On 21st March 2023, the House of Lords debated the Financial Services and Markets Bill in committee. The Archbishop of Canterbury spoke in support of amendments tabled by Baroness Kramer which stressed the importance of the lessons learned from the 2008 financial crash:
The Lord Archbishop of Canterbury: My Lords, I have added my name to Amendments 241C and 241D tabled by the noble Baroness, Lady Kramer, and wish to speak briefly in support of them here. I am particularly grateful to the noble Baroness, Lady Noakes, who made some very helpful and powerful points.
As the noble Baroness, Lady Kramer, said, this marks 10 years since the publication of the Changing Banking for Good report from the parliamentary commission, on which I sat with her. The two amendments to which I have added my name are probing amendments to stress the importance of not forgetting the lessons of 2008-09, because people and sectors entirely can have very short memories.
As the noble Baroness has explained, the amendments seek to prevent alteration to two elements of the banking reform Act 2013 by statutory instrument without proper debate in Parliament, and to prevent changes which go against the recommendations of the parliamentary commission. Our memories have certainly been refreshed this week. If the debate on this group had been held when it was first scheduled two or three weeks ago, I think we would have had a very different reception. If one is grateful for anything in the present crisis, it is that we have been so warmly reminded of why we need a clear memory.
The ring-fence was first recommended by the Vickers commission in 2012, and it was “electrified”—in the words of the noble Lord, Lord Tyrie, in the Parliamentary Commission on Banking Standards report—to address the issue of banks seeking to test it. In our first report in 2012, we commended the coalition Government’s intention to introduce the ring-fence but said, as has been quoted, that it would be worn down in time, and that it had to be
“sufficiently robust and durable to withstand the pressures of a future banking cycle.”
After 10 years, we are now in a future banking cycle. We have gone through a long period of very easy money in which the banks have been able to make a great deal of money and to recover and increase their capital to much better standards than were around in 2008.
The very rapid increase in interest rates right across the western economies—particularly in the United States, which has the fastest increase for 50 years—has resulted in, as usual, the exposure of risks being taken that had not been foreseen. It is the “had not been foreseen” and possibly the “unforeseeable” that are important to stress when looking at this.
Electrification gives banks a disincentive to test the limits of the ring-fence. It is human nature—especially in a corporate entity—to test the limits of any regulation and see if they hurt when you hit them. But 2008-09 hurt far more people than simply the banks. It caused a global recession, and it hurt the poorest in the land more than anyone else. At that time, I was working in Liverpool and living in Toxteth, and we saw the impact on those who were least able to live with it. It is still hurting the whole economy, because for at least a generation after a financial crisis, as opposed to a normal economic recession, there is a deep fragility in confidence. The ring-fence and the other regulation of banks and higher capital are all about maintaining confidence, not about making it impossible for people to go bust.
The recent failure of SVB in the US, and the ease with which what is by global standards a major bank was reclassified as a systemically important bank and thus eligible to be rescued—even though there is a system for resolving banks which is meant to be robust—demonstrates that the issues of systemically important banks are very difficult to handle. Again, the problem is one of confidence: we are talking about the contagion of a lack of confidence, and not simply about the failure to observe rules and regulations.
The resolution of banks is part of the system in the USA. It applied to SVB and to Credit Suisse, but it was not enough to protect the taxpayers of the US or Switzerland from having to put in significant implicit and explicit support. This is all about confidence. If we go on bailing out the system as it is, one of the unintended consequences is likely to be further damage to confidence.
For me, one of the most memorable moments of the banking standards commission was hearing the very broken and tragic testimony of a former head of a global bank outside this country. He was a man of absolute integrity who had been brought to the point of complete breakdown—I suspect my colleagues remember it—by the impact of the failure of the bank he led. Right at the end of his testimony, I asked him, “When you wake in the night, what do you remember and wish you had done differently, because we all do that over events in our past?” He said, basically, “That’s easy. I remember that you can run a small, complicated bank safely, or a big, simple bank safely, but you cannot run safely a big, complicated bank”.
The ring-fence exists to protect the taxpayer when a bank that is very large and has the functions of a utility—in other words, it is big and simple—runs into trouble through its other activities. Secondly, the SMCR, the senior management regime, reflects the fact—as does the ring-fence—that in almost every banking crisis on record, the banks have privatised profits and socialised losses. It happened back in 1929, 1932, 1906 and in the Barings crisis in the 1880s. If we look around, we see that it is happening now.
In 2008-09, we heard evidence from the former Labour Chancellor of the Exchequer, who spoke of the moment in the autumn of the crisis, when, the weekend after Lehman failed, he was told at 2 am that he had to put in £180 billion by 6 am, or no bank would open for business. He said that the new regime must ensure that that is impossible in future.
