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Independent Commission on Banking

Volume 730: debated on Thursday 15 September 2011


Moved By

To call attention to the report of the Independent Commission on Banking; and to move for Papers.

My Lords, in the words of Hunter S Thompson, banking is a,

“shallow money trench … where thieves and pimps run free and good men die like dogs”.

As he is claimed to have said, it also has a negative side.

I propose to avoid politics in my contribution today. I am mindful of Bill Shankly’s observations about the importance of life, death and football, and the matter of banking security, probity and safety is too important to fall back into cheap political point-scoring. However, I shall ask several questions and I am delighted to see the Box filling so that the Minister has no excuses for not answering questions, either in the House or in writing afterwards.

The purpose of the Motion is to discuss the Vickers report of the Independent Commission on Banking. To me it has been rather like a Chinese dinner: I felt quite full after I had first read it but within a short period I became hungry again. It simply fails to address some of the most critical issues currently confronting us in establishing a safer and more economically effective banking system. The Chancellor of the Exchequer sent the ball into the long grass a year ago when he established the Independent Commission on Banking. This dog has come back with the wrong ball.

Let us start with a little context, particularly in the circumstances of the horrendous loss announced by UBS this morning, here in London—a loss of $2 billion, apparently as a consequence of trading by a single person in exchange-traded funds. The current situation in continental Europe feels very similar to the one that we experienced in the UK in the summer of 2008, in the months before I joined the Government. In particular, French banks appear to have lost the confidence of professional depositors, particularly dollar depositors. Major banks are now selling at less than half their price to book value. Senior credit default swaps are trading at a premium of 350 basis points. Funding is taking place at 130 to 150 basis points over LIBOR. These are exactly the conditions that we saw afflicting Royal Bank of Scotland in the early autumn of 2008. France is not alone in these problems. It simply is not a sustainable situation. An early and massive recapitalisation of the European banking system along the lines of the action that we took in 2008 is now absolutely imperative.

Turning to Vickers, there is a massive lacuna in the report. Vickers spends no time at all examining the causes of the collapse of the banking system. He learns no lessons as a result of it. He appears to have completely overlooked a number of the issues in his terms of reference. He says nothing about moral issues, which he was asked to address. Nor does he say much that might inform the UK Government’s negotiations with other countries and multilateral agencies—an explicit requirement in his terms of reference. He does not examine radical solutions; size-capping is not on the list. He does not look at the case for proposing a new enterprise bank along the lines of KfW. He is strong in assertion but weak in evidence in many cases, and frankly lazy in one particularly important piece of evidence. That said, it is better than doing nothing. On that basis, most critically, we should get on with it, rather than delay implementation as has been suggested.

Vickers does not ask core questions about the role of banks. As I said, he fails to opine on the causes of failure; rather, he falls back on the assumption that there will be future failures, so we should find the best way of mitigating and managing them. Ring-fencing and increased capital will help in some way but they will not address the core failures of management and governance, which were at the heart of the banking failure. Put simply, bad management can burn through capital very rapidly. This is not addressed at all by the Independent Commission on Banking, which says nothing about the governance of banks, the competence of their boards of directors or, indeed, the role of the owners—the shareholders—who have been strangely silent. The most critical thing that shareholders can do is to appoint people to boards of directors, yet they stand somewhat distant from that. Over the next year or so I shall strongly urge, through the Kay review, that we change our approach to the appointment process for directors of public companies to put this very much in the hands of institutional investors as members of nomination committees.

The ICB does not reflect on the role and responsibilities of banks in our society and economy. Let us look at it in context. For more than 180 years until the mid-1980s, bank assets in the UK very rarely stretched either side of 50 per cent of GDP. Over the past 25 years, that figure has risen to 600 per cent. I see no evidence that there has been a concomitant increase in economic or social benefit. It has been achieved, on the whole, by leveraging up the impact of a declining return on assets to manufacture a continued, sustainable—or, as it emerged, unsustainable—level of return on equity by putting more and more risk into the banking system. The regulators failed to spot it; they failed to take any action. In many respects, the Independent Commission on Banking has simply swallowed hook, line and sinker the lines produced by the bank lobby on the importance of credit and the banks in supporting the economy.

Let us look at some facts. British banks have assets and liabilities of more than £6,000 billion. Is that significant to UK industry? Loans to UK industry and business—big, medium and small—are approximately £200 billion. Less than 3 per cent of the total assets of our banks are accounted for by loans to business. A further £1,000 billion represents loans in support of home purchases. The remaining £4,500 billion or so is used simply for speculation. If jobs are at risk as a consequence of changes in the banking system, they are not, on the whole, the jobs of ordinary folk. The jobs that would potentially be at risk from Vickers if he had come up with radical solutions are those of international bankers and speculators.

Vickers had to meet some simple tests: to foster a more stable and competitive banking system; to promote resilience; to facilitate resolution; to remove risks to public finances; and, finally, to promote responsible competition. My judgment is that Sir John and his commission have proposed several measures that will reduce risk and be good for the economy in promoting stability. However, in many places the logic of his thinking is poor and there is an absence of strong supporting data. On the issue of competition, Vickers has completely failed to come up with appropriate solutions. Most importantly, the proposed timetable is unnecessarily generous to banks and bankers, creating continued uncertainty and posing numerous risks of moral hazard in the interim—hazard that past experience suggests may be abused by banks.

I turn now to the detail. First, regarding ring-fencing, the key words are “strong” and “flexible”. The proposal is sensible but will the ring-fence hold? The intention is clear. Flexibility in what is inside and outside the ring-fence is preferable to prescription. However, it is difficult not to conclude, on reading the ICB report, that it believes that separation is inevitable. The arguments for rejecting separation but proposing segregation are among the weakest in the ICB’s report. The ICB clearly intends the split to be real. It talks about strict limits on cross-funding, the need for separate boards of directors and independent chairmen, and disclosure by both banks of a standard appropriate for the Stock Exchange. In saying that this is better than full separation, the ICB advances some frankly naive arguments. It says that,

“benefits from the diversification of earnings would be retained”.

This is nonsense. Investors diversify their portfolios and risks through portfolio construction.

The document says that the supply of capital might be available if required. Again, one would be wrong to assume that a cheap supply of capital should come from a related party. If a bank needs more capital, it should turn to its external shareholders. It goes on to say that agency relationships for one-stop shopping might be attractive. I cannot believe that the Vickers commission really believes that nonsense. It talks about shared expertise and states:

“Some operational infrastructure and branding could continue to be shared”.

It is very clear in my mind that Vickers believes that the banks will be forced by their shareholders to split, so I do not know why he did not recommend that. I simply do not understand why the ICB stopped at a halfway point, save under the pressure of lobbying from the banking industry. Who in the mean time will monitor this ring-fence—the Bank of England, which failed on the whole to see the emergence of the crisis? I think not.

On capital, UK retail banks should have 10 per cent core equity capital plus loss-absorbing capital—bail-in bonds or cocos—of a further 7 to 10 per cent. Banks were clearly inadequately capitalised before the crisis and were overleveraged. However, as I said, no amount of capital can make up for bad management or poor stewardship. Vickers’s proposals are actually not significantly higher than those in Basel III. He does not reflect at all on the availability of supply of non-equity loss absorbing capital. He makes an assumption that this capital is available, which I find very questionable. Radical solutions, such as addressing the offsetability of interest against debt in bank capital structures, are simply not considered by Vickers. He has adopted a very conservative, central line approach. Nor has he given any serious consideration to the emergence of “shadow” banks or the passporting of activities by EU-based banks into the United Kingdom to come under the ring-fence.

On the issue of capital, the UK’s four largest lenders have risk-weighted assets of about £2 trillion, implying a need to raise at least £140 billion of as yet untested, and therefore expensive, securities. Vickers expresses no view and seeks no evidence to test whether that type of capital is available. What are we going to see? We are going to see liability management in which some forms of debt will be forced into loss-absorbing debt. We are going to see bankers charging higher margins for their loans, lower margins on deposits and almost certainly paying no dividends. The only dividends that we can expect from UK banks in the foreseeable future will be distributions of debt instruments.

I wish to ask the Minister about some practical issues in this respect. Will the continuing uncertainty about the treatment of senior debt lead to a buyers’ strike? Both Lloyds Banking Group and RBS plan to issue £10 billion to £15 billion of such debt instruments next year. There will be serious consequences for the funding of those banks if this uncertainty is not addressed. What will the Government do to mitigate this? Has HMT received assurances that the ICB’s proposals will be compatible with the European Commission’s CRD4? Mr Banier has said that he broadly supports this but I wonder whether he had actually seen the Vickers report when he was in Marseille last Friday. Perhaps the Minister can tell us that. Perhaps the Minister can also tell us, if the banking system is going to be made secure and safe, whether the bank levy will be dropped because surely we do not need the bank levy if the banking system is secure as a result of the Vickers proposals.

On competition, Vickers gives no serious consideration at all to the size of banks. No serious proposals are examined to encourage new entrants. No proposals are made to establish a national investment bank along the lines of Germany’s KfW. There is no obvious reason why a challenger bank will emerge, yet he almost forces Lloyds into the arms of National Australia Bank—a bank which has been active in the UK since 1987 and has done nothing which seems to me to represent innovation, customer service and challenge. Frankly, he has dropped the ball on competition completely and yet ducks the issue of putting banking to the Competition Commission for a period of time rather than at least starting a slow burn review. Where I say that Vickers has been lazy is over the economic impact. There is an assessment that the cost of the ICB’s proposals will be £4 billion to £7 billion per annum for UK banks. Where did Sir John get this figure from? Amazingly, he got it from investment bank analysts. He simply averaged the number produced by investment bank analysts, which were guesses not forecasts—teenage scribblers, as the noble Lord, Lord Lawson, once described them—based on trying to anticipate what Vickers was going to propose. It is quite extraordinary that a senior economist could put forward such a number as viable.

On the timetable, quite frankly—I am aware that I am at my time limit—Mr Bob Diamond will not be here until 2019. The other leaders of our banks will not be in office until 2019. It is just an extraordinary risk to allow this situation to continue. There is no reason given—we recapitalised the banking system over a weekend in 2008—why something much more radical could not be done in the interim. In the mean time we live in a world in which the sort of extraordinary events announced by UBS this morning can take place. Does the Minister accept that if that $2 billion loss had been incurred by Royal Bank of Scotland or Barclays, the Treasury would potentially stand behind those banks? Does the Minister accept that we underwrite that gambling casino spirit until 2019? If Royal Bank of Scotland comes to the Treasury and says, “In the light of Vickers we want to split our bank into two, and by the way, Minister, we now think you could sell the retail bank but the taxpayer will be left with the casino bank”, will that be acceptable to Her Majesty’s Government?

I would like to ask many other questions but I realise that I am time-limited. I look forward to the response from the Minister, an ex-banker. I am only sadly disappointed that the noble Lord, Lord Sassoon, the Treasury Minister, is not responding to this debate on behalf of the Government. I beg to move for Papers.

My Lords, the whole House is greatly indebted to the noble Lord, Lord Myners, for enabling us to debate the important subject of the report of the Independent Commission on Banking in the week in which it came out. He said that he did not want to engage in party politics. None of us here does; that goes without saying. In the spirit of agreement, I point out one particular area where I agree with him. As far as I am aware, this is not something which has been raised before he raised it today, but I hope the Government will agree to it—that once the proposals recommended in the Vickers report are implemented, the bank levy should be abandoned. That makes excellent sense and I hope that the Government will respond positively to it.

However, it is remarkably quixotic of the noble Lord to have raised this subject—although I and the whole House are delighted that he did—because, of course, the Government of whom he was a member produced the most disastrous and dysfunctional system of bank regulation imaginable—I absolve him completely from it; it was in place before he took Gordon Brown’s shilling—and are therefore highly culpable. They are not uniquely culpable. I agree with the noble Lord’s comments about causes. The root cause is the greed and folly of all too many bankers. Most of us are subject to greed and folly. The problem with bankers is that the temptations are greater and the consequences are graver. However, that is all the more reason to put in place a really effective system of bank supervision and bank regulation. I deeply regret that the previous Government tore up the greatly improved system of bank supervision and bank regulation which I put in place in the Banking Act 1987, and, as I say, put in place something which was completely dysfunctional.

Incidentally, I hope that we can have an assurance that the legislation will be separate and discrete and not something tacked on to some other piece of financial legislation.

What is important, however, is that the Vickers report, although not perfect, is actually rather better than the noble Lord, Lord Myners, indicated. There are some omissions. I have not read every word of the report but I regret, for example, that there is, as far as I can see, no discussion of the Board of Banking Supervision which I created under the 1987 Act and played an important role in by, in short, enabling some poachers to become gamekeepers—some recently retired investment bankers and commercial bankers who would give extremely good advice to the Bank of England, which had responsibility for this area. They had a duty to give that advice. That arrangement was destroyed by Mr Brown and it should be resuscitated. I do not see anything about that in Vickers.

