

The reason why I have not produced the memorandum of understanding is that I was waiting for the Joint Committee—the pre-legislative Committee—that has been looking into the Bill. I thought it would be completely inappropriate to produce the MOU before it had reported so, as I explained to the Committee, I was going to wait until I had its report. The report is only being published today and I hope fairly shortly to be able to produce that MOU, having taken into account what both it and the Treasury Committee say.

The right hon. Gentleman says this is all rather complicated. There is a simple principle, which is that the Bank of England is in charge of monitoring risks in our financial system—

Well, we have tried the right hon. Gentleman’s approach and look what happened: the entire banking system collapsed. So with the greatest respect, his advice on what is a dangerous approach to regulation we will take with a pinch of salt.

I turn to the right hon. Gentleman’s other points. On international agreement, obviously it is extremely important that we are able to do this under European law. There has been an argument about this. We have a great deal of support. Countries such as Spain and Sweden have written to the Commission to urge it to allow countries to have their own national regimes that sit on top of the minimum capital requirements, and we are encouraged by the very recent Commission quote which says that “Vickers can be implemented fully in the UK in a way that is compatible with EU law”, but we will continue to make our argument. It is encouraging that both the European Commission and the European Parliament have expressed their keen interest in the Vickers report and are doing their own work on that. It is good to see us leading the international debate on that.

The right hon. Gentleman mentions competition. On Northern Rock, we welcome the National Audit Office investigation. It would be very surprising if the NAO did not do a report into such a financial transaction. It has done reports into all the previous financial transactions by this Government and the previous Government. I think what it will demonstrate is that this was a loss-making bank and the independent advice that we received was that it would go on losing money. The people who should be to blame for losing taxpayers’ money are sitting directly opposite me.

On Lloyds and the Lloyds branches, we have spoken throughout this process to John Vickers. Obviously, he can speak for himself and give his view, but we have kept him closely informed of what we are proposing. I think it is consistent with the intention in the report to create a strong challenger out of the divestment of the Lloyds branches.

Let me turn to the timetable that the right hon. Gentleman mentions. As I say, we will be implementing some of the competition requirements in the Vickers report—for example, the new competition remit for the FCA. That will be part of the financial services Bill that we introduce in January. We considered carefully whether to try and put all the Vickers requirements—the creation of the ring-fenced banks—into the financial services Bill that we are introducing early next year.

We did not think that was sensible. That was also the view of John Vickers, who recommended a separate piece of legislation. That is precisely what we are going to do, but our commitment is clear. We will have all the primary and secondary legislation, which is where quite a lot of the detail will be, through by the end of this Parliament. That is exactly what we want to see.

Finally, the right hon. Gentleman has been going around complaining that we are not doing enough, we are in danger of watering down Vickers, and the like. This is from the people who have opposed structural reform to our banking system. When I was sitting on the Opposition Front Bench as the shadow Chancellor under both the previous Chancellor of the Exchequer, who is in his place, and also under the Chancellor of the Exchequer before, who then became the Prime Minister, they opposed structural reform. They did not want to separate the banks. No doubt they can answer for themselves, but for the former City Minister who was in post when RBS made its bid for ABN AMRO, for the City Minister who was in post when Northern Rock was offering those 125% mortgages, for the City Minister who was in post when HBOS was making all those commercial property loans, for the former City Minister to complain that we are not doing enough is ridiculous. This is the man who advised that Fred Goodwin should get a knighthood and who told his boss to go and open the Lehman Brothers headquarters. That is his record, and his mealy-mouthed apology reminds me of that film “Whoops Apocalypse”—I am sorry, I just brought down the entire British economy; can we all please move on now. That is what he has done. Frankly, he has not made a substantive or interesting contribution to this debate on bank reform. Perhaps in the next few months he will.

I am grateful to my right hon. Friend for his welcome for the Joint Committee report on the financial services Bill. Will he confirm that the legislation implementing recommendations on ring-fencing will be subject to pre-legislative scrutiny, but after that the banks will be required to implement ring-fencing without delay, whereas there is a strong case for allowing time for the requirements for higher capital adequacy to be built up to prevent intensifying the shortage of capital in the short term?

I will consider the case for pre-legislative scrutiny, and the House will consider it, closer to the time. Obviously there is a trade-off between getting the legislation through and having the pre-legislative scrutiny, but my right hon. Friend’s Committee has done a very good job. Not everyone here will have had a chance to read its report, but I have read its executive summary and I will read the full report tonight. It is an impressive piece of work and an advert for pre-legislative scrutiny. I repeat our commitment that we want all this legislation, primary and secondary, by the end of the Parliament.

