This may look like a complicated and technical issue on which to conclude our deliberations. However, the Committee will recognise that, once the technical jargon is cut through, it is quite straightforward. Risk-weighting is a device used in the capital adequacy regulations of banks, alongside the leverage ratio that we debated earlier. It is calculated by multiplying each type of asset class on a bank’s balance sheet—Government bonds, mortgages, derivatives and so on—by a risk weight. That could be 0% for assets considered very safe such as Government bonds across the OECD, and 100% for assets judged riskier, such as corporate loans. They are added up to form a risk-weighted aggregate.

Under the Basel III arrangement, banks will be required to have equity capital of at least 7% of risk-weighted assets by 2019, while risk weights have also been tightened. The Financial Stability Board of the Basel Committee made some suggestions and policy recommendations on that, particularly for globally significant financial  institutions. The Vickers Commission said that the Basel Committee proposals did not go far enough for several reasons, including the fact that the backstop leverage ratio in the Basel proposals was too lax, and that it looked only at banks of global systemic importance, rather than national systemic importance. The Vickers Commission said that the international debate on loss absorbency was “unfinished business”.

Vickers recommended that ring-fenced banks with a ratio of risk-weighted assets to UK GDP of 3% or more should be required to have an equity-to-RWA ratio of at least 10%; and that ring-fenced banks should also have requirements placed on them.

The new clause would mandate the Bank of England to publish a report annually on the progress of risk-weighting banks and building societies. That is fairly straightforward. We cannot claim full responsibility for some of these matters. Indeed, the Parliamentary Commission on Banking Standards recommended certain aspects. However, we feel that this is an important set of proposals.

The provisions would bolster the risk-weighting process, which definitely needs improvement; several witnesses to the Parliamentary Commission explained that was essential. For example, Michael Cohrs of the Financial Policy Committee was firm in his description of some of the inadequacies of the system. The Parliamentary Commission concluded:

“Risk-weighting has, however, been unsatisfactory and arguably dangerous in practice. Banks were allowed to set their own risk-weights using their own models. Some of the weights were much too low. The zero or low weights attached to government securities have encouraged banks to acquire large amounts of what were in some cases very risky assets. Many governments have an incentive not to address this, because of their need to fund large deficits. Parliament needs to be assured that the work to improve risk-weighting is being given the highest priority. The Commission recommends that the new Bill require the Bank of England to provide an annual assessment to be laid before Parliament of progress of risk-weighting and that the assessment should examine in particular the possible operation of floors for risk-weights, and steps taken with regard to simplification of risk-weights and trading exposures.”

That is a very sensible process and an incredibly important part of making our banks safer. We are disappointed that the Government have rejected the Commission’s proposal for that annual assessment by the Bank of England of progress on improving the risk-weighting arrangements. It is not good enough just to leave the matter to the international bodies and to have that de minimis, lowest common denominator approach. Our system, as we discussed in the debate about leverage ratios, also needs properly to address risk-weighting. It is a loose end that needs tying up and properly sorting out. I commend the new clause and amendment 33 to the Committee.