Nor do I see anything about the role of bank auditors, which is very important. Again, one of the things that I introduced in the 1987 Act was a regular and important dialogue between the bank auditors and the bank supervisors, whereby each could inform each other, to create a more effective system and be more aware of when things were going wrong. Again I say to the Government, a recommendation on this front came unanimously from the most recent report of the Economic Affairs Committee of this House. I hope that we will have an opportunity to debate it in, I stress, this Chamber at a reasonably early date.

What Vickers did was be extremely tough on capital requirements and loss-absorbency requirements. It is right to be as tough as that. However, the timing is important and, bearing in mind the state of the economy, it should be phased in gradually, although the Government must commit clearly to doing it and not let the banks erode it at the edges or anywhere else.

However, the most important issue to which I should like to address most of my remarks is the structural separation proposal in the Vickers report—the separation between what it calls retail banking and investment banking. Retail banking is a bit more than retail banking, but nevertheless that is the jargon. I have to admit that I did not do that in the 1987 Act, but the reason I did not is that, at that time, there was a de facto separation which had been there for ever. All of us can remember that we had the so-called joint stock banks and investment banks which in those days were known as merchant banks. They were completely separate organisations with separate cultures. Very often the merchant banks operated on a partnership basis, which is an important difference. There were two different sorts of institutions and cultures, and that worked extremely well. We now have to introduce that by law.

I return to the noble Lord, and what happened when he was a Minister. It is now two and a half years since I first wrote a piece in the Financial Times calling for this separation. The noble Lord was the Minister responsible. Did he respond to that? Not at all. He is now keen on separation, as far as I can make out, but he was totally uninterested when I proposed it in March 2009.

Although I do not have time to go into them, the important points are laid out in Vickers, which states quite clearly why this is necessary. The question is whether the ring-fence will be adequate or whether complete structural separation is needed. I fear that the ring-fence will not prove adequate. You will not get the two different cultures, which is absolutely vital. There is the idea that different boards will make all the difference. For a time in the early 1990s, I was on the board of Barclays Bank. It is not the boards that can ensure that this happens; it is the management that are important, not least because it is they who get the bonuses. If you have one top management, you will effectively have one culture. There is also only one group of shareholders if there is not complete separation. Therefore you will not get the benefits we seek.

Complete separation may well be seen to be necessary. I therefore hope that the Government, while implementing ring-fencing and doing it without delay, will monitor it very carefully. If there is any sign that the measures are inadequate they should seize the opportunity to go further, and make it clear in advance that they will do so. The arguments against it are weak in the extreme, as the noble Lord said. Why is the idea of the one-stop shop so important? One thing that it does is reduce competition; but the Vickers report was meant to promote competition. It is completely absurd. The report says something very darkly about there being legal impediments to complete separation. I assume that it must be referring to EU law, but that is an avenue and whole new dimension that I do not have time to address.

In conclusion, I should like to make to the Government one practical suggestion that relates to the Royal Bank of Scotland Group, mentioned by the noble Lord, Lord Myners. This was the biggest disaster area of all the disaster areas in British banking, as a result of which the Government on behalf of the taxpayer have the largest stake. As the proprietor of the Royal Bank of Scotland, the Government now have a great opportunity, which does not need legislation, to separate out the retail banking from the investment banking within the group and to have two separate companies. I am not talking about privatisation; that will come later. At this stage there should be two separate entities with a separate board and management on the retail and small business side—the old joint stock banking side—that will provide the money that small and medium-sized enterprises need at present. You will then have an entity that has no other raison d’être but that.

My Lords, I congratulate the noble Lord, Lord Myners, on initiating such a timely debate. Indeed, it is so timely that some of us have been struggling to read every last word of the Vickers report before we drafted our speeches. Indeed, some may have failed to do so.

It is also a great pleasure to follow the noble Lord, Lord Lawson, who, at Second Reading of the Banking Bill last year made the most powerful case I have yet heard for splitting retail banking from wholesale and investment banking. When he did so—and I supported him—the mood was very different from that of today. Those who argued for a complete split or for a firewall were in a small minority. There were some noble exceptions, including the noble Lord, Lord Blackwell, and the noble Baroness, Lady Ford. Indeed, the mood of the time was admirably captured by the noble Lord, Lord Myners, who said:

“I should say to the noble Lord, Lord Newby, that the separation was not something that I and the Government reject because we believe that it cannot be done. We believe that it can be done but do not believe that it is necessary that it should be done”.—[Official Report, 10/3/10; col. 282.]

In the same debate the noble Baroness, Lady Noakes, said:

“My own party does not have a definitive view on the right way forward in terms of structure”, [Official Report, 10/3/10; col. 279.]

of the banks. I am very pleased that the Conservative Party now has a definitive view.

Why then has this mood changed whereby we now have a near consensus for at least what Vickers is proposing? It is partly because over the past 18 months there has been a growing realisation of the advantages of making such a change. For example, I have been struck by the comments of Sajid Javid, a Conservative MP in another place, who was an investment banker on Wall Street when Glass–Steagall was in place and remained an investor as it came off. He described in words of one syllable how the banking in which he worked started to behave much more riskily with the funds available. It is a very compelling argument.

It has also become even clearer that if anyone had hopes that the banks would mend their ways, those hopes were forlorn. There have been a number of examples of that, including the continuing unwillingness to lend to many small firms on reasonable terms, and the continuing payment of huge salaries and even bigger bonuses. Like the heart attack patient who continues to have a daily full English breakfast, the banks have gone back to business as usual.

If there is now almost total agreement on the desirability of separation, what are the concerns and pitfalls? Clearly, cost is not an issue. Although it is easy to mock the cost estimates that have been produced, nobody is mocking their order of magnitude. If the order of magnitude of cost is £4 billion to £7 billion, the fact that broadly speaking that equates to the bonuses that bankers pay themselves each year gives some sense of how difficult that is likely to be, particularly against the estimated annual cost of another banking crisis of £40 billion. I suspect that we will hear no more, even from the BBA, about the cost of the proposals.

The next question is: how can we be sure that it works? The noble Lords, Lord Myners and Lord Lawson, expressed concerns about the efficacy of the proposals. How do we know that we will get what we want? Some people were particularly concerned to read in the papers yesterday that Bob Diamond says that Barclays can live with the proposals. I must say that that was not a reassuring comment.

However, a number of aspects of the proposals, if implemented, should give us at least some confidence that they may be effective. No doubt other noble Lords, like me, will have had a wry smile when it was suggested that the basis on which many of the risk principles should be applied should be that currently used under building society legislation, given that it is the demutualisation of the building societies that has led to some of the problems with which we now find ourselves. However, that legislation, that framework, is tough and it would be very sensible to use it.

I take the point that independent boards have their limits, but they are better than nothing. The principle that the ring-fenced bank and the other entities in the same group should operate no more favourably than third-party relationships is sensible. It is also sensible that the ring-fenced bank should meet its regulatory requirements on a stand-alone basis.

The other factor that will be crucial in implementing the proposals effectively is the way in which the new PRA operates. Surely, if that new organisation is to be worried about anything in its reputation, it will be that it manages to regulate the newly divided banks effectively.

What about the timetable for implementation? Vickers said that:

“Early resolution of policy uncertainty would be best”.

Despite the Government’s support of the principles of Vickers, the only way we get the ending of uncertainty is by early legislation. Here I disagree with the noble Lord, Lord Lawson. We will shortly have before Parliament the financial services Bill. It is fit for purpose in implementing Vickers. That should be possible because, I suspect, much of the detail of implementing Vickers will be not for primary legislation but for secondary legislation, and even more for the rulebook which the PRA will draw up. My very strong preference is to use that Bill as an enabling Bill for the legislation that is required to implement the principal proposals in Vickers. I very much hope that that will be the Government’s working assumption in the advice and guidance that they give to parliamentary counsel. I see no reason in principle or practice why a separate Bill would be more desirable.

How quickly should this be implemented? Vickers says by 2019 at the latest—not, incidentally, before 2019. Like other noble Lords, I think that that is too long. I cannot believe that it is necessary, given the work that is needed in the banks to do it. I think they would probably prefer to get on with it now that the die is cast.

Secondly, we must remember why we are doing this. We are doing this to protect the country against another banking crisis. Although I am an optimist by nature, I am not 100 per cent certain that we will not have another banking crisis before 2019.

Vickers talks about other aspects of banking which I do not have time to deal with today. In my view, the Vickers proposals are a necessary part of making the banks the servants of their customers and the country rather than their masters.

My Lords, I join others in my thanks to the noble Lord, Lord Myners, for giving us this debate. I also express my gratitude for the privilege of hearing the incisive analysis of the report of the noble Lord, Lord Lawson. Perhaps I should also explain why a theoretical physicist who had a mid-career transmogrification into an ecologist and epidemiologist is having the cheek to speak in a debate about banking.

In 2006, in a very prescient way, the US National Academy of Sciences and the Federal Reserve Bank of New York put together a study on the premise that in the increasingly elaborate things happening within financial systems with the aim of maximising profit for minimum risk for individual institutions—allegedly— nobody was thinking about the system as a whole. The NAS and the Fed put together a study that was going to focus on systemic risk. In doing so, they drew in people from cognate disciplines where there might be some read-across—ecology, epidemiology and the electricity grid. It turns out that the electricity grid is not so interesting because we really understand how it works and how switches can control it.

As a result, when the crisis manifested itself a couple of years later, I spoke with friends at the Bank of England. I have been working with Andrew Haldane, the executive director of systemic risk at the Bank of England and some of his very able younger people, following through those ideas about what might be called systemic risk in banking ecosystems. The first conclusion, which I cannot emphasise too strongly, is that there is a huge gulf of difference between natural ecosystems and complex banking systems—not least in that ecosystems, for all their complexity, are simpler. If you think of them as networks, nodes in the network—to be technical for a minute—are species and the connections are that they eat something or something eats them, and the like. In a banking network, the nodes are banks, which have all sorts of things coming in from outside and inside the system, and all sorts of things getting out from inside and outside the system—networks of networks.

I wrote a turgid paragraph in the paper which Andrew and I published emphasising that difference. Andy captured it rather better by saying:

“In financial ecosystems, evolutionary forces have often been survival of the fattest rather than the fittest”.

That caveat having been issued and emphasised, the simple fact is that the recommendations which emerged from the work of the National Academy of Sciences/Federal Reserve Bank are strongly in support of the major recommendations in John Vickers’s independent banking commission report. Specifically, if very telegraphically, first, perhaps I may read from an op-ed that Andy Haldane and I wrote in the FT:

“Are big banks less prone to failure? The traditional economics of diversification suggest so. By scaling up balance sheets across different classes of asset, risks to portfolios will tend, on average, to cancel each other out”.

In general, that seems like a good idea. It is a good idea for individual banks, one by one, reinforced by Basel I and II.

If you look at complex systems in the round in nature, you find that they tell a different tale. Very often, scaling up risks in that way causes them to cascade rather than to cancel out. The conclusion from that is that the present situation in banking is, in many respects, perverse. All banks becoming diversified—spreading risks—means that they become more homogenous, whereas if they were all different and one failed that would be it. The homogeneity and the linkage refer to the system as a whole, and there is genuine tension between the interest of the individual and the interest of the whole, between diversification of individual banks and diversity of the system.

Some of the morals of that translate into the simple fact that, over the past decade or more, if you look at systems of that kind, if you think of the spread of infectious disease within networks, we have learnt to focus our attention on the superspreaders—HIV among people with many partners. The analogue here is the big banks. By virtue of their size, the big banks have argued that they may hold relatively smaller capital reserves and that has been the habit. All the messages of a general kind suggest that in a system like that, the superspreaders, the big banks, should hold relatively larger capital reserves and liquidity, and that is one of the firm recommendations of the Vickers report.

More interestingly, going back to ecosystems, there used to be a naïve notion that there was a balance in nature and that complex systems would be stable by virtue of their complexity, which turns out to be rubbish in ecology. Redefine the research agenda to ask what are the specific structures that real ecosystems have: as observed, that reconcile the complexity that we see with persistence and stability? One of the most important of those is modular organisation. So there are chunks that loosely connect them and there is a clear echo of that in the Glass-Steagall Act and in the desire to produce greater, if not complete, separation between retail and investment banking.

I will not inflict any more of this seminar on the House but I want to conclude by touching on two other topics which have already been broached with more authority and more force, I suspect, by previous speakers. All of what I have been talking about, much of what the analysis has been about, and much of what the banking commission report is about, is systemic risk. If I were a supreme dictator and could do one thing, I would try to forbid the trading in instruments that are so complicated that they cannot be reliably priced. It does not require much sophistication to recognise that if you have a bunch of triple B house mortgages, even though you conceal the assumption in a lot of jargon, and you are going to assume all fluctuations in individual houses are totally uncorrelated, you will have a sort of quadruple B—they will certainly not be triple A. There are more sophisticated examples of that and I would like to see us taking more steps against the inherent problem in credit rating agencies going out of business if they are too diligent.

Finally, I turn to a point raised by the other Friedman, Benjamin Friedman, distinguished professor at Harvard, who, in the spring issue of the American Academy of Arts and Sciences, asked: what is the essential purpose of the financial markets? He said that it is to allocate capital efficiently in that best of systems, free markets, but that the time had come for a serious evaluation of the costs and benefits. He offers the following remarkable statistics: 30 years ago, the cost of running the financial system in the United States was 10 per cent of all profits earned in the United States; 15 years ago, the figure had grown to 20 to 25 per cent; and just before the crash the estimate was one third.

