New Clause 20 - Annual assessment of developments in respect of risk-weighting

Financial Services (Banking Reform) Bill – in a Public Bill Committee am 4:30 pm ar 16 Ebrill 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

‘(1) The Bank of England must, at least once in every year, prepare an assessment of developments in respect of risk-weighting in relation to banks and building societies.

(2) The Bank must send the assessment to the Treasury.

(3) The Treasury must lay the assessment before Parliament.

(4) The Bank of England must publish the assessment in such manner as they think fit.

(5) In this section “risk weighting” means the process by which the assets of a bank or building society are accorded a risk weight.

(6) In this section—

“bank” means a UK institution which has permission under Part 4A of FSMA 2000 to carry on the regulated activity of accepting deposits, other than any description of institution excluded by virtue of subsection (2)(b) of section 142A of that Act from being a ring-fenced body as defined in subsection (1) of that section (or a building society);

“building society” has the same meaning as in the Building Societies Act 1986;

“risk weight” means a percentage that is derived from the risk to the value of an asset.’.—(Chris Leslie.)

Brought up, and read the First time.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move, That the clause be read a Second time.

Photo of Jimmy Hood Jimmy Hood Llafur, Lanark and Hamilton East

With this it will be convenient to discuss amendment 33, title, line 4 after ‘insolvency;’, insert

‘to make provision for reports relating to developments in respect of risk-weighting;’.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

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.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury 4:45, 16 Ebrill 2013

It is good to reach the final new clause and amendment on a note of relative consensus. Risk-weighting is important, and my hon. Friend the Member for North East Somerset made a notable speech on the subject earlier in our proceedings. The primary capital requirements under Basel III are based on banks’ risk-weighted assets. Those risk weights must therefore be reliable and credible. The Parliamentary Commission correctly noted that some risk weights performed badly  in the last crisis. Extensive work is under way to review risk weights and has, to some extent, already been implemented. For example, the capital requirements directive III, which was implemented in 2011, significantly increased the risk weights that applied to complex securitisations. The Basel Committee and the European Banking Authority have begun separate reviews of risk weights and risk-weighting methods. The EBA expects to report by the end of 2013 and the Basel Committee by the end of 2014. [Interruption.]

Photo of Jimmy Hood Jimmy Hood Llafur, Lanark and Hamilton East

Order. The Whips should know better than to have discussions in Committee.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

Thank you, Mr Hood. The Financial Policy Committee of the Bank of England recommended that the PRA ensure that banks take a prudent approach to the calculation of risk weights.

Two questions arise from new clause 20. First, who should conduct such reviews? Secondly, what should be the timing of the reviews? On the first, the Bank of England is specified as the body that would conduct such reviews of risk-weighting. That is certainly possible, but there is a question about whether it should be the FPC or the PRA. After all, the PRA has the ability to review and adjust risk weightings in relation to individual firms and the financial services sector more generally. On the second question about the timing of reviews, we would want to consider, given the international work being done to conclude at the end of this year and the next, to which the UK is a significant contributor, when might be the next time that such a review should take place and how frequently reviews should happen.

Notwithstanding the approach that we have hitherto taken, there is much merit in the new clause’s approach and we will consider it and report back at a later stage on what arrangements are best put in place to keep the important matter of risk-weighting under review.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

That is a useful commitment from the Minister. The risk-weighting issue formed a central part of the thoughts of the Parliamentary Commission on Banking Standards. While the question is clearly technical, it all boils down to ensuring that our banks are safe, that we do not just leave it to them to self-regulate and that some firm, robust and rigorous regulation is put in place, which is why we tabled the new clause. We will want to pursue the issue and will certainly hold the Minister to account for his commitment on Report. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury

On a point of order, Mr Hood. May I make some concluding remarks, since we have reached the end of the Committee’s scrutiny?

First, I thank you for your ministrations in the Chair, and those of Mr Turner, who joined us for some of our deliberations. We have had the pleasure of Dr McCrea’s chairmanship during much of the Committee. He brought a degree of procedural precision exemplified in a magnificent speech that he made this afternoon, which has been praised as one of the finest he has ever made in Parliament, such was its attention to detail. Mr Bone, one of the original Chairs of the Committee, brought valuable experience of chairing other financial services Bills. He  is a particular stickler, we noted, and procedure on the passing of notes attracted his attention, rather as the conference between Whips has attracted yours, Mr Hood. I do not know what we have done to deserve such strict Chairs, but we have enjoyed it.