I welcome the Vickers report and I am glad to hear that it is being implemented, but will the Chancellor be careful about overselling this? This would not have stopped the failure of Northern Rock or HBOS, and the idea that a future Government might decline to step in and rescue an investment bank if it failed is simply not credible. Look what happened to Lehmans when the Americans tried that. So these problems have not gone away. Will he accept that if his reforms of the Bank of England are to work, he has to look at the governance of the Bank, as the Treasury Committee recommended recently? The Bank made some bad mistakes in the past and we have to face up to that, just as we have faced up to the mistakes of the Financial Services Authority. Will he urgently accept the need for European Governments to shore up their banks, because there is very real risk, if we have a sovereign default in the next few weeks, that their banks will be affected because they are not adequately capitalised? If he is still on speaking terms with his opposite numbers, that is something that he should attend to very quickly.

I can assure the former Chancellor that we are still on speaking terms. Indeed, I had an hour and a half conference call just before I came into the Chamber, so I can promise him that a lot of speaking is still going on. The question he rightly asks is: where is the action? The eurozone has taken a number of important steps, but we still need to see a more credible firewall, which will enable it to stand behind its banks even more effectively.

On the right hon. Gentleman’s specific point about the Bank of England and whether this could have prevented what happened when he was Chancellor, of course institutions can get things wrong, and the Bank of England got things wrong in the run-up to the crisis, but it is sensible to try to have one body that is looking at both the prudential risks in individual firms and the overall systemic risks in the economy. The tripartite system clearly failed to do that. I do not think that before he became Chancellor it met in person at a principal level, or perhaps only once. The system did not work and many Committees of this House have pointed that out. For the Bank of England to have clear responsibility for monitoring risks is sensible. As to whether all this could have prevented what happened, I draw attention to two points. First, there are higher capital requirements in Vickers that would have better protected banks such as HBOS, and, secondly—the biggest challenge of all that he had to face—it is precisely the collapse of a large universal bank such as the Royal Bank of Scotland that Vickers is seeking to address. No one pretends that it is easy, but we believe, Vickers believes and many others believe, that the idea of ring-fencing the retail operations focused on the UK will give the Chancellor of the day greater opportunity to protect what really matters to the UK economy without having to resort to bailing out the entire institution.

The House and the Chancellor will have heard the remarks made across the House about the need to strengthen the accountability of the Bank of England, which the Treasury Committee has already reported on, so I will not dwell on that. On the European angle, does he agree that the UK should be permitted to implement Vickers without awaiting the outcome of Commissioner Barnier’s latest announcement that he will review the merits of breaking up banks altogether, an idea explicitly rejected by Vickers, while at the same time not worrying about another of Mr Barnier’s curious and contradictory proposals, which is that a cap, as has just been mentioned, should be placed on the amount of capital UK regulators could demand of banks, which, if implemented, could prevent us from putting Vickers in place at all?

As I have said, I will return to the House early in the new year to address the issues that my hon. Friend’s Committee, other Members of the House and the pre-legislative Committee have raised about the accountability of the Bank of England and the accountability and responsibility of the Chancellor in a financial crisis. On his points about Europe, I understand that Commissioner Barnier, or the part of the European Commission that sits under him, is interested in the Vickers report and is looking at it, as is the European Parliament, which we welcome. On maximum harmonisation—in other words, not allowing individual countries with large banking systems to have their own regimes sitting on top of the EU minimum—that is something that other member states are concerned about. It was actually the Swedish Finance Minister who signed the letter that first raised concerns about that and got other Finance Ministers, myself included, to sign it, and the International Monetary Fund has also been very public in raising its concerns. We have not yet reached the point where the directive is about to be passed, but there is certainly a lively debate going on about it.

Order. If I am to accommodate the level of interest in the statement, I will from now on require brevity, the textbook for which can be written by Sir Stuart Bell.

Building on my right hon. Friend the shadow Chancellor’s statement on bank lending to the small and medium-sized enterprise sector, has the Chancellor made any study at all of the impact of what he calls bigger cushions—raising capital requirements from 7% to 9%—on bank lending to that sector? Can he offer the House a guarantee that he will consider that as part of his consultation leading to his White Paper in the spring?

