On 8th September 2016 the Bishop of St Albans, Rt Revd Alan Smith, led a debate in the House of Lords: “To ask Her Majesty’s Government what is their assessment of progress towards implementing the recommendations contained within the report of the Parliamentary Commission on Banking Standards, Changing banking for good.” The Archbishop of Canterbury, Most Rev & Rt Hon Justin Welby spoke in the debate, having previously served on the Parliamentary Commission on Banking Standards.
The Bishop of St Albans’ opening speech and the response of the Minister can be read here.
The Archbishop of Canterbury: My Lords, I add my congratulations to those of other noble Lords on the appointment of the noble Lord, Lord Ashton, as the Minister at DCMS. I have no doubt that we will come across each other again as “C”, “M” and “S” all seem to cover the Church in various forms. I should also say that I served on the Parliamentary Commission on Banking Standards and had the very good fortune to do so with the noble Baroness, Lady Kramer, from whom I learned a great deal. I am also chairman of the Church Commissioners, who were involved in seeking to buy some of the spin-off assets of the Royal Bank of Scotland.
I am grateful to the right reverend Prelate for arranging this debate. I agree entirely with his speech and indeed with the other four speakers that have been made before mine. I shall try to avoid repeating what they said. As we know, and as previous speakers have said, the key issue is banking culture. Culture comes from actions and decisions, and actions and decisions feed into culture. There is no doubt that changes introduced by the Government and the Bank of England have been extensive, and in many cases very effective. However, there are four linked areas, all of them around “too big to fail”, leading to what must be the long-term aim of ensuring that the Government do not have a contingent liability with respect to large banks that would result in them needing to provide support in the event of serious problems, as they had to do in 2008 at such cost.
First is the internal measure of capital. After some reluctance from the Government to concede this, banks now have a leverage ratio which is set by the FPC. However, in contrast to the recommendation of the Commission on Banking Standards, it is set at 3% rather than 4%. Obviously there is a balance to be met between a low ratio that leads to insecurity and a high ratio that leads to perverse incentives to take on high-risk assets. It would be interesting to know why there has been resistance to the figure of 4%, which has been the unanimous recommendation of all the external experts who have reviewed this case.
Leverage is one way of measuring capital adequacy, and a crude one. One of the great problems in 2008 was that most of the measures of capital adequacy relied on banks’ internal modelling. Recent reports—for instance, concerning the Royal Bank of Scotland and internal transfers of as much as £70 billion across what would after 2019 be the ring-fence—demonstrate that capital adequacy and movement of assets remain very important aspects of the security and good governance of large and complex banking institutions. It therefore remains a matter of concern that significant weight continues to be put on banks’ internal models for measuring capital which the Commission on Banking Standards’ report showed very clearly were not consistent with each other and in addition have a level of subjectivity which makes them almost entirely unreliable.
So long as there is good capital adequacy, the implied subsidy coming from the government guarantee of banking liabilities and assets, which has been measured by the banks themselves as around £30 billion a year, and by external bodies to be as much as £70 billion a year—just think how that might have helped Tata Steel—remains a severely market-distorting factor. Does the Minister agree that it must be a principal target of bank regulation and governance that the Government may formally withdraw any guarantee beyond the fairly low statutory level set for retail deposits, renewing in doing so a culture of risk and reward—not merely reward—and genuine values of resilience in order to ensure that banks remain in business and protect their customers? That leads me to the question of resolution and the importance of the adequacy of plans for resolution which ensure that, especially for banking activities outside the future ring-fence, contagion is avoided and certainty is provided. What progress is being made and how satisfied are the Government with plans for resolution?
Finally, the issue of competition has been raised by other noble Lords. The spin-off from RBS has of course been greatly delayed, in part owing to difficulties around the setting up of independent information technology and governance systems. Be that as it may, it is clear that there remains a lack of new entrants into the banking market; that figures for transfer of current accounts remain very low; that the illusion of free banking in credit is being maintained and is as market-distorting as ever; and that thus one can talk fairly and with reason about a banking market that simply does not function as a market.
The banks have been very clear about their resistance to increases in the ease of transfer of current accounts. Although we now have the seven-day guarantee, more sophisticated and advanced methods that have been available for some years, such as portable account numbers, do not appear to have come over the horizon in practical terms for implementation. They would be of huge benefit, particularly to the retail consumer. Until there is significant competition both for assets and liabilities as well as the essentially utility aspects of banking in terms of money transfers and movement, there will not be competition which keeps things simple, fair and honest, and embeds values.
We need a definitive change of culture to one that says that banks should be treated in ways that encourage competition and reduce government guarantees, and that banks should not be content with being privileged but should have a service mentality growing ever stronger, and should show self-restraint. For me, one of the most memorable quotes from our evidence was from a banker in a state of great distress, who said,
“If I had my time again, I would remember that you can have big, simple banks or small, complicated banks but you cannot have big, complicated banks”.
When the banks begin to have that sense of restraint, perhaps we may begin to see a more secure future for our banking industry.