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Banking Bill

My Lords, in Committee the noble Lord, Lord Newby, eloquently articulated the arguments both for and against the division of commercial and investment banking functions from one another. This is an important and complex issue that is the subject of much current debate. I welcome the opportunity to discuss these issues once again, but I say up front that this is not an issue on which the Government should be required to produce a report. The utility of the universal banking model, compared with separate and distinct institutions conducting investment and retail banking, is being questioned at present, not just by Governments but by markets themselves. Similarly, a range of international institutions and commentators are addressing these very questions. In last Monday’s debate my noble friend Lord Eatwell referenced the Group of Thirty report that was published on 15 January. I was not familiar with that report then but I understand it suggests that large, systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks. As the noble Lord, Lord Newby, informed the House last week, the OECD has voiced similar support for the general proposition that banking activity—the taking of deposits and the making of loans—should be separated from other types of more speculative financial activity. Others may not share that view. The noble Lord, Lord Turner, said in his speech at the Economist’s Inaugural City Lecture on 21 January that he was not convinced that there should be an absolute separation of investment banking from retail or narrow banking. The noble Lord, Lord Newby, will remember bringing up some of the counterarguments himself at our debate last Monday, although I do not mean to suggest that he was putting these forward as his own view but rather to show his acknowledgement of the breadth of the argument. I expressed in Committee some sympathy for the concepts of the narrow bank and the broad bank. This is fertile ground for further debate, which will take place not least of all in the report that we are expecting from the noble Lord, Lord Turner, in his reflections on the role and future of the FSA and in particular how it will flex its regulatory requirements to reflect differences in risk. There is now a broad acceptance that the capital required against trading activities was too low and the capital required against conventional narrow banking assets was too high and therefore there was an incentive to broaden the activity of a bank. There are worthy issues here for debate and discussion. Even if we do not mandate the separation of the activities we can acknowledge that they had fundamentally different risk characteristics that should be recognised in regulation and capital requirements. Incidentally, that is one of the features that the governor had in mind when he talked about further instruments when he spoke recently in Nottingham. I should like to reassure the House that the Government, together with our international partners, will be considering the merits of this, and many other issues, in attempting—and, I hope, achieving—the restabilisation of faltering global financial systems. I remind noble Lords that, as announced by my right honourable friend the Chancellor of the Exchequer, the noble Lord, Lord Turner, is carrying out a review on his recommendations for reforming the UK and international approaches to regulation. He will be reporting to the Government in March and, I hope, will have the opportunity of reporting to this House at that time. His review will cover a range of issues of relevance to the concerns of the noble Lords, Lord Newby and Lord Oakeshott, including UK and international policies relating to: capital adequacy; liquidity; valuation and accounting; rating agencies and the originate and distribute model; market infrastructure in over-the-counter derivatives markets; and remuneration and incentive structures and institutional coverage of prudential regulation: whether recent steps to extend the appropriate accounting and regulatory coverage of near-bank and shadow bank institutions have gone far enough or should go further; and finally, cross-border co-operation and co-ordination, including international regulatory co-operation in non-crisis periods, and the scope for better international co-ordination during individual crises. The Chancellor of the Exchequer has given the noble Lord, Lord Turner, a wonderful opportunity to redraw the landscape of regulation and stimulate debate and discussion around many issues, including those touched on by the amendments of the noble Lord, Lord Newby. The major firms about which the noble Lord, Lord Newby, is rightly concerned are global, and therefore this issue should be addressed on a global stage. It is appropriate that international bodies such as the OECD and G30 are taking this work forward, engaging with Governments around the world. So the UK Government will, in communication and co-operation with our international partners, as well as through ongoing work by the FSA and the tripartite authorities, carry out their assessments of the pros and cons of this complex issue. Should action in this direction be needed, the next step to be taken would of course be to publish proposals on the matter for consultation and debate with stakeholders in the UK. However, I do not believe that this proposal for a report on the matter needs to be placed in the Bill and therefore I invite the noble Lord to withdraw his amendment.