This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Statement by the Chancellor of the Exchequer.
[Check against delivery]
Mr Speaker, I would like to make a statement on the final report of the Independent Commission on Banking.
The report is an impressive piece of work - broad in scope, incisive in its analysis, and clear in its recommendations.
The Commission have done what we asked them to do.
They have come up with an answer to the question of how Britain can be the home of successful international banks that lend to families and businesses - without exposing British taxpayers to the massive costs of those banks failing.
Frankly, it is a question that should have been asked and answered a decade ago.
We should all thank Sir John Vickers and the other members of the Commission - Clare Spottiswode, Martin Taylor, Bill Winters and Martin Wolf - for a job well done.
But this Commission and this report have not come about by accident.
It was set up by this coalition Government to learn the lessons of what went so catastrophically wrong.
A decade long debt-fuelled boom that ended in a dramatic financial crisis, a deep recession and a debt overhang that is still holding back our economy.
A regulatory system that totally failed to spot enormous imbalances building up and proved incapable of dealing with the crisis when it first broke.
And most importantly in the context of this report, huge global banks that turned out to be “too big to fail”, so that taxpayers were called upon for many billions of pounds in order to prevent a financial meltdown.
We still do not know, and may not know for many years, how much of that money will ever be recovered, despite irresponsible promises made at the time that not a penny would be lost.
We are fundamentally changing the system of regulation and tackling the debts.
But this bail-out for banks is the element of the crisis that has, justifiably, caused the most anger.
It is an affront both to fairness and to the very principles of a market economy.
It is not available to any other sector of the economy, and nor should it be.
It breaks the principle that those who take risks should face the consequences of their actions.
And as a result it played an important role in encouraging the excessive risk taking that caused this crisis.
Of course, taxpayer bailouts did not only happen in this country.
An international regulatory response to the crisis is now emerging, with the new Basel rules and the anticipated new additional requirements for systemic banks
But here in Britain we cannot rely only on the international reform process to make our banking system safe.
The scale of the challenge we face - and the risk for our taxpayers - is on a different scale to most other countries.
The balance sheet of our banking system is close to 500% of our GDP, compared to just over 100% in the US, and around 300% in Germany and France.
Only Iceland, Ireland and Switzerland had larger banking systems relative to their GDP and they have all now taken action that goes well beyond new international standards.
As the report itself says, “part of the challenge for reform is to reconcile the UK’s position as an international financial centre with stable banking”.
This is what I have called the “British Dilemma” - how to remain a successful global centre of finance without asking taxpayers to bear unacceptable risks or put the broader economy at risk.
We set up the Banking Commission to help us solve the British Dilemma.
Let me set out their recommendations and how we propose to respond.
The first proposal is the introduction of a ring-fence around retail banking.
The Government has welcomed this recommendation in principle.
As the report says, “the objective of such a ring-fence would be to isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers.”
In other words, the provision of key domestic retail banking services, such as taking deposits from individuals and small businesses or providing them with overdrafts.
The central benefit of a ring-fence is not to end large universal banking groups but to make them more easily resolvable in a crisis.
The costs should fall on shareholders and the wholesale debt holders, not small depositors or taxpayers.
A successful ring-fence will be able to ensure the continuation of vital payment services that are crucial to preventing an economic collapse.
This directly addresses the perceived implicit taxpayer guarantee which is at the heart of the too-big-to-fail problem.
The Commission have also proposed a more flexible ring-fence.
In terms of its scope, they say that “domestic retail banking services should be inside the ring fence, global wholesale/investment banking should be outside, and the provision of straightforward banking services to large domestic non-financial companies can be in or out.”
Many will see this as sensible and it will reduce inefficiencies resulting from any mismatch between customer deposits and business lending within an individual bank.
On the strength - or height, if you like - of the ring fence they recommend that the retail subsidiary should have what they call “economic independence”.
In other words it should meet regulatory requirements on a standalone basis, and its relationships with other parts of the group should be arms length and regulated in the same way as relationships with third parties.
A great deal of detailed work will now be required to see how that principle can be put into practice.
Second, the Commission have also made important recommendations to ensure banks have bigger cushions to withstand losses.
These are that the large retail ring-fenced banks should have equity capital of at least 10%.