The Libor scandal had no impact on top management. One dealer went to prison; no one else took responsibility. The commission heard about the “staggering” ignorance of bank bosses about what was going in their banks under their management. We found:
“Individual incentives have not been consistent with high collective standards, often the opposite.”
The aim of the SMCR is to ensure that those responsible carry responsibility. I support—perhaps unlike the noble Baroness, Lady Kramer—the abolition of the cap on bonuses because it seems that that is part of the idea that if you do very well, you get a bonus, and if you do very badly, you get a malus: you lose what you have gained, which should be awarded only over the very long term. You lose what you have gained in the past because the long-term impact of your management has been poor. In case anyone is wondering, I am quite against bonuses, let alone maluses, for Archbishops of Canterbury—given our figures over the last 70 years.
If we reward people with vast salaries for the risks they carry, they should not be allowed to pass that risk down the line and, ultimately, to the taxpayer. Events of the past few weeks have shown the turbulence in the banking and financial sectors going back to the autumn last year, when we had something that was not the Budget but something with a funny word that I keep forgetting.
Noble Lords: Fiscal event.
The Lord Archbishop of Canterbury: Going back to the fiscal event, a lot of the pension funds almost went bust. We learned a lesson from that, quite rightly, and I think it is a lesson that will be kept.
The ring-fence and the SMCR have been important for encouraging—not solving—improved standards and culture in the banking sector and for protecting the public from bearing the brunt of future banking failures. We cannot forget the lessons learned with such pain for so many outside the banking sector, who had no idea what goes on in banking but found that life suddenly just did not work any more.
I hope that the Government take a further look, certainly through the consultation, at the lessons of the last few weeks, and that the ring-fence is strengthened, not weakened, and improved. I agree with the noble Baroness, Lady Noakes, about both the ring-fence and the SMCR. Both are cumbersome and need rethinking, but not abolishing.
When asked why he had changed his mind, John Maynard Keynes—apocryphally, I think—replied:
“When the facts change, I change my mind. What do you do, sir?”
Given that the facts have changed over the last few weeks, the Government need to ask themselves whether they are going to change their minds and think harder about adequate protection for the basic financial structures that protect the weakest in our society.
Extracts from the speeches that followed:
Viscount Trenchard: I tremble in my shoes to disagree with the good intentions expressed by the noble Baroness, Lady Kramer, the noble Lord, Lord Tunnicliffe, and the most reverend Primate the Archbishop of Canterbury in seeking, in their Amendments 241C and 241D, to make it very difficult to weaken the ring-fencing provisions or change the senior managers and certification regime. It is clear that she and her co-signatories are among those who believe that the introduction of ring-fencing has reduced the risks to which bank customers’ deposits are exposed and that it is therefore important to make it very difficult to weaken the ring-fencing regulations in any way.
It is argued, for example, that universal banking is unsafe because of the volatility of the cash flows from risky investing and investment banking activities. The noble Baroness talked about investment banking as “casino banking”. I worked at Kleinwort Benson for 23 years, which, unusually among accepting houses, had quite a substantial commercial banking business. I am certain that there was never any suggestion or possibility that our customers’ commercial banking deposits could be diverted or invested in dodgy or risky investment banking activities.
Actually, research has found that investment banks’ revenues are indeed volatile, but there is no positive correlation between the two cash flows of retail and investment banking. It follows that universal banks are in fact gaining diversification benefits. The global evidence that splitting up the banks will make them less likely to get into, or be the source of, trouble is pretty weak. In any case, is it credible that the Government would let a major investment bank fail, having seen the disastrous effect that the collapse of Lehman Brothers had on the US economy? Is it not interesting that the US Government did not go for an updated version of Glass-Steagall this time round?
I have one further criticism to make of the market distortion that ring-fencing can cause: it can make it harder for smaller banks to grow. Small domestic banks inside the ring-fence need to compete for a small pool of permitted assets against the capital of the larger banks, which is also trapped in the same pool. This negatively affects the small banks’ profitability, creating a glass ceiling to growth. Can my noble friend the Minister say whether the Treasury has any real evidence that ring-fencing has actually reduced risk, and does she not agree that its continued application negatively affects the competitiveness of our financial markets? I not only cannot support Amendment 241C but urge my noble friend to conduct a review of the effectiveness of ring-fencing. Indeed, events of recent days perhaps support that view. The relaxation of the ring-fence in the case of HSBC’s acquisition of SVB UK indicates that the Government do not think that it is that important or significant.
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