The Minister is right that the amendment tabled by my noble friend Lord Oakeshott and me is designed to raise a broader public policy debate about bank regulation. It covers not just banks covered by the Bill but the entire banking system. A number of things have become clear during the banking crisis: there was mismanagement of the banks; many bankers were grossly over-rewarded; and those bankers had no sense of the broader community around them. We know all those statements to be true because the noble Lord, Lord Myners, made them in his interview at the weekend.
We know that there have been major regulatory failures; we saw it in relation to Northern Rock and we have seen it now more generally. Banks were behaving recklessly; their accounts were almost meaningless because they were propped up by toxic assets and the FSA was not on top of it. As I understand it, in regulating the banks the FSA divides itself into wholesale and retail divisions, and Barclays has to date been regulated by the retail bit of the FSA, despite the fact that the major risks facing Barclays come from the wholesale banking side of the bank. I also understand that Standard Chartered is regulated entirely by the wholesale team, despite the fact that outside the UK it has major retail deposits.
That demonstrates the failure of the current regulatory regime. There is now widespread recognition, including by the FSA and the Government, that there needs to be a fundament review of the regime and reform in the way that the banks are regulated. The current plans have a number of features. There is to be a review of remuneration and capital adequacy rules, and we are moving into an interesting phase in which there is a sort of planning agreement—I am sure that the Government would not want to use that phrase; they are calling it a lending agreement—under which the Government will provide support for the banks in various ways if they can reach an agreement on the quantity and type of lending made available across the country.
In the spring, the Government will publish proposals for the regulatory framework of the banks, together with the FSA's review. My Amendment 203 suggests a direction under which that regulatory framework might operate. It takes as its starting point the fact that banks, at least in terms of their deposit-taking activities, are de facto utilities. That is the clear implication of the lending agreement framework, and of the other steps that the Government have taken. Further action may be required to keep the sector afloat. This means that the banks cannot be treated like any other enterprise.
Despite all the talk during the passage of the Bill of arm's-length dealings with the banks, the Government are now intervening in the core business strategies even of those banks in which they do not yet have a shareholding. The proposal in Amendment 203 is that the Government contemplate separating investment banking from deposit-taking, either entirely or in a clearly segmented holding company. Such a move—in the spirit of, but not exactly replicating, the Glass-Steagall Act—would insulate the element of a bank's activity that most affects individuals and overall bank stability from the more risky practices engaged in by investment banks.
This proposal has wide support from a range of commentators and from the OECD, which a couple of weeks ago in its twice-yearly review on trends in financial markets said that, as a result of regulatory and governance failures, inherently risky investment banking businesses had been able to raise capital too cheaply, leading to a build-up in debt that contributed to the current financial crisis. The OECD said:
"These businesses benefited from a too low cost of capital and, commensurately, they became too large ... as a consequence. When embedded inside a financial conglomerate like Citi or a European universal bank like UBS, excessively large investment bank segments put those entire institutions at risk".
There are two approaches that one could adopt. One is advocated by the noble Lord, Lord Williams. The other is to allow deposit-taking and investment banking to be undertaken by a single holding company, but as separate legal entities. I have no preference between the two. In either case, with a clear segregated structure, it would be much easier to have the appropriate level of regulatory regime for each type of banking activity.
There are a number of arguments against it. The bankers argue that it is extremely complicated and costly and puts the clock back. In one sense, that is exactly what it seeks to do. Some people argue that it would be costly to consumers because, in the past, investment banking profits have subsidised the retail banking side. That is fine when the flow goes in that direction. However, when the investment banking side collapses, as it has, the argument no longer applies. It certainly does not apply at the moment. It is also argued that it goes against what is happening with some banks in the US, where Merrill Lynch has been taken over by Bank of America, and Bear Stearns by JP Morgan. However, Citigroup moved in the opposite direction just last week when it in effect adopted the proposal of the noble Lord, Lord Williams, and split the investment and deposit-taking sides of its activities.
None of these arguments undermines my basic premise. Greed, vanity and recklessness have brought the big UK clearers to their knees, in considerable measure through their over-risky investment banking activity. The Government are undertaking a review of the framework of the banking sector, and the amendment would require them to look at the case for separating investment banking from deposit-taking. I commend it to the Minister and to the Committee.