It is precisely to avoid a procyclical impact that the backstop for capital requirements is 2019, so there is quite a long timetable, which is consistent with the Basel agreement, but the hon. Gentleman is of course right to point out—indeed, the shadow Chancellor made this point—that the current situation in the eurozone is causing a stress on bank funding around the world. It was good to hear the shadow Chancellor acknowledge at the end of his remarks that the biggest single threat to British businesses, as I think he put it, is the current eurozone crisis, which is an analysis we share.

Order. Still on the subject of brevity, I now turn to the person I would describe as the emeritus professor of that subject, Mr John Redwood.

Will the Chancellor take urgent action with RBS to create three new competitor banks from its assets and liabilities so that we can have real competition and more promotion of growth?

I have set out our view as the largest shareholder of RBS. We have to be careful of the shadow director rules and the like, but I was very clear in my statement that we expect and hope to see RBS shrink the size of its investment bank and focus on the UK and its UK customers. That is our proposal as an RBS shareholder. Of course, the question of how to dispose of our shares in RBS, which might arise in future, is one that we will address at the time.

Given the interesting speech recently made by the Prime Minister on the importance of Christian values, is there not a danger that the Chancellor and the Treasury as a whole are spending too long talking to the money changers and not enough time talking to more important elements of the British economy, such as manufacturers and small businesses? Does he feel that when Jesus overthrew the money tables he should have waited six years before acting?

I would not say that what we are undertaking is of biblical proportions, but we are acting now to deal with those problems. We are changing the system of regulation, which will be in place once the draft financial services Bill is passed next year; we are changing the competition remit, which will be in place by 2013; and we are committed to introducing all that legislation, including the secondary legislation, in this Parliament. We are undertaking those reforms, but in the years in the desert, which were the years under the Labour Government, none of those things was proposed at all.

I congratulate my right hon. Friends the Chancellor and the Business Secretary on working together to provide a secure future for our banking sector and to put behind us the failures of the past. Uppermost in the public’s mind from the past will have been the £45 billion bail-out of the Royal Bank of Scotland, and, given that it is now under state ownership, could not the Chancellor consider its break-up to establish a challenger bank on the high street for lending specifically to small and medium-sized businesses in order to provide the finance for future growth and economic recovery?

I have already set out the Government’s view on the Royal Bank of Scotland, and the issue of what to do when we come to dispose of the shares will be one that we can all address at the time.

The document and the process have been a very good advertisement for the coalition Government. The Business Secretary and I have worked incredibly closely on the document, which is a joint one from us both, and people will not have read in the newspapers lots of stories about the “splits between us on the issue”—

Getting a lecture on “splitism” from the shadow Chancellor, who has been the biggest source of division in the House over the 10 years that I have been in Parliament, adds to his lessons on how to regulate banks properly as something to treasure, but this document is a very good advertisement for the coalition Government and the work that we have done with the Business Secretary.

I thank the Chancellor for the statement, and for much of what was in it on Lloyds divestment, competition, account switching, retail ring-fencing and the final 2019 implementation date. I hope that that implementation will do nothing to weaken small and medium-sized enterprise lending, but what in particular did he mean by “RBS will make further significant reductions in the investment bank”? Can he put a cash figure on that? How much deleveraging does he see taking place? What does he envisage being sold off? Will it be in the UK or overseas? We need certainty about RBS’s future, so can we have some detail today, and will he confirm that he does not intend to undermine the independence of the board, notwithstanding the fact that the Government are the major shareholder?

The hon. Gentleman asks me not to undermine the independence of the board and, then, to provide all sorts of detail on exactly what the board should now do, so let me say this. I know that the Royal Bank of Scotland is a very important employer in Scotland and a very important part of the Scottish economy. We want to see it focused on its UK businesses, on UK corporate and individual customers, and its investment bank should support that service. The Royal Bank of Scotland management have also come to that conclusion, and in the coming months they will set out further details on how they are going to do that work, but it is a significant change of direction for the bank.

Given the shadow Chancellor’s involvement in the biggest banking crisis in the history of our country, and given his overt criticism of the current Chancellor, will my right hon. Friend tell me whether he has received from him any constructive submissions at all during this period?

I do not think that I have received a single submission on banking reform from the shadow Chancellor since he took up his job.

Will the Chancellor of the Exchequer confirm that nothing he has announced today will for the next five years reduce in any way the risk to the British taxpayer in the event of a British bank losing out on sovereign debt in the European Union in a way that damages its retail operations?

There are things that we have done and are doing now to make our banking system safer. Banks are required to hold more capital—more cushion—to protect them against losses, whether from sovereign debt or anything else. We regularly take part in pan-European stress tests, and actually the British banks pass those tests when other European banks do not. I think that that is because the British banking system is well capitalised and liquid.