The time is more than right to go beyond the Independent Banking Commission, sound though I believe its recommendations are, to a more fundamental examination of the effective running of the financial system.

My Lords, in taking part in this debate I declare my interest as a vice-chairman of an investment bank based in London, not a universal bank—we do not take regular deposits so it is less relevant in that sense to this debate—and a subsidiary of a bank based in New York. I, too, appreciate the noble Lord, Lord Myners, initiating this debate, not simply because of the publication of the Vickers report but because that report has to be seen in the context of what will happen in the coming days, weeks and months in continental Europe and in the eurozone, which is very relevant to what Vickers is talking about.

Contrary to some, I think the report is a first-class piece of work. It shows a very good mind, it is tightly argued, well written and very thorough. I would have thought that there could be complete agreement on its objectives; namely, to protect taxpayers from the consequences of mismanagement by banks and at the same time to create a competitive banking system. I strongly support the objectives of Vickers. Our regulatory system was clearly not fit for purpose when the financial crisis came and it needed to be changed.

However, I think that the noble Lord, Lord Myners, was a little hard on what it said about competition. I first wrote on the subject and specialised in it when teaching at the LSE in December 1970 and, calling for an end to the banking cartel. As I look at the diagnosis of what is wrong in terms of insufficient and misdirected competition, concentration of barriers to entry, lack of transparency and, problems of switching, I think that it has gone about as far as it could. The commission tried to make recommendations to deal with that and, short of saying that you should break up the banks into smaller entities, I am not sure that it could do much more. Ever since we had a more competitive banking system, starting in the early 1970s, I do not think that, as a country, we have had a great record of competitive banking. The authorities could take more action and I think what they propose, especially in terms of the potential recommendations of the Office of Fair Trading inquiry into personal current accounts, is on the right lines.

A more difficult problem relates to creating greater financial stability through ring fencing retail banking, increasing equity in the system and strengthening the ability of banks to absorb losses. As I read the report, which I found quite tough going as it is very densely argued, I found myself asking more questions than were being answered. I suddenly realised that that was because I was making two assumptions. The first is that the reforms being proposed are a major reconstruction of the UK banking system of a kind not seen in living memory. I cannot think of any changes as major as this since Lloyd George required the banks to finance the First World War and said that in exchange they could have a banking cartel. You almost have to go back that far to see something as significant as this because it is creating new institutions, new rules, new governance and so on and doing so at the same time as we are creating two new regulatory agencies. We are really facing enormous uncertainty. In addition, the commission very honestly says that the cost is considerable, being up to £7 billion a year. The second assumption that I realised I was making was about unintended consequences. In the past 50 years, we know that international banking has been highly competitive and highly innovative, and when you have regulatory changes you have unintended consequences. In the 1950s, when the Federal Reserve introduced regulation Q in the US, we had the growth of the euro dollar market offshore in Europe. When the UK Government placed restrictions in the late 1960s and early 1970s on bank lending, we had the growth of the secondary banking system. In the years immediately preceding the financial crisis, when there was a glut of global saving and very low interest rates—very low margins in banking—we had the growth of the shadow banking market. So change creates uncertainty

Reading the report, It was quite easy—if we want more equity and we want separation, the authorities could simply say, “we need more equity and we will totally separate the activities of banks”. That is one possibility, Vickers produces another and a third would be to remain as we are. I found that the following problems were posed by Vickers. First, are we really sure that if we have a ring-fence and we have another financial panic that, if a number of banks really look as if they are going under, they will be allowed to fail if they are outside the ring-fence? Secondly, this becomes very detailed and complex, but what activities do we put in the ring-fence and what do you keep outside? That seems to me to be an issue which will create enormous controversy. Thirdly, there is the very important point raised by the noble Lord, Lord Myners, to do with the loss absorbers; namely, long-term unsecured debt and so on, contingent capital and bail-in bonds. We do not have markets of any depth in these at present and yet these are critical to the recommendations of Vickers.

There is also uncertainty as to whether UK banks will redomicile, either entirely or in part, and there is also the point raised by the noble Lord, Lord Lawson, that European banks could get under the wire at present and we could have a very curious structure there. Finally, there is the question of how the proposals of Vickers relate to what is happening at present in Europe, which I think is very important, because the stress tests of the EBA found that British banks are much more interconnected with continental European banks than we imagine. Altogether, I feel that there are great uncertainties in these proposals and that to rush things and go straight into legislation would be a great mistake. We need to probe and stress-test Vickers much more. It would be a great mistake to legislate too soon, because we would have the problem that they have in America with the Dodd-Frank legislation; namely, that they have general legislation with all the detail having to be worked out and nobody really knowing what the terms of doing banking are.

I welcome the fact that we have eight years before this huge potential change to the UK banking system takes place. It would be far better to take time to get it right than to rush it, threaten one of the key sectors of our economy and attempt to pick up the pieces later.

My Lords, I, too, thank the noble Lord, Lord Myners, for this debate, which is unusually timely for your Lordships’ House. This is a vital subject and the debate has already taken on a rather academic air. The noble Lord, Lord Myners, appears to give the Vickers report a beta plus query plus, the noble Lord, Lord Griffiths, definitely has it in the alpha category—alpha alpha minus. I am somewhere in-between; I am a beta-alpha man on Vickers in that I think that it is an excellently argued case, but I do not think that it is a full answer to the problems that the British Government have been grappling with since 2007-08 of what on earth to do about the banks.

I had a little personal knowledge of this when I was helping as an adviser to the noble Lord, Lord Mandelson, when he came back into the Government in the middle of the crisis in 2008. In that crisis, the Government had very clear objectives: to save the banking system from collapse and to save the world from falling over the precipice into another worldwide great depression. Over the succeeding six months the Labour Government—the Prime Minister, Gordon Brown, and the Chancellor, Alistair Darling, ably advised by the noble Lord, Lord Davies of Abersoch, and the noble Lord, Lord Myners, with their great banking experience—handled this task very well, with the policies of recapitalisation and economic and international co-ordination. For all the froth of memoirs that one reads—on the whole, I am in favour of people telling the truth in their memoirs—I think that this will go down as a proud historical legacy for that Government. Indeed, if I can engage in one note of party politics, I only wish the present Government would show the same urgency and commitment to international leadership in the present parlous situation—they are clearly not doing that at the moment.

The Labour Government faced the conflict immediately after the crisis of, on the one hand, wanting to sustain lending to business when the banks wanted to strengthen their balance sheets, and, on the other, wanting to restore the banks’ profitability so that the taxpayer could get a return on the vast billions that had had to be injected into them to shore up their finances. An attempt was made to resolve that unresolved tension through the lending agreements, and under the present Government we have had Project Merlin. I am not satisfied that that has worked and I do not know that there is any answer to those problems in the Vickers report. However, the clear problem that happened after 2008 which was not resolved under the Labour Government was that, having rescued the banks, we had created a moral hazard for the future, which, I suppose, is why Mervyn King was so reluctant to get involved in the first place.

“Too big to fail”, once we accept the argument, results in an implicit taxpayer guarantee and taxpayer subsidy. This is a very real issue: I got very frightened by the substance of this issue when I read an excellent paper—Banking on the State—a couple of years ago by Andrew Haldane, who collaborates with the noble Lord, Lord May. It really frightened me and I think, as a social democrat, that the British welfare state would find it very difficult to withstand another major banking crisis on the kind of scale we have seen. We have to find some effective solution to this problem and I think Vickers, with his proposals for separation, goes in the right direction. My doubts about it are over the effectiveness of the ring-fence and the obvious fact that structural reform is not, in itself, a complete answer to the problem. After all, the Labour Government ended up having to nationalise Northern Rock, which was not a universal bank, and Lehman Brothers, which was not a universal bank either, collapsed yet everyone now thinks that it was a great mistake not to rescue it. The problems are complex and Vickers goes some way towards resolving them.

What it does not resolve, to my mind, is the key problem of access to finance for industry. I think we are going to need much more public intervention in banking in future and that this is bound to happen as a result of the higher capital adequacy ratios that we are inevitably going to impose on the banks as an insurance policy. This is a crucial issue for access to finance for innovative SMEs, which are our future if we are to rebalance our economy. It is also a crucial issue for mortgage lending and will lead to great social inequality and stress if the current rules on mortgage lending stay in place. We are going to have to have public/private interventions to try to deal with these problems—possibly a national investment bank, along the lines of what Roosevelt did in the housing market in the 1930s with Fannie Mae and Freddie Mac in the United States. We should not address these problems simply by structural change.

The other point that I will make in conclusion is that these are long-term reforms. I am in favour of getting on with them: I am not in favour of a long and protracted process. They are long-term reforms, but we face a very immediate crisis. There is a real possibility of a second banking crisis as a result of what is happening in the eurozone. The British Government ought to be showing more leadership on this issue. It seems that all our Chancellor of the Exchequer is doing, while throwing out interesting ideas about the need for fiscal union, is using the eurozone as a distraction from Britain's problems, and at the same time dangling before Eurosceptics on the Conservative Benches the possibility of fundamental change in our relationship with the European Union. This is far too serious for that kind of playing about. As my noble friend Lord Myners said, we need, urgently, a plan for the recapitalisation of European banks. As the noble Lord, Lord Griffiths, said, we are affected by this because of cross-border impacts. We cannot say that because we are not in the eurozone it does not affect us. We are deeply affected and I would like the Government to urge that on our partners. So yes, let us move ahead with Vickers—but let us also address other fundamental issues that are important to our future.

My Lords, I declare my interest as a pension fund investment manager for the past 35 years. Noble Lords may be surprised to hear that for half of that time I have worked in banks. I am also a friend and former colleague of Martin Wolf and Martin Taylor. The noble Lord, Lord Liddle, handed out marks to John Vickers. As one who sat at his feet at an Oxford college and did not learn nearly as much hard economics as I should have done, I am happy to give him a pure alpha, although he never gave me one.

The noble Lord, Lord Myners, certainly knows how to damn with faint praise. He is too grudging. This is an excellent piece of work by Sir John and his colleagues. I believe that it is also an example of the old adage that politics is the art of the possible. Certainly, I and many others would have preferred a complete separation, but we are in a coalition rather than a Liberal Democrat Government, so we must be realistic about what we can get through. Sir John has judged it very well. I say in particular, to those who have waded through to the last 100 pages of the annexe, that he has shown brilliant tactical sense by smoking out all the banks' objections in his interim report and then shooting them down in flames in his final report. That is why, like the noble Lord, Lord Newby, and others, I believe that it is essential that we get on with reform now. The banks have had ample time for special pleading and talking to No. 10 and No. 11. Parliament is now the right forum to progress reform, and in particular the expert Joint Committee that is starting pre-legislative scrutiny on the financial services Bill.

I see the noble Baroness, Lady Valentine, looking expectantly at me. She sent me a text just before I started, saying that she was looking forward to lots of fire and brimstone. I am sorry that I have to disappoint her. We have had plenty of that already the past few weeks, not least from me, so I will focus on two key points. I have touched already on one: timing. On radical bank reform, we have won the argument about “whether”: we are now on to “when”. We should look at what the Vickers report said. There was a lot of shorthand this week about 2019, and the noble Lord, Lord Griffiths, repeated it. The report stated:

“The Commission naturally hopes that Government and Parliament will respond positively to its recommendations by enacting reform measures soon. Early resolution of policy uncertainty would be best”.

I will say from very long experience of turbulent markets like these that markets can live with almost anything except uncertainty. Given that the Government have clearly taken the decision, there is every case for getting on with it.

The commission also said that the Government should,

“provide clarity about its view of the Commission’s recommendations as soon as possible”,


“move rapidly to put in place the necessary legislation and rules”.

It also made it very clear that 2019 was a longstop date for final completion of all the details. That is perfectly logical for getting up to the final capital requirements, but it is no argument for delay on crucial structural points.

Finally, the commission points out that,

“the economic conjuncture certainly does not reduce the need for financial reform”.

You can say that again. It states:

“On the contrary, it reinforces the need to make the UK's banking system more robust”.

Today's horrific news that a so-called rogue trader has struck again, this time at UBS, reminds us how much toxic banking risk remains in the system, and how urgent radical reform is. The problem is that big investment banks are full of rogue traders: it is what they do.

Secondly, I will say a word about culture and governance. Again, the Vickers report is right when it points out that it is difficult for regulations to work effectively when they operate against the grain of corporate culture.

Perhaps I may say that I just do not think we can let the noble Lord say that this is what rogue traders do. Traders work on behalf of their bank. Rogue traders exploit their position to do things that are not on behalf of their bank. There is a total distinction between traders and rogue traders. For the noble Lord to put them together is absurd.

If I may say so, the noble Lord has put his finger on it; the trouble is that all these traders are working on behalf of their banks and it is about time they started working on behalf of their clients. There is a real problem of control when there is such a bonus culture and so much risk in the system.

I will move on to how we implement the separate culture of the ring-fenced retail banks, as the Vickers report recommends. The report makes another excellent and important point when it states that there is already a model in the utilities sector, where,

“independent boards are a standard requirement”,

and that,

“board independence was crucial to the survival of Wessex Water despite the collapse of its parent, Enron”.