This has been an exceptionally enjoyable Committee. We have made good progress, and considered in detail all the amendments and new clauses—in less time than was allocated, or than we expected we would need. We learned a lot on the way. We have discovered, as hon. Members may recall from an earlier sitting, that my hon. Friend the Member for North East Somerset is contemplating going on Twitter. It is perhaps even more surprising that he has an alter ego who tweets on his behalf. We are still unpersuaded that he can be imitated.

Furthermore, during the progress of the Bill, there has been a distinct mellowing on the part of my hon. Friend the Member for Amber Valley. Today he proposed a cap on the market share that the banks should have. Some might think that a pretty rigorous approach to financial regulation, but they should reflect on some of his earlier remarks. I seem to remember from a previous sitting that he is on the record as calling for the electrocution of bankers. We are grateful that he has mellowed.

I am delighted to see the hon. Member for Kilmarnock and Loudoun back in her place. Not only did she manage to extract commitments from me to consider carefully and positively some of her suggestions, but she achieved a record in persuading me to back one of the Opposition’s amendments. It is fair to point out that it consisted of a single word—but it was a very fine word indeed, and I am happy that I could back it.

The hon. Lady invited me—slightly mischievously, I think—to praise what she repeatedly referred to as “the institution”. Hon. Members will recall that she was referring to the EU this morning, but she thought that I was praising the institution, and was saying what a good one it is. With deference to my hon. Friend the Member for Carlisle, who has recently married, I will reflect only on Groucho Marx’s comment that marriage is a wonderful institution—but who the hell would want to live in an institution? I think that that applies to the institution that the hon. Lady mentioned.

The Committee has been enjoyable and has made good progress. We have had serious discussions and given the Bill good scrutiny. Amendments have been tabled from both sides, and at various times the Front Benchers were channelling the Parliamentary Commission on Banking Standards. From time to time the hon. Member for Nottingham East, and even the hon. Member for Kilmarnock and Loudoun, were the representatives on earth—or at least in Committee—of my hon. Friend the Member for Chichester. We are grateful for their work in informing our discussion.

Like you, Mr Hood, I thank the Committee Clerks for their good advice and patience throughout the Committee. I thank my changing retinue of officials, who have not been too furious or bundled me away when I have failed to follow their advice and substituted  my own speaking notes for those that they urge on me, entitled “Resist.” I am afraid that I have resisted their advice to resist.

I would like to thank the Hansard reporters for their work in transcribing the debates, and the Doorkeepers, who have had an important role to play and have occasionally been indulgent. At a couple of points I think that the alacrity with which we have made progress through the Bill has caught short some members of the Committee, including my hon. Friend the Member for Reading West, who just managed to get through the door as it was closing. I think that the hon. Member for Telford had to apply for temporary membership of the Social Democratic and Labour party when he made the approach today.

It has been a great pleasure to participate in this Committee. I look forward to coming before the House on Report and Third Reading, and, once again, I am grateful to all Members for their contributions.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Further to that point of order, Mr Hood, with an eye on the time and not wanting to repeat the Minister’s speech, may I also thank all Members who have served on the Committee, particularly those on the Opposition Benches? It is not an easy task when one gets a note through saying, “Hey, come and join us on the Financial Services (Banking Reform) Bill for an inordinate period of time,” but they have been very assiduous in their contributions.

I echo the thanks to those who have chaired the Committee, including yourself, Mr Hood. I also think it appropriate for the Opposition to put on the record our thanks to the hon. Member for Chichester and the members of the Parliamentary Commission on Banking Standards, none of whom decided to serve on the Committee for the Bill to which they had given pre-legislative scrutiny. I hope we will have a chance to hear their direct input on the Floor of the House on Report.

The officials have clearly been working very hard, and I would also like to pay tribute to Treasury officials. Sometimes, the Opposition give the impression that we attack the Treasury, but I can assure them that our ire is reserved for the Ministers, not for them directly. I would also like to thank the Clerks and my own staff, Peter Edwards and Joe Atkinson, for their help in drafting as many amendments and speaking notes as we have required for the Committee.

I would obviously like to place on the record my thanks to both the Whips, to whom thanks should always be recorded, and in particular to my colleague the hon. Member for Kilmarnock and Loudoun. It was suggested earlier today that we could be regarded as the Torvill and Dean of the shadow Treasury team—I am quite happy with that Nottingham-oriented comparison, but this is not our “Bolero” in any way, shape or form. We will come back and no doubt work in close concert on future Finance Bills that are not a million miles away.

I would like to thank everybody involved with the Committee.

Bill, as amended, to be reported.

4.59 pm

Committee rose.