Financial Services (Banking Reform) Bill

Jesse Norman Excerpts

Monday 11th March 2013 Commons Chamber

[Chris Leslie]

My hon. Friend is spot on. A bank’s leverage is the ratio of its assets to its equity capital. Its equity is equal to the value of its assets minus the value of its liabilities. A higher leverage ratio magnifies returns because any growth in the assets will be proportionally greater if equity is thin. The corollary, however, is that any losses are also magnified if leverage is greater. Such a bank’s equity can be wiped out by a smaller shock than would wipe out the equity of a less leveraged institution.

Vickers recommended a 25:1 leverage ratio for systemically important banks—in other words, 4% of equity capital—but the Chancellor has dismissed that proposal. The parliamentary commission says that it is “not convinced” by the Government’s decision to reject Vickers’ recommendation to limit leverage in that way, and that it

“considers it essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3% minimum required under Basel III.”

[Jesse Norman (Hereford and South Herefordshire) (Con)]

Will the hon. Gentleman explain why the average leverage ratio for the banking system, which had been 20 times for the 40 years before 2000, went up to 50 times in the seven years between 2000 and 2007, according to the Independent Commission on Banking? Might that have had something to do with the present shadow Chancellor being the Minister for the City at the time?

[Chris Leslie]

No. With hindsight it is clear that we need a tough leverage ratio, and I think the hon. Gentleman’s question implies that he accepts that leverage is an important part of the regulatory toolkit. That is why it is wrong that the Bill ignores the recommendations of Vickers, in particular, but I am afraid that the Chancellor seems to have dismissed the recommendations of not only Vickers but the parliamentary commission on this issue. It is not good enough that the Government are leaving this matter out of the Bill, perhaps assuming that the European Union will somehow address it in the next eight or nine years.

Even the incoming Governor of the Bank of England, Mark Carney, pointed to the value of a higher leverage ratio as a backstop for a risk-based capital regime when he gave evidence to the Treasury Select Committee. There are ways of overcoming the impact of such a measure on a minority of non-plc institutions—I know that some of the bigger building societies, in particular, have expressed their concerns about a crude leverage ratio approach—but that is not a reason not to put a safeguard in place. At the very least, the Government ought to accept the parliamentary commission’s proposal for an annual assessment to be carried out by the Bank of England of the progress of the work to improve risk weightings and the work towards the leverage ratio.

[Jesse Norman]

Let me put the question to the hon. Gentleman in another way. Does he regard it as slightly ironic that he is now pushing for a leverage ratio that is roughly half the ratio that the Labour Government allowed to occur five years ago?

[Chris Leslie]

We have to learn the lessons of that global financial crisis, one of which is that leverage has come to the fore as a way of illustrating the over-extended nature of the banking system. I am glad that consensus is breaking out across the Chamber on this point. As the hon. Gentleman knows, he and I have almost been in concert in voting on a variety of amendments, some of which have been inspired by his very own articles. I therefore look forward to him joining us in the Division Lobby—if it comes to that—on the question of the leverage ratio.

--- Later in debate ---

[Chris Leslie]

Not at the moment.

We need improvements in the standards and the culture of our banking sector, and Ministers ought to have allowed enough time for them to be discussed in Committee. We will table amendments providing for the establishment of a professional standards body to enhance the approved-persons process. There needs to be a clearer complaints procedure, and a stronger facility for failing banks to be struck off. We need clarity in regard to the professional qualifications and competences that are expected, especially in the wholesale sector, and a code of conduct that is monitored and enforced effectively and applies not just to significant influences in the banking sector but to all bank employees. We need safeguards to secure the independence of board directors overseeing ring-fenced banking activities. The commission has very reasonably recommended a “sibling” rather than a “parent-child” corporate ownership structure.

[Jesse Norman]

I am trying to follow the hon. Gentleman’s argument, but it has become fatuous. The fact is that the banking system had a leverage ratio of 20 times in 2000, as it had had on 40 previous occasions. Deregulation under the last Government but one had nothing to do with this financial crisis, which was caused by an increase in leverage—an explosion of leverage—under the Labour Government between 2000 and 2007. It is in the Vickers report.

[Chris Leslie]

If the hon. Gentleman’s analysis is correct, he will no doubt join us in the Division Lobby to institute the recommendations on leverage from the parliamentary commission. Is that his intention? Will he join us in supporting our amendments? I will give way to him if he wishes to answer that question, but I do not think he does. That is a shame, because I know that he feels strongly about these matters, but I can detect the gagging influence of the Treasury Whip as he texts the message “Be careful: Jesse Norman is on his feet again.” Forgive me, Mr Deputy Speaker, I meant to say the hon. Gentleman. The alert has gone out that rebellion is in the air.

We need more protections to deal with standards and culture, and we need to make sure that whistleblowers in the banking sector are given protection. We also need to set up a financial crime unit within the Serious Fraud Office, using some of the resources that are flowing from the fines. We probably also need to deal with the statute of limitations issue, going beyond the three years to give the regulators additional powers.