The report recommends that on the board of the ring-fenced bank there should be a majority of directors who are independent non-executives, with a minimal crossover between these directors and members of the group. That is vital.

I see in her place the distinguished former business editor and national newspaper editor, my noble friend Lady Wheatcroft, who incidentally is on the Joint Committee. I hope this does not put the mockers on her chances, but I think that she would be an ideal chairman for a ring-fenced retail bank, particularly with her recent experience on the board of Barclays. Sorry, Patience.

The Vickers report concludes:

“While corporate culture cannot be directly regulated, these measures should assist in building a separate, consumer-focused culture in UK retail banking”.

Like the noble Lord, Lord Lawson, I remember the banking set-up in London in the 1970s and 1980s, when I was at Warburg. We can recreate that within the safe part of banks. I share the worry of my noble friend Lord Newby about Bob Diamond saying that he can live with it. I very much hope that that is because he does not think that it will be implemented. Let us prove him wrong. People like him are light years away from the objectives and culture of, for example, Barclays' Quaker founders. They did not gamble or avoid tax. They saw themselves as stewards of people's savings, which they lent prudently for productive purposes so that their fellow citizens could work and prosper. That is the spirit we must recreate in our ring-fenced retail banks to make them safe. Let us get on with it now.

My Lords, I am delighted to participate in this debate and would like to thank my noble friend Lord Myners for securing it. I draw attention to my registered interest. I am a director of NBNK Investments, which is one of the companies looking to acquire banks.

One of the South Sea bubble stocks was entitled “A company for carrying out an undertaking of great advantage, but nobody to know what it is”. The evidence that I heard as chairman of the Treasury Select Committee over the years convinced me that, 400 years on from 1620, quite a lot of banking philosophy and practice was characterised by that. Essentially, privatisation of profits and socialisation of losses must give way to a more democratically functioning market system, which is more aware of its wider social responsibilities.

I am aware that we will never be able to eliminate risk in future financial crises, but taxpayers should not be required to come to the rescue again. Vickers is very clear:

“The risks … associated with banking have to sit somewhere, and it should not be with taxpayers”.

That is why structural change is essential to make UK banking more resilient. In that vein, I welcome Vickers, but I am very much aware that there are issues that the report will not tackle. For example, it will not tackle the issue of too big to fail or the issue of cross-border resolution, particularly in Europe at the moment, but it has taken a stab at it.

The characteristics of the financial crisis were, quite simply, complexity, extreme risk-taking and lack of corporate governance. Those characterised quite large parts of the industry. Vickers provides a blueprint not only for a national debate but for an international debate. I have described it as a game changer. But what is the game? There is still a lot to fill in. Is it, as Philip Stephens said in the Financial Times this week, a victory to the “bankers’ shop steward” Bob Diamond, whom he compared with Bob Crow in his appreciation of fine wine and food, or is it a real game changer? The core issue is the ring-fence. Is the ring-fence an impervious wall, or is it one with multiple gateways that are easily passable? That is the issue for us as politicians and policy-makers.

As my noble friend Lord Myners said, 2019 is an awfully long time away, and if we park this even for a year or two in Parliament, it will lose its potency. We currently have a Draft Financial Services Bill before us, and I would suggest that, after talking informally to regulators such as the Bank of England, the issues are so complex that we need to get on with it and put some of the elements into that draft Bill. If we are to have a Bill on its own, there has to be a commitment from the Front Bench that, in the next Queen’s Speech, there will be a financial Bill taking this on. We need clarity on that point for politicians and for the industry.

On the issue of the objectives of the new bodies, which we are discussing upstairs in respect of that Bill at the moment, such as whether competition should be the primary objective of the financial conduct authority, I think that those issues can all be reduced. I think the primary objective of all these bodies should be to have a fair and transparent market for financial services, which will lead to confidence. Do not say that you have to establish confidence without the ingredients for confidence. The transparency of the market is very important. To change that, we need to tackle the culture of the market. I think that if Vickers missed anything, it was looking at the issue of culture and governance.

I happen to be a member of the Future of Banking Commission, which I established along with David Davis, a former shadow Home Secretary, Vince Cable, who is now Business Secretary, Clare Spottiswoode, Roger Bootle and others. Surprisingly, one of our advisers was Father Christopher Jamison, the former abbot of Worth, because we wanted a wider concept of society in terms of the culture and philosophy of banking, and that proved to be very important. One of our witnesses was the noble Lord, Lord Green, when he was chairman of HSBC. He said:

“It is as if, too often, people had given up asking whether something was the right thing to do, and focused only on whether it was legal and complied with the rules”.

In that report, which we did pro bono, we suggested a code of conduct for the banking industry and a new professional industrial body along the lines of the General Medical Council or the Legal Services Board. If individuals in banking engage in misconduct, they would be struck off. I think that if banking wants to be seen as professional, it has to step up to the plate on that issue.

During our inquiry, we looked at the issue of culture and ethics, culture being behaviour and ethics being how to negotiate conflicts of interest. We got a very interesting contribution from Goldman Sachs, whose ethics code states:

“Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives”.

Hear, hear to that; but ominously, there was a rider, which said that from time to time, the firm may waive certain procedures of the code. However, we do not want an opt-out. It is for us as legislators to look at such fine words to see what they mean and to put them under a microscope and ask “What will that mean in practice?”. It is only culture and behaviour that will change the financial services industry in the long term. My plea is that companies that are presently looking at their business models as a result of Vickers should incorporate that issue of culture and ethics.

But behind Vickers, we need to ask the question of what it will do for jobs and growth. That is the shadow that is overhanging us at the moment. The prosperity of society is behind all this. I remind noble Lords that economic prosperity and social stability go hand in hand, and if we forget this, we may get one but we will damage the other and damage society at the same time. We cannot afford to do that.

My Lords, I am chief executive of London First, a not-for-profit business membership organisation that includes businesses from a range of important London sectors, including banks, professional services firms and their customers.

I start by joining others in thanking the noble Lord, Lord Myners, for introducing this debate, but I thank him more for his swift action back in 2008. The Independent Commission on Banking has two aims: to increase stability and to increase competition. Clearly, both objectives are important and, like other noble Lords, I pay tribute to the approach that the commissioners have taken and to the experience and judgment they have brought to this difficult and contentious task.

Recent events in the eurozone have reminded us that the battle for financial stability has not yet been won, and factors beyond our control may yet have serious economic consequences. Within these constraints, the ICB has made credible recommendations about limiting the impact on UK retail banking, and therefore on the taxpayer, of any future shocks. The commission has also proposed welcome measures to encourage more banking providers to enter the marketplace to deliver more choice to businesses and consumers, pressure for lower prices and improved service, and a spur to innovation. That will support the one thing that we all want—growth.

However, a third and vital consideration has not been given equal billing: the need for the UK to maintain its global competitive position. My concern is that both in perception and in reality, Government must create a tax and regulatory framework that ensures that the UK remains an attractive place to do business. The Basel committee notes that the increased stability from higher capital adequacy ratios comes at the price of reduced economic growth. Concern has been voiced that the unilateral creation of a ring-fence and the imposition of higher capital adequacy ratios on retail banks will disadvantage the UK economy. However, it is unacceptable for taxpayers to bear the cost of poor lending decisions by banks, and better regulation can also be a source of competitive advantage, giving a more stable and reliable environment in which to do business. Confidence and trust are intangible but essential components of a successful business environment, particularly in the current climate.

The Government now have the important and complex task of finding the right place on the yield curve between risk and reward and stability and growth, and much of this devil will be in the detail. In this context, the debate about the timing of implementation is pertinent. The challenge is to do this as quickly as practicable but also to get the implementation as right as possible, and to do so based on a thorough understanding of the law of unintended consequences and the impact on growth. Not only do policy-makers need to understand the impact on bank customers and on UK and EU-regulated banks, but the changes sit alongside wider changes in tax and regulation, nationally and internationally, and an unsettled economic backdrop.

In the UK, we have strong reason to exercise particular care. Our success as a financial services centre is a vital component of our economic recovery and an Achilles heel in our reliance on the sector and our exposure to future shocks. Finance accounted for 10 per cent of GDP in 2009, which is significantly higher than in the US, almost double that of the Japanese and French, and well over twice that of Germany.

I commend the Chancellor's Statement in the Commons explicitly welcoming London's status as the pre-eminent global centre for banking and finance as well as supporting UK-headquartered universal banks. They form a key plank of our economic infrastructure, particularly given the experience of the repatriation of liquidity at the time of the last crisis, and government policy must not be indifferent to their fate. Similarly, real commitment to maintaining the City as the premier international global financial services centre is key. Although focused in London, financial services have a nationwide presence and national importance. They account for a million jobs directly, with another million in professional services, two-thirds of which are outside London. As the world's leading supplier of financial services, UK financial services contribute a net £36 billion to reducing our trade deficit. As the biggest taxpayer, accounting for 11 per cent of revenue paid in 2010, they also fund the services we hold dear.

Other countries eye our success covetously. The Chinese Government are attempting to establish Shanghai as a leading international financial centre by 2020. During the Prime Minister's trip earlier this week, the Russians sought UK expertise in setting up an international financial centre in Moscow. Others, closer to home, have long dreamt of usurping London.

With these thoughts in mind, I commend the Independent Commission on Banking for having navigated a difficult course. It is critical that we prevent any future recourse to the taxpayer. However, we must regulate so that it is safe for the UK to host a globally dominant financial services industry and attractive for that industry to call the UK home. I urge the Government to continue their dialogue with UK and foreign banks as well as with the businesses that are their customers. We must be mindful of the overall effect of the full range of post-crisis reforms, whether at national or international level, and our objective must, of course, be better, not just more, regulation, and therefore the reinforcement of the UK's competitive position.

My Lords, I thank my noble friend Lord Myners for initiating this timely debate. I shall concentrate my short remarks on issues to do with accountability and responsibility in the investment banking sector. These remarks are not the result of any specific expertise in the area. I am neither a banker nor an economist; I am an academic philosopher by trade. Nevertheless, these reflections, however naive, have led me in the direction of thinking that, at the very least, ring-fencing or complete separation of investment banking is the best that we should be looking to achieve, if it is politically feasible.

The character of the present banking system in the UK embodies the development of the liberalisation of financial markets pursued by both Conservative and then Labour Governments since the early 1980s. It is also the result of the growing globalisation of the economy, particularly of financial markets. As the noble Lord, Lord May, said, world financial markets are rather like an ecosystem in which a disturbance in one place can have major and unintended consequences elsewhere.

My argument is that the processes on which economic liberalism normally depends to constrain reckless behaviour have become less operative in the banking system. One of the major instruments for constraining reckless behaviour was the prospect of bankruptcy. People would make their investment decisions and their allocation of capital decisions in the light of the possible consequences in terms of bankruptcy. However, as we have seen in the past few years, this threat has become less and less plausible. This is partly because of the too-big-to-fail problem in which the bankruptcy of a major bank could have untold consequences for domestic economies and, indeed, for economies in other countries. The case of Lehman Brothers shows how unlikely it is for a large bank now to be allowed to fail. The situation has been exacerbated by globalisation. As banks are interlinked in this kind of financial ecosystem, the failure of one bank could have massive and wide-ranging consequences on the world financial system.

In addition, it seems to me that the internal controls exercised by banks on risk-taking behaviour have been eroded. By internal controls, I mean two things: the first is the role of the board of directors and its committees, and the second is the role of shareholders, which was mentioned by my noble friend Lord Myners. Why do I say that they have been eroded? The reason is that the products of the commercial or, if you like, disparagingly, the casino arms of banks have become extremely complex and, indeed, in the case of securitised assets, such as bundled-together mortgages, extremely difficult to understand. Often their worth is computed on the basis of mathematical models and the judgments of rating agencies, both of which are rather dubious in my view.

The economic liberalism that has allowed such assets to be created has drifted away from its original insight; namely, that economic and financial value is a product of individual preferences in a free-market context. Individuals making mortgage decisions are in that context when they initially take up a mortgage and buy a house, but as that mortgage becomes securitised, sliced up and bundled up with other people’s mortgages, those other people are also choosing mortgages for individual properties and so forth, and you are getting further away from the idea of a market value. The only way of imputing value to these securitised assets is through a rating agency using extremely complex mathematical models. If products become more complex and understanding of them is confined to a limited number of people, it is not clear how boards can properly supervise risk-taking behaviour or, indeed, have a clear sense of the value of their securitised assets. The same point applies to shareholders. There is asymmetry of understanding and information between those who are managing the assets and those whose job it is to have oversight and to determine whether undue risks are being taken.

In addition, there is asymmetry of motivation between the traders and the board. The incentive or motive of a trader on a bonus is to preserve his or her positions and not to render them wholly accountable to supervisory inspection. That is much stronger than the motivation of the supervisor who does not have that sort of financial stake. This is a consequence of the bonus culture. There have been spectacular cases, not the least of which happened today at UBS, that show the truth of this point. The ability of a trader to evade proper scrutiny and accountability is partly the result of the bonus culture and partly the result of the complexity of the assets that are being created and traded. There is an asymmetry of information and motivation between traders and those who are supposed to be supervising them. This also applies to shareholders. I am not at all clear how this can be overcome, except by ring-fencing at the very least, or, as I would prefer, a separation of investment banking.