We are also introducing a new system of regulation, which, as I say, will be operational in 2013; once the legislation has passed through the House of Commons, the Bank of England will be in charge. Furthermore, we are introducing the Vickers requirements over the next three and half years, until the general election at the end of this Parliament—we are getting all that legislation through as well. We are doing a huge amount to make the British banking system safer now, but also safer in future.

To protect the City of London, will the Chancellor follow the example of the Prime Minister when he used the veto the other day? When necessary, will the Chancellor here in Westminster override European legislation to protect the taxpayer, the City of London and the United Kingdom?

We need legislation that works effectively for British banks across Europe; British banks have subsidiaries in other European countries. Actually, a single market in financial services would be a very good thing—and it is a good thing for this country, although we need to see it deepen. We also need to make sure that countries with very large banking systems, such as our own, are able to take national decisions that protect our banking systems. I am confident that we can secure agreement to that.

Is there not a possibility that if the banks are split up, there will be more top bankers than there are now? What we need in Britain is small business growth and large business growth. The chances are that the most reviled group of people in the land—the top bankers—are going to multiply.

I do not think that it automatically follows that if we ring-fence the banks, we double the number of bankers. It is our intention, yes, to have a successful financial services industry, which is very important in Derbyshire, Cheshire, where my constituency is, the west midlands and Scotland, as well as in the City of London.

However, we do not want our entire economy to be in hock to the City of London; that is what we are seeking to avoid. We do not want to put all our bets on the City of London. That is what happened over the last 13 years, and it went disastrously wrong. The Government are determined to build up other sectors of the economy, including manufacturing and small businesses. The very fact that later today we are debating the Government’s apprenticeship programme shows our commitment as a Government to building up those other industries.

In certain respects, they will be more regulated compared with some other regimes. Obviously, the ring-fencing requirement that we are introducing is not present in every other financial centre. However, it is an appropriate course of action for the UK, given the size of our banking system relative to our GDP—it is 500% of our GDP; the United States banking system is only 100% of its GDP. As I said, there is now quite a lot of international interest in what we are doing, so we may find that other financial centres follow our lead.

The Chancellor rightly attacked casino banking. Does he not agree that now is the time to restrict UK state-owned banks in respect of their operations in tax havens, which have been a source of much of that casino banking?

We have required all the major banks in Britain to sign up to the tax code that the previous Government introduced, although they got only two or three banks to sign up to it. We not only have the code, but we are making the banks sign up to it.

Does the Chancellor agree with me that if the three politicians identified as culpable in the Royal Bank of Scotland report had been serving in local government, they would probably have been surcharged? Does he think it likely that, in the fullness of time, other European countries will follow us along the road of a retail-wholesale split?

Two of those three politicians are now busy earning quite a lot of money in the financial sector to deal with the fact that they might face a surcharge. Perhaps, with the efforts of my colleagues, we can make sure that the third politician soon follows them.

Actually, we are quite happy for the right hon. Gentleman to stay where he is, so I retract my previous comment.

In response to my hon. Friend the Member for Sevenoaks (Michael Fallon), we are confident that we will be able to do this within the regime of European Union law.

Has the Chancellor assessed the impact on levels of net lending to business of corporate deposits, estimated at £270 billion for RBS, Barclays and Lloyds, potentially lying outside the scope of the retail ring fence? Who will decide which corporate deposits sit outside the ring fence—the new Prudential Regulation Authority or the banks themselves?

A key part of the Vickers report was that the location of the ring fence would be flexible. Certain things would have to be in the ring fence, such as small and medium-sized business overdrafts and deposits and the overdrafts and deposits of individuals, and certain things definitely could not be in the ring fence, such as investment banking activity. However, corporate deposits could either be in the ring fence or not in the ring fence; that would be a decision for individual institutions, although of course they sit under the regulatory regime. That is what John Vickers recommended, having looked at this very carefully, and that is the plan that we are now implementing.

I welcome the coalition Government’s commitment to implementing the recommendations of the Vickers report. What difference, practically, will it make to people in Solihull and elsewhere in the country, and by when will they start to feel that difference?

The intention is to make sure that the taxpayers of Solihull are better protected against the failure of banks in future in a way that they were not in recent years when banks such as RBS failed. That is the overall intention of the report, but it has a very important component that does not get nearly the same media attention as the ring-fencing element that we have all been talking about—namely, the promotion of competition. The report has a specific recommendation whereby, from 2013, customers in Solihull will be able to switch their bank account within seven days, at no cost, and all their direct debits and credits will follow them to their new bank account. That is a very practical benefit to the people of Solihull and, indeed, the entire country.

