Banking reform statement by the Chancellor of the Exchequer.
[Check against delivery]
Mr Speaker, the Government is proposing the most far reaching reforms of British banking in our modern history.
Our objective is to make sure what happened in Britain never happens again.
That taxpayers are protected and customers get a better service.
Last year, the Business Secretary and I set up the Independent Commission on Banking to look at what I have called the “British Dilemma”.
How Britain can be home to one of the world’s leading financial centres, without exposing British taxpayers to the massive costs of those banks failing.
In the years leading up to the financial crisis, a failure of regulation contributed to the build up of a debt fuelled boom.
Banks borrowed too much and took on risks they did not understand.
When the bubble burst, these banks turned out to be “too big to fail”, and the last Government had to spend billions of pounds bailing them out.
Of course, major financial institutions in other countries were bailed out by their taxpayers.
But the British bailouts were on a different scale.
The Royal Bank of Scotland bailout was the biggest in the world.
The FSA’s recent report into the failure of RBS attributed this to “poor decisions made by the RBS management and Board”, against a backdrop of a regulatory regime that failed to stop them.
This Government is determined to do better at protecting British taxpayers from the cost of failing banks, while at the same time acknowledging the importance of the financial sector to our country.
Britain should remain home to one of the world’s leading financial centres and the home of global banks.
But the strength of this industry is also a potential weakness to the economy if not properly regulated.
The sector supports nearly 1.4m jobs, not just in the City, across the whole of the UK.
The balance sheet of our banking system is close to 500% of our GDP, compared to 100% in the US and 300% in Germany and France.
So while a European and international regulatory response to the crisis is important, we cannot rely on this response alone to make our banking system safe.
We in this Parliament have to take action.
And under this Government, we are.
We are putting the Bank of England back in charge of prudential regulation.
We’ve created the Financial Policy Committee to look at risks across the financial system.
And I welcome today’s report from the Joint Committee on the Draft Financial Services Bill
I wanted proper pre-legislative scrutiny.
That has happened, and we will respond in the New Year so that we improve the legislation.
We’ve also introduced a permanent bank levy on wholesale funding.
And we’ve introduced the toughest and most transparent pay regime of any major financial centre in the world.
But we also need to address the structure of our banks.
That is why the coalition Government set up the Independent Commission on Banking.
I want to thank Sir John Vickers and the other members of the Commission - Clare Spottiswode, Martin Taylor, Bill Winters and Martin Wolf - again for their impressive report.
Mr Speaker, it made three main recommendations.
First, that everyday high-street banking services should be separated from wholesale and investment banking activities, and that this be done via a ring fence.
Second, that banks be required to have bigger cushions to absorb losses without recourse to the taxpayer.
And third, that competition in the banking sector be strengthened by increasing the number of banks on the high street and the power of customers to switch accounts.
When their final report was published in September, I made clear that I welcomed these recommendations in principle, and would return to the House by the end of the year.
Today I fulfil that commitment.
Let me now set out in detail how this Government plans to respond and invite further views before we publish a White Paper next spring.
First, the Government will separate retail and investment banking through a ring fence.
It’s important to know that this ring fence will not prevent banks from failing.
But it does mean that if banks get into trouble, those elements of the banking system that are vital for families, businesses and for the whole economy can continue without resort to the taxpayer.
So the following will be in newly ring fenced banks.
The deposits of individuals.
Their overdrafts too.
And the deposits and overdrafts of small and medium sized businesses.
They will all be kept separate from riskier wholesale and investment banking - which will have to be outside the ring fence.
Larger corporate deposits and lending, and private banking can either be in the ring fence or outside.
The ring fenced bank will be legally and operationally independent.
It will be able to finance itself independently, have its own board and there will be limits on the amount it can lend to the rest of the group.
The Commission’s interim report proposed a de-minimus exemption for small banks that were clearly not systemic and we invite opinion on whether to proceed with this.
Our objective is clear.
We want to separate high street banking from investment banking to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail.
Second, we will make sure that banks have bigger cushions, so they are better able to withstand losses.
The international Basel III requirement - which the UK was instrumental in negotiating - requires banks to hold minimum equity capital of 7%, and there is a top up for systemically important banks.
We will go further.
Large ring fenced retail banks will be required to hold equity capital of at least 10%.
There will also be a minimum requirement for the loss absorbing capacity of big banks of at least 17%.
This requirement will apply to the UK operations of British banks.
It will also be applied to the non-UK operations of UK headquartered banks, except where they can demonstrate they do not pose a threat to the UK taxpayer.
I can also confirm that this Government will introduce the principle of Depositor Preference.
In other words: the principle that unsecured lenders to banks, who are better placed to monitor the risks that banks are taking on, should have to take losses ahead of ordinary depositors.
We seek further views on the best way to implement this principle.
This comes on top of the guaranteed protection that the Financial Services Compensation Scheme offers, which covers 100% of eligible deposits up to £85, 000.
All these proposals on loss absorbency will also strengthen the European single market.
One of the greatest distortions to the single market in banking is the perceived implicit taxpayer guarantee for all European banks.
Through these proposals the UK is setting out a plan to remove this distortion for UK banks.
The European Commission has indicated plans to consider what it can do to reconcile that distortion at an EU level.