David Hume argued in the 18th century that when we think about public institutions like banks, we should assume that people are knaves and we should try to erect institutions that protect us from that kind of behaviour. It seems that the most appropriate way of trying to protect ourselves from the utility-maximising behaviour that we all engage in, but which can have particularly dire effects in banks, is through either ring-fencing or separation.

We should be very wary of blaming the banking crisis on a failure of regulation. The bankers caused that mess and it is the bankers’ responsibility, by and large. To say otherwise is like blaming the police for criminal behaviour. Obviously regulation has to be improved and the Financial Services Authority did not cover itself in glory, but then neither did the Bank of England. We would be extremely naive to think that a new regulatory system is going to cure all the problems. It has to be a new regulatory system, plus separation of the investment banking sector.

My Lords, I am very grateful to the noble Lord, Lord Myners, for introducing this debate. It is very appropriate that we are having the debate on the third anniversary of the collapse of Lehman Brothers. I tried to get a debate on the interim report but it was not welcome, so I am even more grateful that he has got his debate today.

The noble Lord said it was the management and governance of banks that caused our present economic crisis. I disagree with him fundamentally. It is the banking system itself that is corrupt and dishonest, as I have been saying since 1997. One actually cannot blame greedy bankers for exploiting the existing system; it is the system that is wrong. My right honourable friend the Chancellor of the Exchequer, in welcoming the Vickers report, said the commission had,

“come up with an answer to the question of how Britain can be the home of successful international banks that lend to families and businesses without exposing British taxpayers to the massive costs of those banks failing. Frankly, it is a question that should have been asked and answered a decade ago”.—[Official Report, Commons, 12/9/11; col.757.]

I posed that question. In fact, I introduced a Bill in 2008 called the Safety Deposit Current Accounts Bill, but it was summarily dismissed in the House, as the noble Lord, Lord Davies of Oldham, will know because he spoke for the Government at the time. Therefore, I have been quite used to being in a minority of one in this House. However, today I see that I have more friends on my side than I have had for some time.

The report recommends that large retail ring-fenced banks should have equity capital of 10 per cent of risk-weighted assets and that retail and other activities of large UK banking groups should have loss-absorbing capacity of 17 per cent to 20 per cent of risk-weighted assets. Unfortunately in the report there is no definition of risk-weighted assets. Perhaps my noble friend on the Front Bench will tell us what he thinks Vickers meant by risk-weighted assets. I have googled it and there are various options. That ratio means that 90 per cent of large retail ring-fenced banks’ risk-weighted assets will still be exposed, as will 80 per cent to 83 per cent of large UK banking groups’ risk-weighted assets. Herein lies the rub. If one digs a little deeper into the report one discovers that risk-weighted assets represent only 50 per cent of total bank assets. Therefore, between 90 per cent and 95 per cent of deposits will remain exposed. That is why I call the recommendation of the ICB a partly secured current account.

In his Statement, my right honourable friend the Chancellor also reminded us that we are in,

“a decade-long, debt-fuelled boom that ended in a dramatic financial crisis, a deep recession and a debt overhang that is still holding back our economy”.—[Official Report, Commons, 12/9/11; col.757.]

In the light of this observation, I find it difficult to understand both his recommendations and those of the ICB. There is no doubt that the economy needs investment stimulus and that it needs it now. We can all agree on that. From where will the money for investment come? The banks legally own all the money deposited in them. That, of course, is all the money not in circulation. Therefore, most people and businesses that need money turn to the banks to raise it. However, banks provide money through the creation of new debt. Banks lend money. Yet we propose a solution that, by definition, produces new debt. Bank lending increases the level of debt. That is totally illogical.

Now that we all seem to agree that there is an overhang of debt that is holding back our economy, surely the last thing we need is yet more debt. The economy needs investment but it needs to be equity investment, not further debt. Equity investment stays in a business and remains its life-blood. Businesses need capital. Capital is an asset, debt is a burden. Contrary to popular belief, banks do not provide capital; they provide only debt. Unfortunately, the consequences of the judicial decisions of 1811 and 1848 mean that banks own all the money deposited in them; it no longer belongs to the depositors. Indeed on the day the Statement was read, on I think Monday, the noble Lord, Lord Elystan-Morgan, questioned whether that contravened the Theft Act. I wonder whether my noble friend would like to comment on that.

Therefore, access to most of the money in the economy is only through bank lending. That is what the ICB and the Chancellor should have addressed. I believe they both missed the mark by not dealing with this blockage to the flow of capital into the economy. Banks’ total ownership and control of all the money they hold allows that blockage. Ownership of the money in a bank rightfully, if not legally, belongs to those who earned that money and deposited it in the bank in the belief that it would be stored safely for them and paid out according to their instructions. Current accounts hold people’s family budgets and business budgets. It is their life-blood and should not be put at any risk. Banks often say they invest savings. That is misleading. They also use current account deposits for making loans and all loans have some risk.

The remit of the ICB was to ensure that there could not be another bailout of banks by the taxpayer, yet it recommends only a partially secured deposit system. Between 85 per cent and 90 per cent of deposits will remain at risk under the partially secured system that they propose. It is too little and it is too late. Such a system is doomed to failure. Parliament needs another option. I will retable my Bill, which I have amended slightly, and that will be an alternative for your Lordships to consider. If your Lordships think you have witnessed a banking crisis, I believe you have seen nothing yet. Under the present banking system it is bound to happen and it is not very far away.

My Lords, I, too, thank the noble Lord, Lord Myners, for initiating the debate. It is always a pleasure to witness him in full flight on this issue, as it is to reflect on the contributions of other noble Lords who have expertise in this field. My life experience has been elsewhere and I have a limited knowledge of the university of banks and their various ways, but my interest in banks and financial services in general stems from the fact that these organisations are extremely powerful. They work in very complex and difficult ways, often unseen and unknown by their customers, and have a dramatic effect on the lives of ordinary people. That is why I intended to intervene in this debate. I want to explore what benefits, advantages and opportunities the commission on banking might hold for customers. That is what I am particularly interested in.

What does the lay person, the customer of a bank, make of the recommendations? Certainly, the ability to switch accounts more easily should be welcomed, although we have heard little of that today. We, the customers, do not want to travel in the direction of the energy industry with the ridiculously high level of cold calling that goes on to persuade people to change their providers. We hope that the Government will look carefully at the recommendations on switching.

If the retail ring fence can make retail customers’ deposits more secure and avoid the anxiety in people’s minds, it can also be viewed in a positive light. There are lots of arguments both ways around costs, viability and stability of the ring fence, but the general impression, the general consensus, and certainly what we have heard from the Government and the Opposition is that the principles are right and that we should see a programme for implementation.

There is still widespread disillusion with banks and the banking system. If these proposals do more than put in place technical mechanisms for the management of deposits, the customers need to be taken on board in a big way. I hope that if the Government decide to take this report forward, they will engage with ordinary people and customers to say what the advantages will be. At present, it is two cheers as far as customers are concerned.

The timetable seems rather long to me but I assume that in time, inside the ring fence, customers’ deposits will be safer and free from the financial speculation and exotica that scurry around the commercial banking system. I also assume that within the ring fence there will be a dedicated board of directors and perhaps different forms of governance than we have seen before that would give confidence that the banks do not wildly speculate with their deposits. This is what I should like the Government to consider.

In this period of careful implementation, which we have heard about, I should like the Government to press upon the banking leaders the importance of re-establishing trust with their customers. That can be done basically in two ways. First, they should talk to the banks about the possibility of including customer representation on the boards of the retail banks, along with the usual FSA-approved people whom I accept absolutely are necessary. Can we really have a serious conversation about having different sorts of people on the banking boards, including those with experience outside banking and who might bring a common sense to deliberations that has been absent in the past?

Secondly, there is a huge gap between the boards of banks and their customers. No matter who is on the board, the gap between the board and the customers is enormous. Banks try to bridge this gap with customer service, focus groups and other devices that are more about marketing and not at all about customer engagement. I should like the Government to open a conversation with the banks and to ask them seriously, as a result of this report and the possibility of the ring fence, and all that might happen there, what they can seriously do to engage customers more effectively in their work. I also believe—this is a really important point—that proper customer engagement can affect the behaviour of the banks. The problem in the past has been that top bankers have never had to talk to ordinary customers. If they have to engage with such customers, they just might see the world in a different way. It is important that the Government, who are our representative in these negotiations, take those points on board.

The world’s most ethical bank is the British Co-operative Bank. The behaviour of this bank is determined and shaped by the members on the board, 50 per cent of whom are not bankers, which is not a bad achievement for a bank. There are other institutions inside the Co-operative Bank which you do not find in other high street banks. It has a customer council that engages random customers in a dialogue with a top leader of the bank in order to determine how the bank should behave. I am not saying that every bank has to be a co-op bank, and I fully understand and accept that banks have a responsibility to their shareholders, but they also have a responsibility to their stakeholders, their customers and their employees. I am saying strongly that with 10 years’ experience of chairing a customer council within a bank and building society, the Vickers report implementation provides us with a new opportunity to open up a conversation with banks. Within the ring fence, I ask my friends in the banks what they can do to gain the trust of their customers once again. Can that be a bad thing? I do not think so. What can the banks do to engage customers and employees more effectively?

I know some of the answers but the answers have to be with the banks and not with me. All of us in this House will accept that customer engagement that brings the customers and the banks more closely together is a good thing. We would all support it. Let us work out a plan of how it might be done and let us see that the Government are on the side of the voters. I wait to hear.

My Lords, in congratulating the noble Lord, Lord Myners, on achieving this debate, perhaps I may say that as I listened to him, I indeed thought of the Chinese meal that he described. He clearly got to the end, opened the fortune cookie and found a fortune that said, “Vickers has given you all that you asked for”. Then, given his position on the Benches opposite, he felt that he had to attack it for not dealing with every financial and banking problem nationally and globally. Vickers is just part, albeit a crucial and important part, of resolving our economic banking and financial crisis. We should be welcoming this with enthusiasm.

For my sins, for 15 years I was in the banking trade, primarily in the United States and in central and eastern Europe. One of the consequences is that I am a cynic. In my time I saw banks decline on the back of at least two devastating collapses in real estate markets, following the collapse of heavy industry in the north-eastern United States. I joined the Continental Illinois bank on 5 July 1982. On that morning it was the most prestigious bank and the largest lender worldwide to businesses. By that evening it was clear that fraud and incompetence in oil and gas lending had utterly destroyed the institution. But all that could be dealt with in that period because, essentially, the failure was contained. There were rescue plans, acquisitions, mergers and restructurings, but the banking system as a whole did not tumble as a consequence.

That is the change that we face today. The crises will not end, but we now live in a world of interconnectedness. That started out as a mechanism by which banks could manage risk, but essentially, through structured finance and derivatives, and the layering of transaction upon transaction on the back of an individual initial loan, a situation has been created where, rather than just the bank that directly made a stupid or fraudulent loan finding itself at risk, the whole system can be pulled down after it. What I so appreciate about Vickers is that it takes a sword and strikes right through that interconnectedness. Surely that has to be essential in what we do. The deep structural change being proposed is also, I would suggest, very hard to erode. I said that I am a cynic, and as a consequence of that, I do not believe that regulation, supervision or even living wills can, by themselves, eliminate or enable us to deal with systemic risk in our system.

Noble Lords might think that the regulators had no way of knowing in 2008 that we were entering a financial and banking crisis. Indeed, the noble Lord, Lord May, described the absence of various forms of systemic analysis that he is now hoping to introduce. But, frankly, if you ignored the top bankers and talked to the people I know—I have certainly never been a top banker or a board member—one person after another could have told you that the loan books were going wrong, there was bad stuff in them, there was a lack of transparency and a crisis was coming. The noble Lord, Lord McFall, is no longer in his place, but he was chair of the Treasury Select Committee on which I served briefly. We were in the United States in January 2006 and we talked extensively with investment bankers. Again and again they would say to us quite casually, “You understand that there are storm clouds gathering and a major crisis is coming in 18 months to two years off the back of some of the ridiculous home mortgage lending that has been happening in the United States”, and they mentioned various other problems. Trying to tell the Treasury about it was absolutely impossible. Trying even to tell the Americans via the British embassies in the United States was impossible. There was a sort of dewy-eyed belief in the investment banking system, and the regulators caught the same disease. It strikes me as something that is inherent at the top levels of the banking system. I noted when reading Alistair Darling’s memoir that the arrogance tends to come through. However, it is not the case for everybody.

Banking is an industry in which structural barriers have to be put in place. You cannot rely on regulation and supervision, not just because of the frequent absence of common sense but also because I think that we can guarantee that the leaders of our various banking institutions will, within 36 months, be back in through the door of the regulators and the Treasury trying to persuade everyone to go back to a much lighter touch. It is far harder to change structural division than it is to constantly amend regulation at the fringes. That is why it is absolutely crucial.