Given that the Government are not spending and banks are not lending, is the Chancellor at all worried that he and Sir John Vickers are generals fighting the last war? Surely, rather than keeping a lot of money in vaults, we want it out there fructifying in the economy creating jobs and new businesses.

At times it feels like the current war as well. I do not think that the effects of the financial crisis have disappeared from our economy. Through these proposals, we are taking steps better to protect British taxpayers in the future. There is a decent implementation period for some of the recommendations, such as the loss absorbency recommendations, precisely to take account of what is going on in funding markets. It would be pretty extraordinary if this country, after all that it went through in recent years, with the biggest bank bail-out in the entire world happening here, did not learn the lessons of what went wrong and try to protect people in future.

The Vickers proposals definitely make banks more robust and more resolvable, but does my right hon. Friend think that they will definitely be more competitive? Specifically, the stickiness of personal current accounts and SME accounts is a real problem. Will he consider the proposal for full account portability rather than this halfway house which just makes it faster to transfer one’s bank account?

There is a specific reference to full account portability in the report, as my hon. Friend will see when she reads it, and that is there partly because of the point that she made to me about it in the Treasury Committee. We will consider full account portability if the switching service that we introduce is not effective and does not deliver the expected consumer benefits.

The House is not clear from an answer that the Chancellor gave to my right hon. Friend the Member for Morley and Outwood (Ed Balls) whether he supports the Vickers recommendation that in order to create an effective challenger bank, Lloyds needed to divest itself of a greater number of branches. Does he agree with that recommendation, and if so, when is he going to implement it?

We are confident that the sale proposed by Lloyds of 600 branches to the Co-op will create a sufficiently strong challenger bank because it is to an existing institution rather than a new institution. Obviously, that sale is subject to commercial negotiations and the deal is not yet done, but we think that it meets the conditions set out in the Vickers report. We have kept in close personal contact with John Vickers throughout this process.

The Chancellor has acknowledged that the Vickers recommendation would gold-plate the already onerous capital requirements on EU banks, as set out in the Basel III protocol. Does he recognise that if the figures were implemented in full, there would be the twin risk of diminishing the attractiveness of London as a global financial centre and further disincentivising corporate lending by UK banks, which is an essential part of the economic recovery and growth that we all support?

I do not think that it will discourage corporate lending, nor do I think that it will make the UK any less attractive as a location for the headquarters of global banks. We addressed that issue explicitly in our response. Because the principal proposals and additional national requirements are directed at UK retail banking, I do not think that it will change people’s view of the UK as an attractive place to locate their financial services, whether it be in the City of London or elsewhere.

I welcome the Chancellor’s conversion on bank regulation. I remind him that there are more bankers and former bankers behind him than there are behind me. [Interruption.] I mean on all the Benches behind me. Why can he not bring forward the 2019 timetable? That is what my constituents want to know.

The 2019 timetable was recommended by John Vickers in the report. People should be clear that that is the backstop. That is the final day when everything has to be implemented. In particular, if the additional capital requirements were implemented today, it might have an impact on the economy that we would not want to see. The ring-fencing legislation will be in place by the end of the Parliament and banks will be expected to comply with it as soon as is practically possible. The competition requirements will be in place by 2013. When it comes to jibes about who is working in the financial services, I seem to remember that a number of former Labour Prime Ministers are now quite lucratively paid in the financial services.

Chapter 3 of the Government’s report, on loss absorbency, seems, perhaps reasonably, to take for granted the adequacy of accounting standards. I press the Chancellor in his forthcoming White Paper to consider seriously the pernicious effects of the international financial reporting standards, which were applied to banks by the previous Government.

There is a debate to be had about international accounting rules and their impact on the financial crisis, which I am happy to have with my hon. Friend in person. There are moves afoot to make the international bodies that set the standards more accountable by using the Financial Stability Board. He raises a good issue.

What assessment has the Chancellor made of the proposal in the ICB report to apply a blanket leverage ratio across all financial institutions, and in particular of the possible unintended consequences that that could have for building societies?

That is an issue that some building societies have raised with us. That is why we say in the report that we are attracted to a leverage ratio—indeed, it is now part of the international regulatory architecture—but that we will consult on exactly how to implement it so that it does not have a perverse impact on building societies, which have served customers well throughout this period.