I welcome that and the UK will engage actively in the debate.
This House and other Member States have objected to the European Commission’s proposals to impose maximum standards for bank capital.
These proposals undermine efforts we and others are taking to improve financial stability and the single market.
In the view of bodies like the IMF, the European Commission’s proposals also water down the international Basel III agreement, giving exemptions to globally active banks in certain European countries.
We will be seeking, with others, changes to ensure the EU faithfully implements international agreements.
Third, the Government will take action to increase competition in the banking sector.
The disappearance of banks such as Bradford & Bingley, and the decisions taken by the last Government on the merger of Lloyds and HBOS mean the banking sector is dominated by a handful of large banks.
Last year, just four banks took 70% of the market share.
We need new banks to enter the market, to provide consumers and businesses with more choice.
The Government announced the sale of Northern Rock to Virgin Money last month, creating a new competitor in our retail banking sector.
In the Coalition Agreement, we made clear we wished to foster diversity in financial services, including promoting mutuals.
We welcome last week’s announcement that Lloyds has identified the Co-op as preferred bidder for the divestment of over 600 branches, to create a strong challenger in the high street.
We will also make it easier for people to switch their current accounts.
This recommendation from the Commission has received less attention from the media, but could be of huge benefit to millions of customers.
The idea is that individuals and small businesses can switch to another bank within seven days and all the direct debits and credits will be switched for them at no cost.
The Government has secured the banking industry’s agreement that they will implement these proposals by September 2013.
We will also support the Treasury Select Committee’s proposal to bring the Payments Council within the scope of regulation.
And I can confirm that our Financial Services legislation next year will specify that one of the objectives of the Financial Conduct Authority is to promote effective competition in the interests of consumers.
A new statutory competition remit will provide the FCA with a clear mandate for swifter more effective action to address competition problems in financial services.
So within months of the ICB report, legislation to bring this change into force will be introduced.
This brings me to timing.
Mr Speaker, some have questioned whether the Government will seek to delay implementation of these reforms.
In fact the reverse is true.
On the advice of Sir John Vickers’ and others, I will be bringing forward separate legislation to implement the ringfence.
The Government’s intention is that implementation should proceed in stages with the final changes related to loss absorbency fully completed by the beginning of 2019, in line with the Basel agreement.
But I can confirm to the House today that primary and secondary legislation related to the ring fence will be completed by the end of this Parliament in May 2015 and banks will be expected to comply as soon as practically possible thereafter.
The Government will work with the banks to develop a reasonable transition timetable.
Of course there are both costs and benefits to these reforms.
The Government estimates the total costs to UK banks to be between £3.5bn and £8bn, broadly in line with the Commission’s estimate.
Much of this reflects the cost to them of removing the subsidy that comes from any perceived implicit taxpayer guarantee - which is precisely what we intend.
The cost to GDP is estimated by the Government at just £0.8 billion to £1.8 billion - slightly lower than the Commission’s estimate.
These are far outweighed by the benefits of the ICB’s recommendations.
Even a relatively modest reduction in the likelihood or impact of future financial crises would yield an incremental economic benefit of £9.5 billion per year.
Such is the cost of financial crises to the economy.
Since the wholesale arms of non-UK banks would be unaffected by these reforms and the principle recommendations relate to UK retail banking, the competitiveness of the City of London as a location for international banking will not be affected.
Mr Speaker, we are fixing the banking system to protect taxpayers in the future.
But we also need to clear up the mistakes of the past.
I have already mentioned Northern Rock and Lloyds.
But the biggest call on the taxpayer was the bailout of RBS.
The FSA’s recent report was a damning indictment of all that went wrong in this crisis.
Those responsible are clearly identified in it.
We need to deal with the mess they created.
We are already reforming the regulatory structures that allowed these catastrophic failures to occur.
Bonuses are a fraction of what they were four years ago.
Early this year we placed a limit of £2,000 on cash bonuses for RBS and Lloyds.
We’ve made it very clear that the bonus pool next year must be lower again, and more transparent.
We are also clear that at a time like this, the Financial Policy Committee’s advice should be followed - that bank earnings should be used to build capital levels not pay out large bonuses.
RBS itself has also made significant changes since 2008, including reducing the size of its investment bank by half.
But I believe RBS needs to go further, and the management agrees.
We are the largest shareholders.
Let me set out our view.
RBS has already announced that it will further shift its business strategy towards its personal and SME customers and its corporate banking business which serves UK and international companies.
We believe RBS’ future is as a major UK bank, with the majority of its business in the UK and in personal, SME and corporate banking.
Investment banking will continue to support RBS’s corporate lending business but RBS will make further significant reductions in the investment bank, scaling back riskier activities that are heavy users of capital or funding.
RBS should emerge a stronger, safer bank, able to maintain lending to businesses and consumers, and which in time can be returned to full private sector ownership.
Mr Speaker, the British people are angry about what happened in our banks, and angry at the politicians who let it happen
This Coalition Government sees two parties working together to clear up the mess of the past, and to create a banking system that protects taxpayers and serves customers better.
Today we present the most far reaching changes to banking in our modern history so we can build an economy that works for everyone.
And I commend this statement to the House.