Many noble Lords have talked about the increased costs involved in separating the banks, and I fully accept that. However, there are some counterweights, and I again recall my own time in banking. When there was separation of companies which by culture and by customer focus essentially did not belong together, both received a new lease of life. Retail banks are suddenly free to be genuine retail banks, with different training and corporate structures, and can look at their customers in a different way. They should become far more competitive and responsive, and much more competitive in terms of price than one might think given the difference in their capital ratios and the additional costs that fall on them. Indeed, we might even see some new excitement and innovation in the investment banks when they no longer find that everything they do is masked by the pool of retail deposits. When they have to face that reality, I suspect that they will be equally innovative. That is one of the reasons why I am happy to say to the noble Baroness, Lady Valentine, that I am not afraid for London’s pre-eminent position. The artificial intermingling of two very different kinds of institution has been demonstrated in other industries to do no one any good, so I do not think that we are going to see the kind of damage which many have been afraid of.

I have two final comments. The first is that it would be interesting to have an opportunity to focus much more on the whole range of measures that are being used to deal with our financial and banking crisis. I was struck by the concerns expressed by Donald Kohn, an external member of the Financial Policy Committee, about the lack of transparency and,

“the re-emergence of complex instruments with chains of counterparty exposures that are not transparent or well understood”.

We have talked in this House about “dark pools”. There are a lot of issues that have to be dealt with alongside because we have highly fragmented financial markets. We are also seeing relatively little in terms of international co-ordination at the moment. If one thinks in terms not just of Vickers but of Basel III, the EU capital requirements directive IV, the Dodd-Frank Act in the United States, the EU insurance industry Solvency II rules, one sees myriad things happening. I should love to hear from the Government that we are seeing some co-ordination among all this, because fragmentation makes decision-making difficult.

The noble Lord, Lord Sawyer, was one of the few noble Lords who spent a lot of time talking about the change in the competitive environment for retail banks. I am going to take this chance to make one last plea: that one of the considerations for the bank that comes in and joins our high street is that it will service micro and very small businesses and economically disadvantaged individuals who are of no interest to our mainstream banks. If we could kill those two birds with one stone, I would find Vickers to be something close to a perfect report.

I declare a range of conflicts, as I work with a number of companies in the financial services industry. Until I became a Minister in the Government, I had been a career banker—I should perhaps lower my voice at this stage. I love the industry, which may be an unfashionable thing to say, and found it to be an industry with huge integrity. In fact, I was going to thank my noble friend for introducing this debate until he described the bankers as either thieves or pimps operating in a shallow money trench—I shall pass over that quickly.

I was lucky enough in my career to become a chief executive of a bank and a chairman. I served more than 12 years on the board of Standard Chartered in Asia and London. So many factors affect running a bank; it is, after all, the risk business. This is a business where you need trained professionals who operate within a strong culture. Culture and values are just as important as balance sheets. If you have the wrong culture in an institution, you will go bust. It is also important to have checks and balances. We have touched on auditors. Auditors were missing in the run-up to the financial crisis. They were not mentioned in the report; they should have been.

This morning’s announcement of UBS’s losses of $200 billion highlighted yet again that this is an industry which has the capacity to shock. You cannot have an autocratic style in a bank. You need pragmatism and caution; you also need a balance between risk and reward. So much of running a bank is about the board of directors and the relationship that the executives have with the board. It is also about having individuals and the blend of experience and skills to govern a bank. In a number of the British institutions, we did not have the right mix and we paid the penalty.

Banks and financial companies are complex and operate with sophisticated products. We should never forget—I know because I was a chief executive—that the shareholders of the companies were pushing CEOs to grow faster and expand more aggressively.

Every crisis, whether it is dotcom, Russia, the Asian crisis or even the tulip crisis many moons ago, has taught us that bubbles occur, that markets collapse and that management has to scenario-plan and think through the downsides. Culture, values and skills are all key ingredients, supplemented with proper supervision. There was insufficient supervision.

It is important to highlight that is an unusual industry because you are playing with other people’s money. You are selling products that you want back, perhaps after 40 years in the case of a mortgage, in arguably better condition than when you sold them. If you get it wrong, the consequences for society generally are catastrophic. Contrary to the “casino” image that goes around, most banks facilitate trade and support their consumer and corporate customers—with foreign exchange, trade, term loans and mortgages. During the past few decades we have seen the world become a smaller place. Companies today source from Bangladesh and Shenzhen. They sell online; they sell in the high streets of all the UK. We are living in a true global economy. Banks such as Barclays, HSBC and Standard Chartered typically operate in more than 50 countries. They may be British, but they are multinationals, like Coca-Cola, Unilever and Vodafone. They cannot operate with 50 different regulatory approaches. The Vickers report may have some great recommendations, but we are part of a global economy.

I turn to another issue. London, through focus, through its timeline and through a clear strategy, has become a top-three world centre of excellence, particularly in insurance, foreign exchange and wholesale trading, et cetera. Now is the moment to learn from our mistakes. We have to yet operate within the global economy; we have to keep London’s top-tier position; yet we have to protect the consumer and the taxpayer, and we have to be balanced—something that so many banks got wrong. That is the nature of the dilemma that we are facing today.

The regulators, as I said earlier, missed it. Boards missed it. The shareholders and owners missed it; they were nowhere. A very large bubble burst and nations have paid a huge cost. Now, as we talk about the Vickers report, we have another European crisis to add to our worries. The one thing that the report does not mention is that all these crises have one characteristic, which is the shortage of liquidity. When you run a bank, so much of your conversation is making sure that you have the right liquidity—the right funding. Northern Rock did not have it and neither did some of the other banks, and they collapsed.

This is a global, international industry and political leaders at this moment have to be just that: leaders. We need a global standard, not a set of British, Indian, Singaporean or even American initiatives. The regulatory arbitrage that will result from the implementation of the Vickers report if the US, Hong Kong and other places go with a different model will result in a much bigger unintended consequence—lower lending and a major global slowdown.

The noble Lord speaks with immense authority and therefore it is important to tease out one particular point that seems to be emerging. Is he actually suggesting that we do nothing in this country along the lines of the Vickers report or whatever until we have a global agreement, which might take goodness knows how many years and might never be attainable?

No, not at all. This is the moment in history where we use the Vickers report and the European crisis and in the next six months we come and agree a global accord for liquidity and capital. We must not end up with a system whereby we impose the separation of retail and investment banking on an HSBC or a Barclays when Jamie Dimon—the chief executive of one of the largest banks in America, JP Morgan Chase and Co—made it very public when he said in the FT:

“I am not sure that we should achieve even Basel III regulations in America. They are too strict”.

If one of the key competitors of an HSBC, Barclays or Standard Chartered is saying in America that it is not even going to comply with Basel III, we will have a major regulatory arbitrage in the world. Long term, that is a big mistake.

If you are a chief executive or are on the board of the bank, you have to ask which centre you should have your head office in. The amounts of capital required are extraordinary. The Vickers report has huge implications. I have great sympathy with separating retail and investment banking. They are fundamentally different businesses. But let us truly understand the amounts of capital that will be required to fund the investment banks with the capital ratios that are being suggested before we rush to a law.

We need to be very aware of the political anti-banker bashing. We have had that and we need to move on. We need to move into an era where the G7, G8 and other applicable countries come together, learn the lessons and in the next six months agree a regulatory framework.

Autocratic leadership, reckless lending abroad with the wrong make-up, a disastrous acquisition coupled with shareholders who seemed to egg the bank on—that is the story of RBS. It was not actually about capital: it was so much about the culture of the board. I am concerned about a move to saying that the answer to all the banking problems is just capital. It is not.

The important thing about banking is that retail banking is all about small loans and a huge volume of customers. The other thing that the Vickers report misses is that it is increasingly difficult to fund a retail bank without wholesale deposits. That is the fundamental issue for the future of banking.

My Lords, I, too, congratulate the noble Lord, Lord Myners, on introducing this debate. It is certainly to be welcomed that your Lordships’ House has an opportunity to discuss the Vickers report during the week of its publication but the other side of that is that not all noble Lords have had time to read every word of the report yet. I am afraid I count myself among that number. Like other noble Lords, I congratulate Sir John Vickers and his colleagues on their hard work in addressing the very complicated task set for them by the Government.

I must declare an interest in that I am employed by Mizuho International plc, the investment banking and securities subsidiary of the Mizuho Financial Group of Japan. I have been a banker for 38 years. I joined Kleinwort Benson in 1973, at which time it was what my noble friend Lord Lawson called a merchant bank. However, it actually combined both a significant commercial banking business and an emerging securities business, which was developed further after we bought the stockbroker Grieveson Grant and bond and equity underwriting and fund management businesses, so that part of what we did was—in Vickers parlance—ring-fenced and part was not. At that time, there were not in place the ring-fencing restrictions of the kind now being proposed. Even though I am a banker, I would not wish to argue that nothing needed to be done in response to the financial crisis and the collapse of several leading banks. However, in proposing the unilateral adoption of a strict ring-fencing of retail businesses and significantly higher capital requirements than internationally agreed levels, Vickers surely underestimates the damage to London's position as the world’s principal financial centre.

I entirely agree with what the noble Lord, Lord Myners, said about governance and the need to concentrate more on it. The report is somewhat thin on that and I think it is also true that Vickers does not adequately address the reasons for the banks’ failures. They were somewhat different in each case, while the banks that failed were not like each other in any particular regard. It is absolutely not necessary or desirable to introduce these additional reforms, certainly at present given the economic background with the euro situation and other things. The effects of the already increased capital requirements, the bank levy, restrictions on remuneration and stricter regulations have already completely changed the environment in which banks operate.

It is absolutely right to set up a framework which minimises the risk that the taxpayer will again be required to bail out our banks. However, I fear that the gold-plated additional capital requirements, over those internationally agreed in the Basel III framework, together with a very cumbersome proposed regulatory system and the ring-fencing proposals mean that the greater risks which the taxpayer faces today are very different from those from which Vickers seeks to protect him. International banks’ perception of London's attractiveness has already changed for the worse. The problem with our regulation is not that we did not have enough but that the FSA did not do what it was supposed to do—and did not work effectively with the Bank of England.

Several major banks are already booking more business in other centres, and new businesses that would have been set up here are now not going to be. There are already fewer banking jobs and reduced income tax revenues from bankers, in spite of the 50 per cent tax rate. I welcome the Chancellor's decision to launch an inquiry into whether it is a net contributor. If our banks are so encumbered, with too much detailed prescriptive regulation and unnecessarily large capital buffers, they will cease to be competitive compared with their international peers. They will lend less to smaller companies and their margins will have to be higher. This will restrict growth in the economy. That will prevent the Government from restoring our former competitive tax rates, which played a part in establishing London’s leading position.

If the banks are broken up as proposed, that will have a serious adverse effect on the price and the timing of the Government’s intended sale of shares in RBS and Lloyds. Furthermore, the ring-fenced retail banks will not find it easy to issue the additional equity and debt securities that they will be required to under the proposals.

I welcome the report’s recommendations to make account-switching easier, but I rather wonder what will be the point of doing so if every Vickers-style retail bank is identical, offering the same products probably on identical terms. I would rather that the customer had real choice of what type of bank he switched to. For example, he might see a significant difference between RBS with its significant investment banking business and Lloyds with very little.

I refer noble Lords to the article by Sir Martin Jacomb in yesterday’s Financial Times. As noble Lords will know, he is a distinguished banker. He was a vice-chairman of Kleinwort Benson when I joined and went on to be chairman at BZW and, later, the Prudential. As he argues, when Governments decide that retail depositors must not lose money and that some banks are too big to be allowed to fail, regulation becomes essential and the importance of sound management is diminished.

My noble friend Lord Lawson argues for a return to the separation of banks and investment banks. I think that I have heard him on a previous occasion advocating the introduction of a Glass-Steagall Act in the United Kingdom. As Sir Martin points out in his article, though, Glass-Steagall was abolished because customers want the services that universal banks can provide. In any event, the purpose of Glass-Steagall was completely different from that now sought by the ring-fencing proposal.

I do not believe that ring-fencing is the answer or that the lack of it was the cause of the bank failures. Neither do I think it likely that any other country with a significant financial market will introduce it. Even in a Vickers-style ring-fenced retail bank, there will still be some risk. We should beware the paradox that a system to limit risk invariably increases it.

My Lords, I thank my noble friend Lord Myners for making this debate possible. I am grateful to him, the noble Lord, Lord Lawson, my noble friend Lord Davies of Abersoch and others for their expertise and insight. It has been a real treat and has given me serious food for thought. Unlike many noble Lords, I have no particular expertise. The only interest that I should declare is that I have a current account and a joint savings account with First Direct.

Like many noble Lords, I would have liked Vickers to have gone further. I support, though I will not repeat, many of the concerns of my noble friend Lord Myners, the noble Lord, Lord Lawson, and others. However, I am also aware that the best should not be the enemy of the reasonably good and that, contrary to some of the views that we have heard from people in the banking industry over the past few days, time is pressing.

I want to make some points about the importance of ensuring both that the recommendations of the commission on banking are implemented swiftly and that we do not make the mistake of thinking that the set of issues addressed by the commission, crucial in protecting taxpayers as they are, somehow completes the task of addressing the full range of problems related to our banking sector that were thrown up by the financial crisis, the ensuing recession and the continuing economic slowdown.

