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Banking Bill

I assure my noble friend that not only do I have a view but I expressed it at Second Reading and will do so again in a moment, if he would have some patience. The Government believe that the scope of the regulations should be able to coexist with other insolvency procedures that might be applied to a deposit-taker—for example, the bank insolvency procedure—and that institutions holding a permission under the FSMA to accept deposits should not be automatically excluded from the scope of the new insolvency regime. There are of course considerations to be made as to how any special insolvency regime for investment banks would fit alongside such schemes as the bank insolvency procedure under Part 2. But the regulation-making power in government Amendment 174F will allow us to make provision as to how such schemes will work together. In short, the Government believe that this flexibility should be retained for the enabling power, as an investment bank could also have a deposit-taking business. Indeed, several such banks are in existence. If the review recommends that the new insolvency regulation should be drawn up for the insolvency of investment banks, it is likely that we would want to bring such institutions into their scope. Having discussed my noble friend’s amendments and the specific effect that they would have on the Government’s intended policy in this area, I will now return to the wider debate on the so-called Glass-Steagall issue. The question is whether there is a case for splitting the business of banking between its utility functions, such as deposit-taking on one side, and its more speculative investment functions, which could be loosely referred to as investment banking, on the other. Amendment 203, tabled by the noble Lord, Lord Newby, proposes a new clause that would require the Government to produce a report that examines this question and to report within the year. Members of the Committee will appreciate that this question is one part of the wider debate that policy-makers around the world are having on an ongoing basis on the appropriate form that financial service providers, and particularly those institutions that act as intermediators of capital, should take in the future in the light of the financial instability that we have experienced throughout the world in recent months and years. I assure the House that the Government, along with their international partners, will consider the policy questions posed, along with many other questions and possible solutions related to the goal of reaching a more stable financial system. However, I do not believe that this goal is best served by requiring the Government to have a period of one year in which to respond on one specific point. I believe that this question is best addressed as part of the wider work I have just mentioned and that the timetables of any announcements should rightly depend on the progress made with the UK’s international partners. The noble Lord, Lord Newby, suggested that the response of others to his amendment and those of my noble friend Lord Williams might be that we were putting the clock back or, perhaps I may suggest, trying to put the toothpaste back into the tube. The noble Lord, Lord Newby, pointed to Citibank, which appears to be splitting its utility function from its investment bank, although there was little specificity in its announcement and it is not entirely clear how far it would intend to go. But that is juxtaposed with the fact that the Bank of America has only recently concluded the acquisition of Merrill Lynch. Goldman Sachs and Morgan Stanley have gone the other way and have registered as bank holding companies, having previously been investment banks. The noble Lord, Lord Newby, mentioned the interview I gave to the Times, as reported on Saturday. As I have previously said in this House, there has been mismanagement of the investment banking arms of a number of our major banks, which, in part, is due to an absence of appropriate supervision and the consequences of asymmetrical incentive schemes. The FSA in its very forthright and honest response to the collapse of Northern Rock admitted to a number of shortcomings in its own regulatory engagement with that institution. The FSA’s new chairman, the noble Lord, Lord Turner, is carrying out a fundamental review of regulation and the operation of the FSA. In parallel to that, we are in discussions with the G20 countries and the Financial Stability Forum to see what lessons can be learnt as a consequence of the failures that we have seen. Clearly, it would not be acceptable simply to say, ““This has all been rather unfortunate, but let us put that behind us and move on””. There is a clear need to recognise that we need a series of responses across intergovernmental bodies, regulation, supervision and institutional shareholder engagement. It is also worth pointing out that the investment banking arms of hybrid or diversified banking institutions were not only, as the noble Lord, Lord Newby, indicated, for some time apparently subsidising the commercial and retail banking arms—I say ““apparently”” because one has to say that possibly some of the profits that were reported were somewhat illusory or at least slipped away, although not always before large bonuses had been paid to those who claimed responsibility for generating those profits—but developed new methods of managing risk and pricing risk, which were of value to the banks’ commercial and private retail customers. We simply somehow morphed into a situation in which these generally beneficial consequences of these larger organisations went to a situation where the investment bank became the dominant force within the organisation. International co-operation, improved regulation and, very importantly, improved supervision—including effectiveness of boards of directors and remuneration—and risk management processes are capable of offering significant progress.