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Independent Commission on Banking

My Lords, I suppose I should be grateful that we got one cheer from the noble Lord, Lord Eatwell, who is a hard man to please. I am sorry that he finds serious flaws in the ICB’s analysis where most other commentators have not found flaws with what is widely recognised as an impressive and important analysis and one that is being looked at well outside the UK for the light that it sheds on continuing issues that other countries have around their banking systems. I shall take a number of the noble Lord’s many questions. First, he asked about risk weights and the loss-absorbing capacity. The ICB did a detailed analysis of almost 40 banks. Its key chart is picked up in the Government’s document today. Of the 40 banks that suffered significant losses that the ICB looked at, the noble Lord, Lord Eatwell, highlighted the Anglo Irish Bank as the only one where the loss exceeded the 17 per cent—I think he referred to 10 per cent—loss absorbency which the ICB recommends for big banks. As my right honourable friend the Chancellor of the Exchequer made clear, this is not about making sure that no banks will fail but about a combination of things, including loss absorbency, that will make our banking system much more resilient in the face of the range of losses that are likely. The noble Lord also asked whether the Government have accepted all the ICB’s proposals on the ring-fence. A detailed discussion of ring-fencing issues takes up one chapter, or some 15 pages, of our response today. A number of outstanding technical considerations are clearly set out in the discussion. As I have already said in repeating the Statement, this is the first round of a sequence of consultation and draft legislation, both primary and secondary, to get this right. I make no apology for not having answers to all the very detailed questions at the moment. We are putting out this 70-plus-page document today as the start of the discussion that must go on. The noble Lord then questioned what activities should be inside and outside the ring-fence. On the question of where the ring-fence is located, he picked up on the adjective ““flexible””, which is advisedly used in the Government’s response document. The key driver about what should be inside and outside the ring-fence in the ICB’s analysis is whether it is an essential banking service, the interruption of which would cause great difficulty. For individual and SME deposits and overdrafts it is quite clear that interruption of normal banking activity would cause hardship whereas large corporates and private banking are clearly categories of banking consumer much better able to look after themselves for a period in those circumstances. That is what has determined in principle where the ring-fence should be. On this flexibility, in order to have an efficient banking system, it is quite right that the banks should be able to decide on a one-off basis whether their large corporate activity should be inside or outside the ring-fence so that they can match up their activity on the lending side with the structure of their deposit base. The noble Lord, Lord Eatwell, then raised questions about the situation of branches of a European bank in this country. It is certainly the case, as he recognises, that branch activity of a European bank would not fall within the provisions of this ring- fence. They cannot and should not do so under the arrangements for the single market. However, in relation to branch activities in this country, the supervisors—the FSA and, in future, the Bank of England—will of course have regard to subsidiarisation in relation to the scale of activities that are carried out through foreign bank branches. Lastly, the noble Lord asked about implementation and timing. As I have said, both the primary and secondary legislation will be completed in the course of this Parliament. The final part of the proposals in line with the ICB’s timetable—on loss absorbency and with regard to capital—will be in place on the same timescale as the Basle III implementation in 2019, but between now and then we expect to see the ring-fence itself put in place. As I have said in repeating my right honourable friend’s Statement, we will work with the banks on what is judged by the Government to be a practical implementation timetable. That, I emphatically say, will, along with all the rest of it, be a decision for the Government and, where appropriate, for the legislation that will come before Parliament in due course. We have been fast on the case to respond to what has been an enormously detailed report and, as I say, we will get the legislation through in the course of this Parliament.