It is good to hear strong support for the proposals of the commission across the political spectrum. There is widespread recognition that the two key proposals in the final report—the requirement for the ring-fence to protect individuals and small business and the stipulation of minimum capital requirements—are tough as well as right. They offer the prospect of much more effective protection for ordinary depositors, small businesses and taxpayers alike. They are serious proposals, which are commensurate with the seriousness of the structural problems in our banking industry revealed by the crisis. The primary challenge now is for the Government to show decisiveness in response to the commission, not simply by welcoming it—although I am glad that they have done that—but by legislating sooner rather than later. Acting swiftly should not be tendentiously misinterpreted as acting rashly.

The magnitude of these changes requires that they are made in collaboration with the banks. The structural changes to banking operations need to be planned and tailored to each bank, as Vickers notes. Minimal capital requirements cannot be introduced overnight. All this is understood. However, an early and swift move to legislate is crucial, first, because the banking industry itself and its shareholders and customers need certainty to plan ahead. Secondly, we need to send an unambiguous signal that the period of lobbying to contest both the basic approach and the provisions of reform is now over. We have all noted the noises off, as well as some noises on, from the banking industry over the past few days, as well as some of the thin praise uttered though gritted teeth by others. However, I hope that our leading banks recognise that the Vickers recommendations will be implemented and co-operate in making that happen promptly and smoothly.

The Government have a role to play here, too. If they allow a mood music of reticence, foot-dragging and uncertainty to emerge after the publication of the report, they may give false hope to the small—we hope—minority in the banking community who want to turn a period of reflection on how to implement Vickers into a period of rethinking whether the recommendations should be implemented at all. That is why I join the noble Lord, Lord Newby, and others in urging the Government to get on and legislate in the near future, and to agree that the upcoming financial services Bill is the best vehicle to do as much of the work as possible in laying the legislative groundwork for these reforms.

Secondly, I hope the Government remain robust, both privately and publicly, in rebutting the criticisms that have been lodged against these recommendations. Some have said that the reforms will damage the competitiveness of British banks, penalise shareholders and lead to an increased cost of credit. However, underlying these criticisms is a slightly false choice between the competitiveness of our banking sector and the stability of the banking system as a whole. We cannot afford to base the banking industry on inadequate regulatory standards that cost the British economy more in the long term and—in times of economic crisis, as we have realised in the past few years—sometimes in the very short term, too. The aim of these reforms is to protect the long-term stability of the banking system and the taxpayers who have in the past few years been called upon to guarantee its health, in a way that is consistent with maintaining the banks’ competitiveness and improving their services to depositors and businesses. The important issue is not whether there are some trade-offs in the short term between some of these objectives—there probably will be—but whether the recommendations as a whole are right for a sector that has been through such turmoil and caused such turmoil for millions of ordinary people.

The recommendations of the commission are important, and it is important that the Government act swiftly to get the ball rolling on making them a reality and hold the line against those who want to derail this process. It is equally important to recognise that there is a set of related issues around the activities of our banks and their relationship to the wider economy that cannot and should not be parked, but requires action in parallel with implementing the commission’s recommendations. I agree with the noble Baroness, Lady Kramer, that Vickers cannot answer all the issues surrounding our banks and the problems that we have experienced. My concern is that these other issues are addressed—and addressed in parallel.

First, as many noble Lords have said, the commission has some good recommendations on competition in the banking sector, particularly on greater divestiture of Lloyds branches, account switching and the case for a new challenger bank, although detail on how to achieve some of these is a bit slight. However, I am puzzled as to why the commission has backtracked on its interim report recommendation that the Financial Conduct Authority should have a primary duty to promote competition, to saying simply that the duties of the FCA should go in a more pro-competition direction. I hope that this is not a prelude to a weak rather than a strong competition role for the FCA. In addition, the recommendation that the Government should wait a full four more years before even considering a Competition Commission reference two years after these reforms should have come into effect, seems a bit lax and not to reflect the importance of ensuring greater competition as soon as possible.

Secondly, the Chancellor said on Monday that one reason for his caution in progressing quickly with the Vickers recommendations was that he did not want to,

“damage credit supply in the short term”.—[Official Report, Commons, 12/9/2011; col. 770.]

I welcome the Chancellor’s early and clear support for the report as a whole. However, I think that many people will be surprised that concerns about the weak supply of credit lurk behind some of his scepticism about the banking commission’s reforms, when at the same time the Government have done so little to get credit flowing from our banks to our small and medium-sized businesses over the past year and a half. This is, of course, in part a consequence of a policy choice of a contraction in economic policy during a period of prolonged stagnation. But more specifically, I hope that the Government now take up the Governor of the Bank of England’s idea of instructing UKFI to require state owned banks to increase lending now.

Thirdly, the Vickers proposals on structural reform of our banks are intended to protect taxpayers’ interests in the event of future bailouts. We all understand that but we must remember that the financial crisis threw up other activities and practices that undermined the stability of the banking system as a whole, and on which Vickers’ report says not as much. In particular, we know from the past decade the risks of activities such as proprietary trading where banks essentially develop internal hedge funds and trade using their own rather than their clients’ money—activities which were associated with the crises at Drexel, Barings, Salomon Brothers and others. We know that proprietary trading can lead to concerns about conflicts of interest that undermine confidence and increase the fragility not only of individual banks but of the banking sector as a whole. In the United States there is a strong debate going on in Congress and elsewhere about how to respond to this problem. Opinions differ on that, but there is a recognition that there is an issue that needs to be addressed. I hope that in the coming months the Government set out what their thoughts are on this important area of financial regulation. Perhaps the Minister might say something about his thoughts on that.

The ICB’s report has already succeeded in commanding authority and respect in the academic and policy communities, and in creating a cross-party consensus. It should be applauded for that.

I am sorry. I have just one or two more sentences. The key message here is that the ball is now in the Government’s court. I hope the House will agree that if we want British banks to be not only world-leading, secure and efficient but also the servants of ordinary depositors and of businesses whom we rely on for jobs and prosperity, we need to maintain the level of ambition and urgency that this report demonstrates.

My Lords, the House is indebted to my noble friend Lord Myners not only for securing this extremely timely debate on such an important and pressing subject but for identifying the issues raised in the Vickers report and seeking to put them into context, including issues that perhaps Vickers addressed more marginally, if at all. I am grateful that this theme was taken up, most significantly by the noble Lord, Lord May, who illuminated the debate with his analysis of the problems of systems and how we need to address ourselves to the totality. He was followed by my noble friend Lord Plant who was keen to emphasise that bankers should act with a sense of morality to enable our country to be better served than it has been in the recent past.

First, I wish to concentrate on some basics, as did a number of noble Lords. I am not going to follow the noble Lord, Lord Griffiths, my noble friend Lord Liddle, or, I think, the noble Lord, Lord Newby, who got involved in an evaluation of the report that gave rise to an academic nomination of its success rate. I am not going to give it an academic grade. I am going to say that as far as the Opposition is concerned the report is extremely useful in clarifying some significant issues. We are sufficiently in support of its cardinal points, particularly about ring-fencing, which is a tough and radical proposal and causes anxieties, which have been reflected by my noble friend Lord Davies of Abersoch and the noble Viscount, Lord Trenchard, about the care we need to take. I am very grateful for the noble Viscount’s contribution. We recognise the care with which we need to follow these measures.

We also need to put that into the context of what the country demands. It of course demands some security as rapidly as possible against the horrors that have been visited upon our fellow citizens as a result of the banking crisis of recent years, and the economic and financial crisis that is the consequence of it. That is why we support the report, but we are somewhat concerned about the timescale of implementation that the Government appear to be sympathetic to. I agree entirely with noble Lords who have emphasised this in this debate. It was begun by my noble friend Lord Myners, but others have supported the need for us to take legislative action as rapidly as we can. We all recognise that some fresh legislation will be necessary and that that will take some time, but the fact that we have a financial services Bill under some consideration by Parliament surely provides an option for early action to lay some of the groundwork on implementing some of the key features of the report.

I appreciate the aspects of the debate that have emphasised the degree of additional competition sought in the report. We share the anxieties that the FSA is not in fact being charged with quite the same proactive role to encourage competition as the earlier report presaged. Nevertheless, there is no doubt that it is important that we see the emergence of competitive banks in such a way as to, first, make us less dependent on the growth of the mega few and, secondly, provide greater choice for the consumer. It is clearly a reflection of a long-standing position in the community that the numbers of people who change their bank accounts—their current accounts—each year in Britain is a mere 6 per cent, which is less than in almost any other advanced country. That is a reflection of the fact that the consumer sees no overt advantages in competition between the retail banks, which we want to encourage. This report indicates a route down which that could be pursued. We want greater competition between retail banks.

However, we are also concerned about investment banks. For instance, it seems that the effective charges put on equity underwriting fees have increased enormously over the past 25 years—again a reflection of the rather closed circle in which these decisions and opportunities are expressed, rather than in a more open system. Of course we appreciate that the tougher capital standards that will be required will make demands upon the banking system, but the earlier we approach these issues the less the danger that ordinary members of the public will bear these costs, whether they are individual account holders or small or medium-sized businesses seeking to borrow at reasonably competitive rates.

This is of cardinal importance for business. Thus far, the Government have replied overwhelmingly, in all responses on the question of increased investment and opportunities for credit by banks to businesses, on the Merlin project. Clearly, the Merlin project is a failure. The amount of lending under that framework is falling year by year, at a time when it is so clear that we need to rebuild our small and medium-sized businesses in this country.

Finally, my noble friend Lord Myners broadened the context of the report by emphasising the international dimension. That theme has been picked up on several sides. I recognise the points made about the importance of ensuring that London is internationally competitive. I was very grateful for those contributions, which emphasised the significance of the finance sector to our economy.

It is clear that if we are to make progress on the effective structure of British banks, we need to appreciate the international context within which they work. That is why so much work needs to be done in the international sphere. If there is a criticism that I would want to express in a debate that has been largely free of party politics, while at the same time seeking to deal with the inherent nature of the problem that confronts us all, it is that the Chancellor ought to be more active in the international councils that set out to deal with international crises in circumstances in which we all recognise that we cannot solve the problem just on a British basis. However, the report, if implemented by the Government as rapidly as possible, can go a considerable way to creating security for our banking system and remedy the abuses of the past.

Lord De Mauley: My Lords, I congratulate the noble Lord, Lord Myners, on the timeliness of this debate. Even if I do not agree with everything he said, I thank him for his questions, because they set the parameters for the debate today, which was helpful.

When they came to office, the Government faced the task of establishing a new culture for regulation where irresponsible risks were unacceptable, while creating the space for innovation and commercial success. This included addressing the issues of financial institutions deemed too big to fail.

Alongside a wider programme of reform in financial services, the Government established the Independent Commission on Banking to formulate policy recommendations with a view to reducing systemic risk in the banking sector, mitigating moral hazard in the banking system, reducing the likelihood and impact of firm failure, and promoting competition in both retail and investment banking.

I join others in thanking and paying tribute to Sir John Vickers and the other members of the commission, Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf, for their work during the past 14 months. Theirs has been little short of a herculean task, producing an issues paper, an interim report and now their final findings—in all, more than 600 pages of documentation. They have sifted through more than 300 submissions and thousands of pages of evidence from market participants, consumer groups, individuals and wider society. I say with great respect to the noble Lord, Lord Myners, that I think his criticisms are more than a little unfair.

However, I agree with him that decisive action is needed to reform financial services and to ensure that the sector is responsibly managed and well regulated. I shall set out the commission’s key recommendations and how the Government intend to respond.

The report proposes a high ring-fence around retail banking to protect the provision of vital retail banking services, such as taking deposits from individuals and small businesses and the provision of overdraft facilities. Furthermore, it adds that retail subsidiaries should be able to operate and meet regulatory requirements independently and that relationships with the rest of their group should be conducted in the same way as with third parties. I can confirm to the noble Lord, Lord Sawyer, that the ICB proposes that they would have separate boards of directors and I welcome some of his other helpful suggestions. In answer to the noble Lord, Lord Wood, the report is clear that proprietary trading, about which he was concerned, is very firmly outside the ring-fence.

As my right honourable friend the Chancellor has said, we welcome this recommendation in principle, as we do the commission's other proposals. Successful implementation of them will allow us to resolve universal banks more easily in the event of a crisis, without affecting vital payment systems or banking services. They will also help to address issues such as the perceived implicit guarantee from taxpayers of so-called too-big-to-fail institutions.

Today there were powerful arguments from my noble friend Lord Lawson and the noble Lord, Lord Plant, among others, for total separation. Decisions on implementation will be taken once the Government have considered the report. The Government accept in principle the ICB’s recommendation that retail banking should be ring-fenced. For any ring-fence to be practical, it will need to be set up so that high-street banking can still provide vital banking services efficiently. The Government’s response will be announced by the end of the year; however, the ICB believes that ring-fencing can achieve equal benefits at a lower cost because total separation could have a higher economic cost than ring-fencing in terms of efficient intermediation between saving and investment, diversification of risk and customer synergies. It is not clear whether total separation would make for greater financial stability, as it would preclude support for troubled retail banks from elsewhere in banking groups and because total separation is harder to enforce under European law inasmuch as universal banks in other member states would still be entitled to own UK retail banking operations.

