Financial Services Bill — Second Reading
Lord Lawson of Blaby (Conservative)
My Lords, I am grateful for that. This is a very important and complex Bill, and we should be able to speak if we are not waffling-and I hope that I have not been waffling-at adequate length. However, I assure the House that I shall not take another 10 minutes.
No banking system is likely to be stable if it is financed by a mountain of loan capital on an exiguous equity base. Yet that is what we now have. I suspect that this is unlikely to change unless there are two supporting changes.
First, the bank regulators and supervisors should at least strongly discourage if not actually forbid the remuneration of bankers on the basis of the rate of return on bank equity. Secondly, there needs to be a fundamental change in the tax system as it applies to banks, or at least banks that conduct ring-fenced activities, à la Vickers. At present, a bank that finances itself by raising loan capital finds that the interest paid on that capital is tax-deductible, whereas the dividends paid on equity capital are not, so there is a clear tax incentive in the system for the banks to capitalise themselves on the smallest possible sliver of equity-the very reverse of what is needed in the interests of stability. That should be changed. Interest on the bank's loan capital should no longer be tax-deductible. The quid pro quo might well be the abolition of the blunt instrument of the bank levy.
In conclusion, I warmly welcome the Bill, but there is much still to be done.