On behalf of my knees, Mr Speaker, I thank you. [Laughter.] I commend the Chancellor on his statement. Will he confirm that had these proposals been implemented before 2007, the RBS-ABN AMRO deal could not have taken place?

The RBS-ABN AMRO deal stands out as the moment of greatest folly in banking regulation, not just because—[Interruption.] The shadow Chancellor was the City Minister. He has incredible amnesia about his role, but thankfully we are here to remind him. It is extraordinary that the ABN AMRO deal was given the go-ahead after Northern Rock had failed. People do not appreciate the fact that it happened after that. We were highly critical of the Government’s regulatory system then, and we remain highly critical of the regulatory system that we inherited.

On 16 June 2010 the Chancellor told me that he would read the confidential parts of the Bingham report on the closure of the Bank of Credit and Commerce International and seek urgent advice from the Treasury about whether he should publish them. I do not know what the definition of “urgent” is in the Treasury, but 18 months seems like a very long time. I know that he has been busy, but has he read the report and will he now publish it?

The good news is that I have read the report. The bad news, from the right hon. Gentleman’s point of view, is that I do not propose to publish the appendices. Of course, my predecessors also took that decision. I have looked into the matter, and the view remains that publishing the appendices would not add substantially to people’s understanding of what went wrong, and that they would probably require extensive redacting, which would not only be expensive but still leave people with suspicions, even if those suspicions were unfounded. I have taken the same view that I believe the last three or four of my predecessors took.

Order. I think the hon. Member for Watford (Richard Harrington) has set a trend of leaning forward expectantly, and the hon. Member for Erewash (Jessica Lee) is now following in his wake.

Does my right hon. Friend agree that one key conclusion of the report is about customers’ ability to move their accounts more cheaply and easily? That will be well received by people in Erewash and elsewhere. Banks are there to provide a service, and that is the type of measure that will significantly increase competition and aid this country’s recovery.

My hon. Friend is right, and she speaks up well for her constituents, who want greater choice on the high street. They want to be able to switch their bank accounts easily, and there are significant proposals in the report to help them do that within seven days and without having to chase up all the direct debits and the like, which will be done for them at no charge. That will be a practical benefit of the Vickers report and the Government’s implementation of it.

Will the Chancellor give the House a categorical assurance that he has now fully recovered from his dangerous flirtation with deregulation, and that he will be able to avoid any further advances from the right hon. Member for Wokingham (Mr Redwood)?

If the hon. Gentleman examines what the Government and I have done over the past 18 months, he will see that we want proper regulation that works, enabling consumers to make choices and market forces to operate where appropriate while protecting the British taxpayer, with the Government stepping in where necessary. The report that we commissioned from John Vickers sets out a very important point about the regulation of bank structure that the previous Government did not examine. It represents a significant advance by this Government.

The public are impatient for reform and proper regulation of our banks, so I applaud the Chancellor’s dexterity in separating the timing of the loss absorbency requirements from that of the requirements for increased competition and the introduction of a ring fence on high street banking. Having decided to introduce that ring fence, what is preventing him from doing so before 2015?

We have made a clear commitment—Sir John Vickers set the back-stop at 2019, but we have said that we want the legislation to go through by 2015. My hon. Friend has to appreciate, and I am sure he does, that it is about passing not just the primary legislation but the secondary legislation through Parliament. That is a very complex matter, because we do not want the banks to find a way around secondary legislation and we do not want to come up with rules that turn out to be full of holes. It is detailed, technical work, but we are absolutely determined to do it and have given ourselves a clear timetable for delivering it.

Order. In framing his response, the Chancellor of the Exchequer should be aware that if it is related in any way to banks, he is welcome to answer, but he is not obliged to do so. The question must relate to the specifics of the statement. It is up to the Chancellor.

I welcome my right hon. Friend’s excellent statement, and I also understand why progress on ring-fencing has to be slow. Will he confirm that the guarantee for eligible retail deposits does not necessarily extend to the banks themselves?

The financial compensation scheme is very clear. We cover 100% of eligible deposits, up to £85,000 in a subsidiary. It is important that people are aware of that, and I think the public are more aware of it than they were three or four years ago. We want the explicit taxpayer guarantee of people’s deposits; what we do not want is the implicit taxpayer guarantee of the banks that took those deposits.

I welcome the Chancellor’s statement. Will he confirm that the legislation will apply to mutual societies? If so, would it have prevented the crisis in the Presbyterian Mutual Society in Northern Ireland?