They also recommend that retail and other activities of large UK banking groups should both have primary loss absorbing capacity of at least 17%-20%, including long-term debt that can be written off.
So that unlike last time both shareholders and bondholders bear losses, not the taxpayer.
Within this they recommend some regulatory discretion about the composition of this loss absorbing capacity and, again, many will see that as sensible.
Third, the Commission recommends the introduction of depositor preference.
I repeat again that the Financial Services Compensation Scheme covers 100% of eligible deposits up to the new European limit of €100,000.
The depositor preference proposals would bolster this Scheme by ensuring that other bank creditors are subject to losses first when a bank goes bust, minimising the cost to the FSCS and ultimately the taxpayer.
The fourth set of recommendations relate to competition in the banking sector.
They haven’t got as much attention as the other recommendations, but they are as important to families and businesses.
I agree with the Commission that the best way to ensure a reliable and affordable supply of lending to our families and businesses is through competition.
The collapse of banks like Bradford & Bingley and the merger of Lloyds and HBOS, welcomed by the last Government, mean that there is too little competition and switching bank accounts remains difficult.
I welcome their recommendations to change this.
On the divestment of the Lloyds branches, the Commission have said that the key test should be the emergence of a strong and effective new challenger bank.
I agree that would be very much in our country’s interest.
Mr Speaker, those are the recommendations.
Let me now turn to the implications for the wider economy, the implications for Britain as a global financial centre, and the timetable for the Government’s response.
The report is clear that the right solution, implemented properly and to the right timetable, will help our economy, not hinder it.
Let’s remember that the mistakes made by poorly regulated banks ended up costing the economy many many billions of pounds.
The Commission note that some of their recommendations could reduce the profitability of some banks’ investment banking operations.
That is largely because we would be removing the subsidy that comes from any perceived implicit taxpayer guarantee.
We should not confuse the interest of bank shareholders with those of British taxpayers.
It is also critical that reforms of this kind do not lead to a worsening of credit conditions in the economy.
Indeed Vickers says “Banks with more robust capital, together with the creation of the ring-fence, would provide a secure and stable framework for the supply of credit to businesses and households in the UK economy”
Indeed, the Commission believe their proposals could help to rebuild the culture of relationship banking that has been so sadly lost over the last decade, and this would help banks understand the credit needs of their customers better.
Let me turn to the UK’s role as a global centre for finance and banking.
I will be very clear.
This Government wants Britain and the City of London to be the pre-eminent global centre for banking and finance.
We want universal banks headquartered here, with all the advantages that brings.
The Vickers report explicitly addresses this issue - and for those investment banks with credible recovery plans they have not recommended higher equity requirements than those agreed at an international level.
This would mean that the global investment banking operations of UK banks can continue to be as competitive as any in the world.
And we will continue as a Government to keep the City as a whole internationally competitive, as was clear last week when we welcomed, with the Chinese government, the development of the offshore RMB market in London.
Let me end by explaining to the House how we will now take forward the Commission’s report.
We welcome the recommendations in principle.
They would require far-reaching and complex changes - John Vickers is the first to say that they cannot be delivered overnight.
The detailed work will start immediately.
We will consult on the costs and benefits of the most appropriate way to implement these changes.
And we will provide a response by the end of this year - so there is no uncertainty hanging over the industry.
We will legislate in this Parliament to put the needed changes into law.
We will consider which changes can be in the existing Financial Services Bill and which will need a new Bill, and we will discuss these changes with international partners to ensure consistency with international agreements and EU law.
We will follow the advice of the Independent Commission and ensure that any changes to the British banking system are fully completed by 2019.
This is a sensible timetable that fits with the international regime.
As Vickers himself said this morning “short-termism got us into this mess and we need long-termism to build a more stable system for the future”.
Mr Speaker, the question of how Britain is the home of successful, global banks than lend to British families and businesses, but don’t have to be bailed out by British taxpayers should have been answered a decade ago.
But it was not even asked - and that failure means this country is still paying the price for that failure.
Billions of pounds have been spent and hundreds of thousands of jobs have been lost as a result.
It is this Government that set up the Banking Commission - not just to ask the questions but to provide the answers.
Today represents a decisive moment when we take a step to a new banking system that works for Britain.
And I commend this statement to the House.