John McFall on the government’s weak and defective response to banking reform
Exactly one year ago this month the Parliamentary Banking Standards Commission was established by the government to examine culture and standards in the Banking industry. After taking evidence in public for over 170 hours in almost 80 sessions, and asking 10,000 questions, our conclusions were crisp and to the point. Standards in banking were abysmally low and the culture was rotten.
We were clear that a relationship existed between the culture and structure of the industry. It was important therefore, to establish some separation between the retail and investment activities of banks. Some of us were of the opinion that this could only be done effectively by full separation, akin to that advocated by the hugely respected Paul Volcker (ex-chairman of the US Federal Reserve) in his evidence to us.
Mindful that the government wouldn’t tolerate such a proposal we agreed a compromise position of an electrified ring-fence; whereby banks which tried to game the system would be brought into line quickly by the regulator which could threaten and impose separation if thought fit.
On paper, Ministers have responded by accepting this proposal, while in practice neutering it. So much so that the Conservative chairman, Andrew Tyrie has declared that the government has rendered the ring-fence so weak as to be virtually useless. Three preliminary notices by the regulator to the offending bank, with permission being sought from the Treasury on each occasion, followed by a five year gap before any decision on separation is an affront to the genuine efforts made by all commission members to seek a unanimous way forward. No wonder Tory Peer, Lord Lawson is unequivocal in stating “the Banking bill as it stands, remains defective in many key areas”.
The leverage ratio is another key area where the Commission are firm that the regulator should be in sole charge. Yet the government has seen fit to reject out of hand.
In every banking crisis in history, excessive borrowing has been the trigger. Mervyn King, enobled this week as Baron King of Lothbury, is unequivocal: “Leverage is the one issue that matters above all others – it is precisely for that reason that the banks will resist most strongly the regulation of leverage and the politicians will compromise on precisely that“. All too true as far as both Mr Cameron and Mr Osborne are concerned.
Given the multiple choice in banking scandals from which to choose, from money laundering to mis-selling, perhaps they can be reduced to one big one? Namely, that the interests of the customer have come last.
To transform an industry with low standards and a rotten culture the government has to become an active participant in this exercise. Having set up the cross-party Commission it cannot stand aside and give the industry a free-pass. The Commission was faithful in executing its duty. So when will the government do likewise in order to deliver a safe, sound and sustainable system to the benefit of both our country and its citizens?
Lord John McFall of Alcluith is a backbench Labour Peer and was a member of the Parliamentary Commission on Banking Standards
Published 24th July 2013