One of the things we are considering is whether there should be a de minimis exemption from the regulations for smaller banks and building societies. Vickers proposed that in the interim report, but not in the final report, so this is an area where we are looking at the interim report, rather than the final report. However, we will consult, and the views of Members from Northern Ireland and others will be welcome in that process.

Does the Chancellor agree that there is no painless way of reforming the banks and that the banks have to accept a little pain now, so that the Government can protect taxpayers from future bail-outs?

The banks themselves—inasmuch as we are talking about shareholders who own them—will benefit from a safer banking system. Among the casualties of the banking crash were shareholders of the Royal Bank of Scotland, Northern Rock and the like. They lost money too and, as my hon. Friend well knows, they were not all immensely rich City people; rather, many were actually on quite low incomes. The shares were their main source of savings, so the shareholders also lost out. Owners of banks, including small shareholders, will benefit from a safer banking system.

Given that the UK’s four largest banks hold seven out of 10 personal current accounts and eight out of 10 of the current accounts of small and medium-sized businesses, will my right hon. Friend reassure me that the proposed new legislation and regulation will neither result in banks leaving the UK or being deterred from expanding, nor deter new banks from opening in the UK, thereby reducing competition and restricting choice for customers?

The reforms will make the UK an attractive location for international financial services, which will know that our system is better regulated, and for retail banking, because customers will have greater assurances that the banking system is safe and that they will not have to bail out the banks if they go wrong.

I very much welcome the report, which, along with all the other measures, I hope will help to change the culture of finance. With that end in mind, will the Chancellor set out what he hopes we can achieve in terms of having a direct impact on individuals’ personal pay and compensation in the financial sector?

We expect the bonus pool to be lower than last year and very much lower than four or five years ago, when it was probably four times what it will be now, so bonuses have come down. We have a very transparent regime, which did not exist when we took office, with the pay of the eight highest-paid non-board executive members now having to be disclosed. Above all, however, people should pay attention to what the Financial Policy Committee has just advised, which is that banks should retain earnings to build up capital at a time such as this, not pay them out in bonuses. The Governor of the Bank of England, the Financial Services Authority and I have all made it clear that banks would do well to pay attention to that advice over the next couple of months.

Does the Chancellor agree that the high street banks have a key role to play in regenerating our towns and rural communities, by continuing to have a presence on the high street?

Yes, I do, and, to be fair, the banks themselves acknowledge that they withdrew from the high street too much. We want to get back to more of that face-to-face banking that served our country well for many decades. As I have said, the banks acknowledge that, and they have come together to create the business growth fund, which will invest in new start-up businesses. They have also issued a new code of conduct to enable them to get back to the high street banking that we remember from the past.

On the subject of the personal responsibility of directors, I should like to draw the House’s attention to Fannie Mae in America, some of whose directors are being charged and, if found guilty, could face prison. Is there anything in the Chancellor’s proposals that could put directors in this country in the same boat, in that they could be sent to prison if they were found guilty of doing something wrong?

There is nothing specifically about that in the Vickers report, but the Financial Services Authority has done an investigation into what happened at the Royal Bank of Scotland, and has made specific recommendations on the law regarding bank directors. It turns out that the laws were inadequate to help the authorities to investigate specific individuals at RBS and HBOS, so we are going to look at the recommendation, which came to us only recently, and see whether we can implement it, to ensure that individuals as well as institutions can be held responsible for their actions.

There is no agreed definition of which bank functions may be included in the ring fence, and which may not. There is therefore a risk of fudge as the proposals are rolled out over the next few years. Will the Chancellor agree to ensure that that is defined in primary and secondary legislation, and not simply left to the regulators to argue over with the banks?

There will be clear definitions in the legislation. To be fair, what John Vickers recommended, and what we are proposing, is relatively straightforward. There are certain things that will have to be in the ring fence, such as the deposits of individuals and the overdrafts of small businesses. There are also certain things that cannot be in it, such as classic investment banking activities. There will then be a middle ground, which will essentially involve corporate lending, and that can either be in the ring fence or not. John Vickers thought that it would be wrong to prescribe that, because different banks have different models, so he has left the location of the ring fence flexible. However, the height of the fence will be high, and we are going to introduce it into legislation.

I welcome the emphasis in the Chancellor’s statement on more choice and competition, which will benefit businesses in my constituency and elsewhere. They often tell me that this is not just about bank lending, and that it is also about poor customer service and unexpected charges being imposed. Will my right hon. Friend confirm that this is just the start of a process, and that there will be continuous monitoring of the way in which banks treat their customers from now on?

