I am moving this amendment because the best form of bank regulation is full disclosure. This amendment concentrates on requiring a bank's auditors to provide explanation and commentary on contingent liabilities contained in the bank's off-balance-sheet investments. That is so important, because the record seems to show that this banking crisis was started by an acronym.
At Second Reading, I offered noble Lords a real sentence that came from the banking world:
I encouraged your Lordships to ask your friends in the banking world what that meant. I have been doing that over Christmas, since Second Reading, and I have yet to meet a chairman, a chief executive or an owner of a bank who can translate that sentence into plain English. They know what those acronyms are, and what the letters stand for. They know that they exist, but cannot explain what they mean.
The distinguished former Governor of the Bank of England, the noble Lord, Lord George, confirms the point. Writing about those banking acronyms in a recent pamphlet, he said that when they arose, while he was the governor, he did not understand,
"how they were rated or related".
Those acronyms brought the world to its knees, and hence this amendment. I do not want to detain the Committee at this hour, but on the audit of banks it is important to appreciate the startling creativity of how that all came about. Some people—wise people—said that the amendment was pointless because you could not legislate for creativity and that there would always be a way around whatever rules or regulations there were. I do not have such a low opinion of the law, so I am still confident of the amendment.
I will try to edit what happened as best I can. We all know that there was a time when it was thought that banks should not lend more than they had on deposit. Then it was thought that that was very restrictive on banks and that they ought to be able to lend a multiple of what they had on deposit. It was unfair not to let them do that because not all the depositors would ever ask for their money at once. Then it was agreed that there could be a multiple, which became a ratio. That was going to be determined by a body called the Basel Committee, with which this Committee is familiar.
The Basel Committee does not lay down rules. It is a committee of central banks, regulators and bankers, and has no authority and no power. It describes itself as a forum and makes what it calls recommendations. It made recommendations about what the capital ratios of banks should be—in other words, what the multiple of deposits should be.
Here came the first startling piece of creativity on the part of the banks, which was deliberately concocted to get around the restrictions of the Basel Committee. It was to create what are called structured investment vehicles, which for some reason—and I still have never had an adequate explanation from any auditor—could be contained off balance sheet. Therefore, these became investments, not loans, and this was no longer a bank's loan book; it was a market in investments. It enabled the banks to do exactly what it intended, which was to lend more.
As banks began to lend more, they began to lend more to classes of activity that brought them to a second restriction, which was the credit rating agencies, just referred to by my noble friend. Apparently, in this world it is not possible for certain institutions to buy or invest in anything other than what are called triple-A-rated securities. Sometimes they do not want to; sometimes they are not allowed to. Anyway, they reached the point where they had to overcome the problem that the credit rating agencies were refusing to give triple A ratings to some of these investments. They hit on another brilliant way around that; they created a new industry. They went to insurance companies which, up until then, had insured cars and houses against loss, and said that this was a new world in which they could insure securities—debts—which the insurance companies willingly did. The banks were then able to go back to the rating agencies and say, "There you are. These debts are now triple A because they are insured".
Therefore, in two steps you have the makings of how so much debt and liabilities were contained off balance sheet in the accounts of giant banks. This is why when the crisis arose it was all such a shock and why it is still unravelling. Nobody knew—not even the Minister himself, not the Treasury, the FSA, the Bank of England, the US Federal Reserve, the US Treasury Secretary or the Chancellor of the Exchequer—and they still do not. I am assure that there are more write-offs and shock announcements on the way. To give the Committee an idea of the scale, Citigroup still has $1.2 trillion in off balance sheet special purposes entities. To underline the point, the Committee should consider what was said by a senior Government source on Friday about the liabilities of the banks. He said:
"In short, we do not know what they are worth. All the assets on the balance sheet have got to be valued to the best of our ability. Auditors have been brought in to work this out".
That statement, were it to apply to the grocery shop down the road in your local high street, would be sad but understandable. When it applies to the biggest banks in the world, it is truly astonishing. No wonder the former head of the Federal Reserve, Alan Greenspan, looked on as all these events unfolded with what he called "shocked disbelief". A request that banks routinely make to their customers—"Please show me your balance sheet"—was one with which the banks themselves could not promptly comply. This amendment places a duty on the auditors of the banks to ensure that this never happens again and that their clients can provide an answer in future.
"Basel II ... fostered the creation of off-balance sheet vehicles", which, as you have just heard, are at the epicentre of this financial crisis. What does this Bill say about such vehicles? Nothing. What does this Bill say about off balance sheet items? Nothing. What does this Bill say about bank liabilities which are supposedly insured? Nothing.
I can predict the Minister's response to this amendment. I can virtually read his brief upside down. He will echo the words of Ben Bernanke, Chairman of the US Federal Reserve, who said last week that there is a need for increased surveillance and more oversight, particularly of capital regulations and accounting rules, on a global basis to detect and manage risk. Having said that, the Minister will reassure us that the International Accounting Standards Board has recently been charged by the Financial Stability Forum and the G20 leaders to review its relevant standards and, as a result, is proposing new consolidation rules. He will go on to say that, in addition, the Committee of European Banking Supervisors and the FSA are seeking greater disclosure following this financial crisis and that the BBA has supported this by offering their recommendations in advance of the 2008 half-year interims. He will then conclude that this area needs to be taken on an international basis rather than the UK alone and he will reassure us that good work is already under way. And we will all be touched by his romantic faith in the wisdom of bodies such as the IASB, the FSF, the G20, the CEBS, the FSA, et cetera. If your Lordships want, at nearly 2 am, to send a message to these bodies about the crucial importance of full disclosure, this amendment will do the trick. It is a wake-up call to the regulators, the bankers and especially their auditors. I beg to move.