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Safety Deposit Current Accounts Bill [HL]

My Lords, it is a pleasure to respond to this Bill today. My noble friend Lord Caithness is to be congratulated on developing a Bill which makes us challenge basic notions of what our banking system is about. When I first saw my noble friend’s Bill, I was somewhat perplexed by it, but he took pity on me and gave me some recess reading in the form of a book by Mr John Tomlinson entitled Honest Money—A Challenge to Banking. The book was written in the early 1990s, when there were concerns about recession and unemployment. The book laid the blame for this at the door of bankers and their continuous search for new lending opportunities, which created a spiral of inflation. The solution in the book was to stop the lending merry-go-round, replace debt with equity and thereby largely fix the stock of money supply, which would stabilise the system and eliminate inflation. That is a rather extreme version of the scenario on banking that my noble friend has opened up for debate. I do not think that the banking system is quite the ogre that the book portrays. I think that banks have had a net positive impact on wealth creation by facilitating investment and growth in the global economy. On the other hand, I do not believe that banks are perfect. The reason why we have banking regulation throughout the world is to ensure that banks do not create economic mayhem. We have seen in the past nine months or so how much economic harm can be caused by a banking system which kept liabilities off its balance sheet and which created ever-more complex borrowing vehicles, disconnected from the underlying transactions. Mortgage securitisation sounded and looked simple until the music stopped and no one knew where the sub-prime losses would end up. The consequential failure of confidence in the international financial markets is still causing many problems in the world, including the UK. I do not think that we should lay at the doors of the banks all the blame for the asset price bubble that is now bursting, but they clearly have some measure of responsibility. Banks respond to demand within the regulatory constraints placed on them. Those constraints have recently been updated after much consideration by the Basel committee, but it is already clear that the Basel 2 rules do not deal sufficiently with liquidity or off-balance sheet transactions—and already they need to be revisited. We believe that the capital requirements for banks within the credit cycle should also be revisited, so that a monetary element of the capital adequacy calculations could be used to control credit in times of boom and expand it in times of contraction. In this way we could harness the energy of the credit cycle in a positive way and mitigate boom and bust. The Prime Minister used to boast that he had abolished boom and bust, but we now know that he knew only how to ride the crest of the wave in boom times and knew nothing about preparing the economy for a downturn. We are currently paying the price for that. That requires us to have some new thinking. That brings me to my noble friend’s Bill, which genuinely does represent new thinking. The Bill recognises that the Brown-Darling guarantee of Northern Rock’s liabilities was an undesirable outcome of the bust phase and offers a way for the Government to escape from their guarantee to the banking system. However much the Government like to deny it, the practical impact of last September’s guarantees of Northern Rock is that they will be expected to stand behind retail deposits as a minimum in future. The Financial Services Compensation Scheme did not deal with the Northern Rock crisis and the Government had to go way beyond guaranteeing retail depositors as they progressed through their messy journey towards privatisation, de facto guaranteeing the whole of the liabilities of Northern Rock. The Bill’s elegant solution is a new class of bank account, a safety deposit current account, which will always be preserved at the cash value at which it was created. My noble friend’s solution does not involve putting cash in safety deposit boxes, as the noble Lord, Lord Razzall, suggested. I am sure that my noble friend was mindful of the experience of the Central Bank of India, where an invasion of termites attacked safety deposit boxes in which Indians were accustomed to putting large amounts of bank notes. When customers turned up, the termites had had ’em. The Bill proposes a new account which will be backed by an equivalent amount of cash, audited and inspected by the FSA. Owners of such accounts will get no interest because the bank cannot use the money to work within its balance sheet. They may incur fees and they will almost certainly lose value in real terms, but they will at least be able to sleep easy at night knowing that the nominal monetary value will remain safe. On the other hand, those who have an appetite for risk would be able to deposit money with banks on any other terms that banks offer and can earn a return on that money, but Clause 4 of the Bill says that these accounts will not be guaranteed by any authority. I am not sure that the use of the terms ““any authority”” and ““public money”” are unambiguous, and my noble friend might consider tightening the wording if this Bill proceeds to Committee. I am not aware of any clamour among the public for safety deposit current accounts. However, given the Brown-Darling guarantee, there is unlikely to be much call for an unremunerated bank facility, if the Government already underwrite retail deposits. The bigger question is whether we should facilitate this by making it absolutely clear that public money will not bail out any other bank liabilities. I cannot myself see a banking industry which did not encourage return-seeking deposits. One problem facing our economy is the slump in the savings ratio and the fact that too few people have savings as opposed to debt. We need to encourage saving and, if that is to make a meaningful contribution to retirement incomes, the money has to seek a return. Of course, most of that investment will not be in bank deposit accounts but it would seem odd to steer people away from seeking a return when depositing cash as opposed to investing in other assets. That of course means that I see the need for a robust compensation scheme for retail deposits. We await the outcome of the Government's review of the existing scheme. The Minister might like to talk about that today, and, in particular, whether they can come up with a scheme which deals with the fact that some of today's banks are so large that if they did fail they would overwhelm any industry-funded scheme. But, given the systemic risks of such a failure, it seems very difficult to do away with public support in all circumstances. I have doubts that the Government will be able to produce a scheme that extricates them from de facto underwriting retail deposits. My noble friend has given us a lot to think about. I look forward to the Minister's response and, indeed, to later stages of the Bill if my noble friend chooses to take it forward.