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Banking: Leverage Ratios

Volume 705: debated on Tuesday 11 November 2008

asked Her Majesty’s Government:

Whether they will invite the Financial Services Authority and the UK Statistics Authority to produce a statistical time series on bank leverage ratios.

My Lords, the Financial Services Authority and the UK Statistics Authority do not routinely collect information on leverage ratios. However, the FSA is currently considering whether a leverage ratio could be adopted as a useful supplement to risk-based measures of capital.

My Lords, I thank my noble friend for that positive reply. Does he agree that at the heart of the disaster which the banks and other financial institutions have recently inflicted on everyone, including themselves, in part through their bonus-driven irresponsibility and lack of transparency, was the pushing up of their average leverage ratios by 50 per cent, to unprecedented heights? Secondly, does he agree that we should no longer rely on the City’s self-serving mantra that self-regulation brings international competitiveness?

My Lords, there undoubtedly was a trend over recent years on the part of banks both to increase their leverage and to reduce their liquidity and holding of marketable instruments. The sources of the problems affecting the banking industry are numerous and global. Certainly, questions are being asked throughout the world about the need to strengthen regulation. Indeed, we have invited the noble Lord, Lord Turner, the chairman of the Financial Services Authority, to look at the opportunity for reforms in UK financial services regulation. Remuneration policies have been an issue there; we have made specific requirements in that connection where we have participated in the recapitalisation of banks; and the FSA has said that it will be looking with increased intensity at the issue of remuneration as an incentive effect for recklessness in regulated institutions. On my noble friend's final point, I suggest that we are no longer in an environment of self-regulation; we clearly have strong regulation through the Financial Services Authority; self-regulation was a feature of the past.

My Lords, given the degree of reckless lending by the banks, does the Minister think that there is now a case for having a separate regulatory regime for, on the one hand, retail and day-to-day business banking and, on the other hand, investment and the more esoteric types of banking which have brought the bulk of the problems on the banking sector?

My Lords, the noble Lord, Lord Newby, makes an interesting point, which is being debated in academic circles: the distinction between thin banks and wider banks. However, the reality is that banking institutions are increasingly complex and it is very difficult to identify a bank that fits neatly into either of those categories. In this respect, it is interesting to note that in the United States, the investment banks have very recently sought registration under the Federal Reserve Bank, so they have become wider banks, rather than remaining narrower banks. The issue of defining effective regulation and ensuring that we are aware of the consequences—to ask ourselves who we are regulating and why—is at the heart of the work that the FSA and the Treasury will be doing on regulation in future.

My Lords, does the Minister agree that splitting the regulation of financial companies and businesses between three separate organisations, the Treasury, the FSA and the Bank of England, made a significant contribution to the muddle that we are in today?

My Lords, I fear that the noble Lord, Lord Howard, is misdirecting himself. The responsibility for the regulation of institutions rests with the FSA, and the FSA alone.

My Lords, does my noble friend agree that it is not yet time to assess the crisis, because the crisis is not over yet? Should we also not be careful not to design a regulatory system to cure a crisis which has already passed but to anticipate what may arise in future?

My Lords, my noble friend exhibits great wisdom in his observation. That is precisely why we have asked the Financial Services Authority to reflect in a considered way on the lessons to be learnt, and why we are working with other states, because this is not just an issue of national regulation, there are clearly challenges here concerning international regulation of financial institutions. Our Prime Minister will be putting that to the fore in his representations at the important meetings due to be held in Washington this weekend.

My Lords, following the observations of my noble friend Lord Howard, was it not a great mistake to remove bank supervision from the Bank of England? It was widely recognised to have the expertise to deal with banks, which is certainly something that the FSA has not got.

My Lords, the expertise that the Bank had in the regulation of banks transferred almost en bloc to the FSA.

My Lords, I congratulate the Minister on not having a brief in his hand or on the Dispatch Box for either this Question or the first one, an example much to be applauded.

My Lords, the noble Lord says that new regulation is on its way. Will that regulation be made entirely in this country by the British Government, the Bank of England, the FSA, and so on, or will we have the new regime imposed on us by the Commission in Brussels, of all people?

My Lords, noble Lords know that the initiative for regulation will remain in this country with the Financial Services Authority, the Bank of England and Her Majesty’s Treasury through the tripartite arrangements.

My Lords, my noble friend spoke about pay. We have a Low Pay Commission, which he knows a lot about. Does he think that we should have a high pay commission?

My Lords, I thank my noble friend for that question. At this point, I wish that I did have a briefing book in front of me. It has been interesting in the past 10 years to see the significant progress that there has been in reducing inequalities of income. The Gini coefficient of wealth distribution has significantly reduced. The rich, as we know, have got richer in this society, but the poor have become distinctively better off. That is a great testament to the Government’s record in managing the national minimum wage through the Low Pay Commission and through benefit programmes. The super-rich in the City and the incentive effects that allowed them to earn those high returns are of considerable concern to many Members of this House and to the Government.