My Lords, I begin by congratulating the two chairmen and members of both committees for producing these two stimulating reports. What I did not grasp until I started preparing for this debate is that the questions that the reports address are not remotely new. Banking crises have been erupting periodically for centuries. Sovereign default on loans is an everyday hazard for banks, just one example of which was the downfall of the Medici banking family in Florence. The difference now is that the roles are reversed. It is banking default that threatens sovereign structures.
As long ago as 1825, there was a dress rehearsal for the present crisis. The then director of the Bank of England put it thus:
"We lent [money] by every possible means and in modes we had never adopted before; we took in stock on security, we purchased exchequer bills, we made advances on exchequer bills, we not only discounted outright, but we made advances on the deposit of bills of exchange to an immense amount, in short, by every possible means consistent with the safety of the bank ... Seeing the dreadful state in which the public were, we rendered every assistance in our power".
As the noble Lord, Lord Skidelsky, said, plus ça change, plus c'est la même chose. Nothing seems to have changed in the intervening 184 years except that the decimal point has moved a couple of places to the right. Central banks are still taking on collateral whose value remains unquantified. Even credit default swaps, about which the noble Lord was very rude indeed, have an historical precedent. It is no good Citibank or Goldman Sachs congratulating themselves on paying themselves huge sums of money for original thinking. Back in the 12th century, King Baldwin II of Jerusalem secured a loan using his beard as collateral. No doubt he, too, thought he was doing God's work.
Having looked back, let us look forward to find out what can be learnt. Both reports make the central point that there should be no rush to action or quick fix. The report of the noble Baroness, Lady Cohen, concludes by saying:
"But there should be no rush to all-embracing new legislation".
Taking that into account, I should like to touch on two points which I think deserve further consideration. The first is the question of deposit insurance, and I wonder whether this is the right way to go.
Let us take the example of Icesave, which is dealt with in Chapter 7 of the report on EU regulation. Deposit insurance by definition must make depositors risk-insensitive. Why should they care when the taxpayer will pick up the tab? As soon as Icesave went down the tubes, local authority treasurers, charity treasurers and university and college bursars who had placed money with Icesave came bleating to the taxpayer for help.
I had a deposit with Icesave. Icesave was an accident waiting to happen. It was quite clear that that was the case; you had only to read the financial pages early in 2008 to know that it was time to pull for the shore. If a simple peasant could work that out, what were the overpaid council and charity treasurers and college bursars doing with their minds idling in neutral? Depositors should understand that a deposit is nothing more than a loan and thus carries a degree of risk. If depositors want a risk-free deposit they should buy gilts or put their money with NS&I. State protection—or, more accurately, taxpayer protection—for depositors carries a double risk as state support stokes future risk-taking by banks. It is only rational behaviour for banks to double their bets: if the bets come off they win; if they do not, the state guarantees their losses. As Vince Cable pointed out, the gains are privatised and the losses socialised. I hope the Government will look carefully at the danger of taxpayer guarantees.
This brings me on to the equally difficult question of how to deal with financial institutions that are too big to fail or, as the noble Lord, Lord MacGregor, said, too difficult to manage. The banking supervision report looks at this problem in some detail, making a number of sensible suggestions to de-risk the taxpayer. I should like to add something different to the mix. I suggest, rather diffidently, that there may be lessons to be learnt on banking structure from the unlikely source of hedge funds. Noble Lords will be aware that hedge funds were the villains of choice as the cause of the banking crisis; subsequent analysis has, however, shown that they had little or nothing to do with it. Why? Because, unlike banking, the hedge fund sector does not consist of a small number of large players but a large number of relatively small players. On the face of it, prudence and hedge funds seem unlikely bedfellows, but please listen to this quotation:
"It may be coincidence that the structure of the hedge fund sector emerged in the absence of state regulation and state support. It may be coincidence that the majority of hedge funds operate as partnerships with unlimited liability. It may be coincidence that, despite their moniker of 'highly-leveraged institutions', most hedge funds today operate with leverage of less than a tenth that of the largest global banks. Or perhaps it might be that the structure of this sector delivered greater systemic robustness than could be achieved through prudential regulation. If so, that is an important lesson for other parts of the financial system".
Who wrote that? It was not some financial scribbler in the financial press. No—it was taken from a paper called Banking on the State,written by the Executive Director of Financial Stability at the Bank of England, Andrew Haldane. I leave the thought with the Minister that that paper was written by an adviser at the Bank of England; it deserves careful study.
On the question of EU regulation of our financial services, the committee asked whether the EU is the right area for action, going on to recognise the dangers of over-regulation and a resulting loss of global competitiveness. It also usefully underlined London's pre-eminence in financial services, pointing out that London would lose much more than any other member state from ill thought out regulation. What it did not say, perhaps out of misplaced tact, is that there is an EU bias against London's success. The German Finance Minister, Peer Steinbrück, in an interview with the BBC on
"There is a clear lobby in London that wants to defend its competitive advantage tooth and claw ... We will deeply change the rules of the game for financial markets".
However, I draw some comfort from the unequivocal statement in paragraph 94 of the report, which says:
"Witnesses told us that giving binding powers to any EU body was not possible under the EC Treaty".
It went on to say,
"no EU body is currently able to make binding decisions over national supervisors".
So far so good, but can the Minister explain how that squares with his Written Answers to the noble Lord, Lord Pearson of Rannoch, on
"whether they have power to prevent overall control of the United Kingdom's financial system and its supervision passing to the European Union; and, if so, whether they will exercise that power".
The Government's reply, through the Minister, was:
"The European Commission has indicated its intention to use Article 95 of the EC treaty as the legal basis for its proposals to establish a European System of Financial Supervisors. The European Commission has confirmed that day-to-day supervision of financial institutions should remain at the member state level".—[Hansard, 21/7/09; col. WA365.]
I gather that this proposal, as the noble Lord, Lord Trimble, mentioned, will be subject to qualified majority voting. So it seems that when the debate gets political, the UK can simply be outvoted.
This subservience to the EU's political agenda has recently been cruelly spotlighted by the sorry story of the Royal Bank of Scotland's mugging by the Competition Commissioner, Neelie Kroes. She forced disposals on Stephen Hester, the chief executive of the Royal Bank of Scotland, in discussions that he termed "bruising". He said at his press conference that,
"the settlement with the EU makes recovery harder ... the disposals don't improve competition and don't improve our ability to pay back the taxpayer".
That is a not a very good result, is it? The noble Lord, Lord Trimble, who is not in his place, was absolutely right that the Commission seems to have decided that it wanted a political trophy and the Royal Bank of Scotland fitted the bill. The Treasury did not really seem to understand the damage that this could cause to the bank until too late in the day. In fact, it was behind the game all the way.
Will the Minister tell the House, therefore, what the position is? Will control of our financial system rest with the UK or the EU?