The hon. Gentleman makes an absolutely valid point. I am not trying to suggest that the whole Basel system should be dumped in the basket and forgotten. I am merely raising a suite of concerns about the content of Basel II, because I am worried that if world leaders, when they discuss re-engineering the architecture of banking regulation, assume that everything must proceed in the way that the accords previously proceeded, that will not be enough. That does not mean that there are not robust and important features in the Basel system, because there are, and they will want to retain them. I am pointing to the weaknesses, which will have to be addressed if we are all to have confidence in the new system, and if it is to be a permanent, not a temporary, fix.
I am running through some of the consequences of Basel II. Adam Applegarth cited Basel II compliance when he told the Treasury Committee last October that it was fine for Northern Rock to increase its dividend rather than to shore up its capital. He said that that decision was based on the regulations implied by Basel II. The accord's weaknesses have also been identified by the Bank of England in its financial stability report, which points to the weak treatment under Basel II of trading book assets and risks relating to off-balance sheet exposure. Many analysts argue that if Basel II were fully implemented, it would lead to lower capital asset ratios—even lower than the average 8 per cent. that it envisages.
Despite that, the Basel system in general has many advocates, and many of its features are perfectly respectable, but important institutions around the world still address the current issues of banking regulation using Basel II as the platform on which to build everything. For example, the European Commission proudly cites Basel II as the foundation on which it is writing its capital requirements directive, which is currently being debated by MEPs. Further refinements are being made to Basel II, some of which were set out in documents published in September. They call for regular stress testing, ensuring the alignment of risk-taking with liquidity exposure, and maintaining a cushion of quality liquid assets as insurance. Those are welcome reforms, but they are based on the core principles of Basel II, some of which are now exposed as fatally weak. It is worth remembering that the Basel accords are not law; they are simply guidance. They have no direct enforcement mechanism, and are entirely dependent on the interpretation of each country's central bank or regulatory authority. Nor is Basel II's remit comprehensive enough to embrace all aspects of the toxic mixture of banking practices that have imploded.
That tour of the institutions is the main part of what I want to say. It is relatively easy to agree a list of weaknesses: inflated balance sheets, assets of uncertain value, complexity of new instruments, dangerously high levels of leverage, too much dependence on wholesale funding, dangerously low capital asset ratios, and insufficient understanding of the level of global interconnectivity between the different practices and instruments that banks have introduced.