The point of firewalling is not to eliminate all risk, but to minimise the cost to taxpayers should a bank fail. These measures should not be seen in isolation. The noble Lord, Lord Myners, referred to governance. Here the Government are taking strong action on financial regulation. The UK's resilience to future crises will be strengthened by the creation of a new prudential regulation authority as a subsidiary of the Bank of England. To complement it, the Financial Conduct Authority will provide strong conduct regulation across the industry.

The noble Lord, Lord Myners, and my noble friend Lord Lawson asked an important question about who will monitor the integrity of the ring-fence. The FSA and the future prudential regulatory authority will be responsible for supervising UK deposit-takers. Recovery and resolution plans will provide the regulators with a basis on which to assess whether a bank is resolvable. As set out in the PRA White Paper, bank resolvability will be at the heart of supervisory risk assessment of United Kingdom banks.

The noble Lord, Lord McFall, asked whether a ring-fence is permeable and whether it contains any doorways between the retail and investment bank and how firm will be the separation. The retail ring-fence will limit the funding and capital exposure to the investment bank. The ring-fenced bank will be able to access funding only from the investment bank on a third-party basis as though it were borrowing from another bank. Those restrictions are part of limiting contagion in the event of failure, ensuring that the ring-fenced bank can continue operating, should the investment bank fail. The Government will examine those proposals in detail and respond before the end of the year.

My noble friend Lord Griffiths asked about ring-fencing for retail banks and suggested that it did not address the Lehman risk or the financial stability consequences of allowing the investment bank part of a universal bank to collapse.

Ring-fencing the retail bank will mean that it can continue functioning even if the investment bank were to collapse. However, it is essential to consider the stability benefits of ring-fencing as part of a wider package of reforms, of which I spoke earlier. Vickers has presented his report as a package aimed at improving bank resolvability and reducing taxpayer exposure.

Turning to loss absorbency, the commission recommended a 3 per cent equity surcharge for large, ring-fenced banks, over and above the minimum 7 per cent required under international requirements, giving an overall equity capital requirement of 10 per cent, supported by a tighter leverage cap than proposed in Basel III. The commission also recommended that banks be required to hold so-called bail-in bonds and for this to be supplemented by a backstop statutory bail-in power to improve their loss-absorbing capacity in resolution and ensure that bondholders share the costs of bank failure. I thank the noble Lord, Lord May of Oxford, for his fascinating contribution which, I think, focused on this area and I would like, if I may, to think further about what he said.

My noble friend Lord Caithness raised the issue of the adequacy of any particular level of capital. The ICB has done a great deal of work examining what happened in the recent crisis and has not lightly recommended a loss-absorbing capacity of between 17 per cent and 20 per cent of risk-weighted assets for the UK’s largest banks. The Government will, as I have said, review these recommendations and particularly how these impact upon our banks in different ways. My noble friend also asked for a definition of risk-weighted assets. I approach this question with some trepidation, but in outline, risk-weighted assets are a regulatory measure of the riskiness of certain assets and are used to calculate the level of capital a bank should hold, based on the riskiness of its asset base. For example, cash has a zero risk-weighted asset factor applied to it and therefore requires no capital to be held against it.

The third area of the ICB’s recommendations is the depositor preference for deposits covered by the financial services compensation scheme to give depositors super-senior status over other unsecured creditors.

Finally, there are a number of recommendations to improve competition in the banking sector, including an account redirection service, to which the noble Lord, Lord Sawyer, referred. I assure him that we will be examining it carefully. It will make it easier for personal and small business customers to switch their bank account from one bank to another. Other recommendations include welcoming the Financial Conduct Authority’s proposed statutory competition duty while proposing changes to the treatment of competition and efficiency in its statutory objectives, reiterating that the Lloyds Banking Group divestment should deliver an effective new challenger and recommending that the Office of Fair Trading should review progress against these measures in 2015.

The noble Lords, Lord Myners and Lord Davies of Oldham, asked what is proposed to increase competition. It is clear that the UK banking market needs increased competition. The ICB puts forward sensible proposals that the Government will consider. The proposals on account switching—making the switching process easier, faster and risk-free for consumers and small businesses—will empower bank customers to hold their banks to account better. The ICB also recommends giving the Financial Conduct Authority a primary duty to promote competition. We agree in principle with all the recommendations and will need to work through them in detail. Allied to this, the noble Lord, Lord Myners, asked what the Government are doing to encourage new entrants. The Government are committed to reducing barriers to entry in retail banking, subject to the risks which we must, of course, take into account. The Financial Services Authority has taken steps to reform the new bank authorisation process—the application process for prospective new banks. The process is now more streamlined, with “minded to approve” letters now provided to applicants to provide feedback. Numerous new banks and lenders are currently going through this process. The Government will consider the ICB’s competition recommendations carefully to see what more can be done to foster an environment in which banks better serve their customers.

The noble Lords, Lord May and Lord Wood, asked about a review of the market by the OFT. The ICB’s competition proposals include measures on transparency, switching, the objectives of the Financial Conduct Authority and the Lloyds divestment. These measures cannot be implemented overnight and it is important to get them right. The FCA still needs to be set up by the next financial services Bill and the finer details of the transparency measures still need to be worked out if they are to be implemented. The Government believe that a competitive market is, by and large, the best way to achieve positive outcomes for consumers and the economy and we will carefully look at the timing by which any competition measures can be achieved.

The Government are very grateful for the proposals that were put forward by the ICB. We recognise the need to give industry certainty. To that end we will begin considering and consulting on the costs and benefits of what has been proposed, and examine the design and implementation options that might be available, so that we can provide the Government's initial response to the commission's proposals before the end of the year.

As the Chancellor made clear in his Mansion House speech, the Government will judge the commission's final proposals against the condition that, as the noble Lord, Lord McFall, said, a bank should be allowed to fail without affecting vital banking services, without imposing costs on the taxpayer, and in a manner applicable across our diverse sector and consistent with EU and international law. We will then seek to implement any resulting measures according to Sir John's recommended timetable, with any necessary primary legislation by 2015 and implementation by 2019.

The noble Lords, Lord Myners and Lord Davies of Oldham, and my noble friends Lord Lawson, Lord Griffiths and Lord Oakeshott, spoke about the speed of implementation. Not all of them came at it from the same direction. The Government have welcomed the suggestions in principle. However, as Sir John noted, these are extremely complicated, far-reaching and detailed proposals. The report acknowledges that the additional capital measures in particular will need an implementation period of the order recommended. Crucially, as my noble friend Lady Kramer and the noble Lord, Lord Davies of Abersoch, said, we need to consider the changes with international partners to ensure consistency with international agreements, in particular Basel III and EU law.

Powerful arguments were made today for the Government to get on with it. I acknowledge that need. There is every intent in government to act in a timely manner, and I will welcome further debates and questions, which I have no doubt that noble Lords will bring to your Lordships' House to keep up the pressure.

Noble Lords raised a number of other issues in the debate that will need to be considered by the Government ahead of their response. The noble Lords, Lord Myners and Lord Wood, and my noble friends Lord Lawson and Lord Newby, were among those who asked how the proposals would be legislated for. The Government will consider ICB implementation options between now and the publication of their formal response. To the extent that the Government decide that legislation is necessary, they will set out their plans before the end of the year, with the intention of legislating by 2015.

The noble Lord, Lord Myners, asked whether there would be a buyers’ strike for senior debt. It is fundamental to market discipline that private investors, not taxpayers, bear the losses where a bank fails. The Vickers report contains analysis of the kinds of losses that investors might absorb to leave the taxpayer protected in the event of bank failure. The Government will now consider the potential market reaction, as well as any interaction between this proposal and others in the report, and will respond in full later in the year.

The noble Lord, Lord Myners, and my noble friend Lord Lawson asked whether the bank levy would be dropped. I noted the comments attributed to Mr Winters in today's newspapers. The bank levy has been an important part of the Government’s reform of the banking sector. I note that the idea of dropping it was not in the report. However, the Government will consider the overlap between existing policy and the Vickers report in drawing up their response.

The noble Lord, Lord McFall, referred to the vital issue of economic growth. This is an important issue that the Government will keep continually under consideration and bear closely in mind as they consider the report. The recent financial crisis demonstrated the significant detrimental impact that failure in the financial sector can have on the real economy and public finances. The Government are clear that decisive action is needed to reform the financial services and ensure that the sector is responsibly managed and well regulated.

The noble Lord, Lord Liddle, asked what impact these proposals might have on lending. This is of course related to growth, and something that we will consider carefully. As the report says, ensuring that banks are more robustly capitalised, and creating a ring-fence, would provide a secure and stable framework for the supply of credit to businesses and households in the UK economy. Ring-fencing should strengthen, not weaken, the framework for the supply of bank credit to households and businesses in the economy.

My noble friend Lord Trenchard took the most extreme position against the ICB's proposals. I will not respond to him today, but will be happy to do so afterwards. However, I am a long way from agreeing with his central thrust.

The noble Lord, Lord Liddle, referred to Project Merlin and the noble Lord, Lord Wood, also asked about actions on lending. In February, the Chancellor announced a new commitment by the United Kingdom’s biggest high-street banks to lend £190 billion of new credit to business in 2011, up from £179 billion in 2010. The Bank of England is monitoring lending on a quarterly basis, and, at the half-year point, banks are lending over £100 billion against the implied target of £95 billion, including £37 billion to SMEs.

The noble Baroness, Lady Valentine, made a point about the importance of the competitiveness of the UK’s financial sector. This is an important issue that the Government will clearly be taking into account. Increased financial stability will be a positive for the UK’s role as a financial centre as well as for the wider economy. It is of course important to decrease the probability of another crisis happening.

The noble Lord, Lord Sawyer, made a welcome suggestion about customer service quality. Ring-fenced retail banks, no longer allowed to siphon customer deposits from their investment arms, will be forced to focus on their core business of lending to SMEs and individuals. This renewed retail focus will mean that banks will need to know their communities better and their customers, and the quality of those relationships and their understanding of those customers should improve.

I admit to having spent some of the happiest days of my life, at least before joining the Government, working for the noble Lord, Lord Davies of Abersoch, at Standard Chartered Bank, and I agree with him on what he says about the importance of culture. The health of his former bank speaks volumes for that culture. I have to say that being in opposition has certainly made his personal health look considerably better than being in government. His point about liquidity is well taken and, as I have said, we will consider all these issues before we respond to Vickers.

My noble friend Lady Kramer and the noble Lord, Lord Davies, asked whether the proposals take sufficient account of the need for international co-ordination, which is of course a vital point that I have referred to before. The Government are focused on preserving a level international playing field to ensure that UK firms are not unnecessarily disadvantaged. The UK continues to engage actively in international fora—in particular the Basel committee, the Financial Stability Board, the EU and the G20—to achieve a level playing field. That said, the size of the UK’s financial sector is very large relative to the size of our economy, and it is important that we take account of this as we examine the proposed reforms of the UK banking system.

I am sure that I have not answered every question raised by noble Lords today, of which there was a veritable blizzard, and if I have not, I will write to noble Lords afterwards. Strong, well capitalised banks will be an important part of a strong economy, providing credit and vital services to people and SMEs. As economic growth recovers, the financial services sector will need to respond to meet increasing demands from business customers. Poorly regulated banks have, however, cost our economy billions of pounds. The recent financial crisis demonstrated the significant detrimental impact that failure in the financial sector can have on the economy and public finances.

I agree with the noble Lord, Lord Davies of Oldham, that the ICB’s final report is an important contribution to our programme of reform and we will produce a formal response by the end of the year.

My Lords, I thank the Minister for a very constructive response and I thank those of your Lordships’ House who have contributed. The debate has once again shown the breadth of experience not only from those who might be described as insiders on this issue but from outsiders, who made fascinating and challenging contributions, such as those of my noble friends Lord Sawyer and Lord Plant and the noble Lord, Lord May of Oxford.

I expressed some reservations about the Vickers report, but perhaps I carried expectations higher than they should have been. Both the noble Baroness, Lady Kramer, and my noble friend Lord Wood of Anfield reminded me that this is but part of the complex series of actions being taken to address issues in the banking industry. On that basis, it is only right that I should note that Sir John and his esteemed colleagues Mr Winters, Mr Wolf, Mr Taylor and Miss Spottiswoode laboured diligently with little or no reward to produce a report which is, at the very minimum, extremely useful to our understanding of the issues and for which we should therefore express our great gratitude.

However, the Government are on notice. Sir John Vickers and his team have told us that the current system is unstable and places the taxpayer at an unacceptable level of risk. The taxpayer is on the hook, and the Government leave them on the hook until they take action. It is interesting that in his closing speech the Minister mentioned proprietary trading. The Government have done nothing to stop state-owned banks engaging in propriety trading. They are still speculating on the back of the taxpayers’ guarantee. However, I think we have had a very good debate, and on that basis, I beg leave to withdraw the Motion.

Motion withdrawn.