The Government’s interventions to stabilise the financial system have been decisive in restoring confidence in the banking sector. To underpin this improvement in confidence, regulatory reform is also necessary. The Government, in conjunction with the FSA and the Bank of England, have already made progress in improving financial institutions’ corporate governance, remuneration practices and risk management, and are working with international partners significantly to strengthen capital and liquidity requirements.
My Lords, I thank the noble Lord for his interesting Answer. I greatly appreciate the time that he has spent in recent days on this very important issue, but—there always has to be a “but”—does he agree that there is a strong sense of frustration that, after 18 months of talk, nothing has really changed? Goldman Sachs is back making huge profits and is having difficulty restraining its bonuses from being too large. I have two quick points on this very difficult issue. Will the noble Lord follow up the proposition that there must be a fundamental divorce between retail deposit banking and what is politely called investment banking, but in fact has often simply meant taking large and obscure risks in derivatives whose profit was based on the growth in house prices? Secondly, will the Minister persuade his colleagues to declare, as President Obama has done, that never again will the British taxpayer be held to ransom by a bank that is too big to fail?
Does my noble friend agree that what would really restore confidence among the public at large, not least those who have lost their jobs as a result of the bankers’ ramp, would be to make positive use of taxpayers’ money to create jobs and to ensure that the investment banks, from Goldman Sachs downwards, are part of that? The public at large will no longer put up with the national scandal of banks paying themselves billions of pounds of money which is not theirs.
I thank my noble friend for his question. The support we have given to the banking system is evident in the fact that the economy is now coming out of recession and has done so with much less damage in terms of unemployment, business failure or people losing their homes than was the case in previous Tory recessions. The support we have provided to the banking system has undoubtedly helped to support the extension of credit to achieve that goal. We continue to use the pressures of the FSA, other legislation and international engagement to bear down on bonus costs in banks, but ultimately these questions must be determined by the shareholders of those banks.
My Lords, does the Minister agree that one of the best ways to restore trust in the banking sector is to split off the more risky elements of banking from the more utility functions? Has not President Obama shown how that might be done? Why will the Government now not follow suit?
The observation made by the noble Lord does not accord with the facts. The failures that we have seen in the banking system have not come through the co-joining of utility banks and investment or casino banks. Lehman Brothers and Bear Stearns were pure investment banks. Freddie Mac, Fannie Mae, IndyMac, Northern Rock and Bradford & Bingley were pure retail banks. It is not the conflation of the two that was the source of the error. I have spent a lot of time looking at this and I have concluded that the answers lie not in architecture but in behaviour. The reason why these banks failed was because they were atrociously managed.
My Lords, that may well be the case, but is the noble Lord not aware that the risk taking was an integral part of the atrocious management and it was risk taking on the knowledge that the taxpayer would bail them out? Are not my noble friend Lord Renton, the noble Lord, Lord Newby, and Mr Paul Volcker, who knows a great deal about this, more likely to be right than the Minister?
I do not think so. It is a very challenging question that the noble Lord, Lord Lawson, puts to me. When I say atrociously managed I mean atrocious management of risk as that is what lies at the heart of banks. It was the failure through traditional bad lending that lay at the heart of the collapse of the Bank of Scotland, part of HBOS, and of Royal Bank of Scotland.
We will have to see the detail of President Obama’s proposals. They lack detail at the moment but there is nothing in them that we see which accords with continuing concerns we have about the UK banking system. Proprietary trading, hedge funds and private equity were not at the heart of the problems that were faced by the UK banking industry. These are complex issues, as the volte-face of George Osborne over a matter of a few hours on Thursday night and Friday morning evidenced.
My Lords is not the real reason for any loss of confidence the appalling judgment of the bankers—who are still there—on lending? There is no guarantee that they will not still be there on any changes that will be made later. May I clarify my noble friend’s policy on this? Unlike the President of the United States, is he saying that because those bankers are still going to be there, whether they are running small or large banks, the only way to get round the problem is by having some kind of compulsory insurance fund so that it cannot happen again and taxpayers and others are protected?
The truth is that the senior management of Royal Bank of Scotland and HBOS has changed almost entirely since the failures so there has been a complete re-engineering of leadership with new people brought in from other more successful organisations. It is axiomatic that a failed bank must see the shareholders suffer and the management must be removed. That is what we have done in the case of failed banks.
As for levies, as the House is no doubt aware, I chaired a meeting in Downing Street yesterday which looked at contingent capital and risk-based systemic levies in order to assist the world banking system become more resilient and to feed into the work of the IMF and the G20 when they meet later in the year.
My Lords, the Question of my noble friend Lord Renton was about confidence. Can the Minister not accept that what the Government have done so far has failed to restore confidence in UK banks? Why is the Minister so stubbornly refusing to accept that President Obama’s solution could add to that? Does he not agree with the Governor of the Bank of England who told the Treasury Select Committee in another place this morning that structural reform is needed?
Again, I wonder where the noble Baroness gets her information from, because the share prices of our major banks have in some cases quadrupled since their low point. That is a real sign of improved confidence, as are lower interest rates, a lower OIS spread, the fact that a bank such as Lloyds Banking Group can launch the largest-ever rights issue in this country, and the decline in the credit default swap rates. This is real evidence of returning confidence. I could go on for much longer; I shall not, but I can assure the noble Baroness that if she wants to ask fact-based questions we will have a better dialogue.