There will be, and part of the new regime will involve a specific authority looking at competition and customer service. In that way, we shall avoid having one institution—namely, the FSA—trying to do both functions of a regulator, which are to look at the point-of-sale service that someone gets to ensure that they are being sold a product correctly, as well as ensuring that the bank itself is being properly managed and is not about to collapse. Separating those functions will be an essential part of our reforms.

May I urge the Chancellor to consider a whole in-country depositor preference system, such as that in the United States, rather than the insurance-based system recommended in the Vickers review? This would, over time, discourage reliance on the wholesale short-term funding markets. It would also reduce the risk to the taxpayer of banks that are too big to fail.

I am happy to consider my hon. Friend’s views, but we are equally clear that the depositor preference proposals in the Vickers report are the ones that we support in principle; their implementation in practice will be addressed in the White Paper.

Does my right hon. Friend agree that the ring-fencing outlined in the proposals will not only protect the taxpayer from casino banking but have the longer-term benefit of encouraging more competition by creating a fairer and more even playing field for small banks, which would be to the benefit of all?

We want to see more competition, which is why we proceeded with the sale of Northern Rock and why we are pleased to see Lloyds seeking to sell its branches to the Co-operative bank. It is also why we want to see other challenger banks out there. We are also considering a de minimis exemption for some of the smallest banks; we will report back on that when we publish the White Paper.

Small businesses in Banbury, Bicester and elsewhere will welcome the enhancement of competition in high-street banking and the fact that it will be easier for them to move accounts. Will my right hon. Friend explain, however, why it is going to take until September 2013 for these changes to be implemented? If the banks had the will, surely they could implement those changes much more speedily.

I believe this is quite a complex operation. We have looked at this, as has John Vickers—and he thought 2013 was the appropriate timetable. We are trying to create a seamless service through which people can indicate that they want to change their current account; that happens within seven days without any charges and all the direct debits and the like will follow people to the new bank. It is, as I say, quite complex to achieve and we want the service to be seamless for the customers, so I would rather spend a few months to get it right rather than try to rush its introduction.

Notwithstanding the benefit to individual taxpayers, the banking sector is unlikely to welcome the separation of its retail banking from its investment banking activities, so will my right hon. Friend assure us that he will stand his ground and ensure that our banks cannot look to the taxpayer to save them from the consequence of high-risk borrowing in future?

I can absolutely assure my hon. Friend that we will stand our ground. While I have been on my feet, I have received the news that John Vickers has welcomed our response. I absolutely commit to my hon. Friend, to John Vickers and to others that we will implement the proposals in the report to make sure that our banking system is safer, that taxpayers are better protected, that customers get a better service and that we do not repeat what went so badly wrong under the previous Government’s regulatory regime.

Given the dominance of the four largest banks in the UK, does my right hon. Friend agree that, in addition to new banks, credit unions such as the Pendle Community Credit Union or building societies such as the Marsden building society headquartered in Nelson in my constituency have a key role in improving competition on the high street?

I think credit unions and small building societies have a key role to play, whether it be in Pendle or other parts of the country. What we want is the greatest possible choice for customers. This report is an important step towards providing that competition and dealing with the large banks that have such a large proportion of the market. The competition part of the report is important and sits alongside the ring-fencing part—all designed to make our banking system safer and to serve customers better.

My Kettering constituents would like to see more competition between the high-street banks. At the moment the big four banks have about 77% of all personal current accounts and 85% of all small business accounts. Would the Chancellor like to see those market shares fall; and, if so, by how much?

I would like to see them fall, which is why we are keen to get challenger banks out there. It is why we proceeded, as I have said, with the sale of Northern Rock, and why we want the Lloyds divestment to take place. As for what the exact market share of those banks should be, I do not believe, perhaps unlike my hon. Friend, in the command economy in which the Chancellor of the Exchequer determines every share of the market for every business. I will not prescribe exactly how much market share a bank should have; there has to be an element of the free market .

I welcome these recommendations for regulation. It might come as a surprise or, indeed, a shock to Members to learn that I was refused my first mortgage application. That happened back in the days when mortgages to first-time buyers were capped at two thirds of the value of the property. Under the previous Government, however, first-time buyers could get 100% or 125% mortgages. Will the Chancellor confirm that those days of irresponsible lending are behind us?

We have not much mentioned today the report from the Financial Services Authority, which is about ensuring that people can afford the mortgages they seek. The changes are important, as they get the balance right between not pricing first-time buyers out of the market even more than they are now and ensuring at the same time that people are informed and can get a mortgage that they are able to afford.