Cable quizzes Darling about the banks

12.23.09pm GMT Sat 6th Feb 2010

• [Feb 02] Vincent Cable (Twickenham, Liberal Democrat): THE Chancellor and I have agreed to differ on the Government's rejection of the Governor of the Bank of England's advice on breaking up those banks, but now that the President of the United States has made the case that proprietary and, indeed, wider, own-account trading by banks is dangerous and must be separated from traditional banking, do the Government not wish to rethink their position at all?

Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour): Interestingly, if one looks at Paul Volcker's proposals, which he made as part of his Group of Thirty proposals a year ago, one finds that he recognised that proprietary trading could be risky and recommended that greater capital be held against such risky activities. We have expressed that view before, and the issue clearly needs to be looked at. However, we must also bear in mind that most British banks do not engage in that much proprietary trading, and it certainly was not the root cause of the recent problems.

I say to the hon. Gentleman, as I have said to him before, that traditionally the regulatory system was modelled on the basis that if one firm was all right, the entire system was all right. Over the past 18 months or so, however, we have seen that we have to look behind that, because risks were laid off to institutions, which laid them off to further institutions. In some cases, we found that the first firm that had attempted to lay off its risk was buying it back through another part of the empire, without having any idea of what it was doing. The interconnections of financial institutions are the problem, and that is why the hon. Gentleman's proposals do not fit the bill. In fact, he is rather like a general fighting the last war rather than taking account of where we are likely to be in the future.

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• Vincent Cable (Twickenham, Liberal Democrat): The Chancellor says that this is not the basic cause of the problems within the UK system. Is it not true, however, that there were enormous losses within the Royal Bank of Scotland, for example, as well as within the mortgage lenders? Is not the real reason why the Government-and, for that matter, the Conservatives-are not willing to go down this route the fact that they have been persuaded by the City, for its own self-interested reasons, to adopt this position of a level playing field? Whereas the Government took the world lead in the bank rescue operation, they are now lagging behind the rest of the world in dealing with this very dangerous problem.

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Alistair Darling (Chancellor of the Exchequer, HM Treasury; Edinburgh South West, Labour): No, I do not accept that. If the hon. Gentleman reflects on what has happened since 2007, he will see that the problems were partly to do with liquidity. For example, Northern Rock was totally dependent on wholesale funding, and when that dried up, the bank effectively collapsed. However, the other problem was that too many firms, such as RBS, clearly did not understand the extent to which they were exposed, and because of that they got into difficulties. That was a feature of many of the banks that failed. We need, first, to ensure that we have adequate capital that stands behind the banks' activities, and that that capital is commensurate with the nature of the operations. Secondly, we have to ensure that in the event of a bank getting into difficulties there is a resolution plan-a living will-whereby the regulators of the banks know exactly what needs to be done and who needs to be doing what.

The crucial thing-this comes back to the point raised by Sir Peter Tapsell-is that it is necessary for us to ensure that the regulatory reforms are not just put in place here but done on a broad-based international basis. That is what we need, and it is in all our interests to ensure that it happens. Let us remember that at the end of the day we have to ensure that we have a robust regulatory system, but also a system that ensures that banks are there to provide credit for the economy, which is the objective of all the reforms that are being put in place.

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