The behaviour of senior bankers could come under much closer scrutiny, after the House of Lords voted to create a “licensing” regime that would impose tougher controls on staff.
The Labour amendment to the Banking Reform Bill would require the annual validation of staff competence by the regulator, but is likely to be challenged by the government when the bill returns to the House of Commons in coming weeks.
Another amendment to the bill, which would have introduced a power to separate the entire industry if the government’s ring-fence between retail and investment banking fails, was not voted through.
The partial win for the government came on the day the chancellor bowed to pressure from MPs and announced a Bank of England review that is likely to bring forward new controls of the amount of debt in the banking system.
In an unexpected move, George Osborne wrote to Mark Carney, BoE governor, asking him to begin an immediate inquiry into whether the BoE’s financial policy committee should have formal powers over the level of leverage across banks.
The move comes after months of pressure from MPs and peers to give the FPC control over a sector-wide leverage ratio as soon as possible, rather than waiting until 2018, as proposed by the Treasury.
Appearing before the Treasury select committee, Mr Carney left MPs in no doubt that the Bank wanted this power. He called it a necessary part of a “robust capital framework” and said he expected it to be brought into force during the current Parliament following a 12-month review by the bank.
Mr Osborne’s letter calling for the review struck a more cautious tone, asking Mr Carney to consider “whether and when” the FPC should have powers to set a leverage ratio across the whole banking system and saying the Chancellor wanted to understand the impact on bank lending to consumers and businesses.
Andrew Tyrie MP, who chaired the Parliamentary Banking Commission, said the review was welcome and that it came close to implementing a recommendation the commission made nearly a year ago. “That power will be an essential part of the Bank’s toolkit for improving the safety of the banking system,” he said.
The government had until now resisted calls from MPs to give the FPC powers to set a sector-wide leverage ratio before 2018, insisting that implementation should be consistent with the international timetable set by the Basel Committee.
However, in his reply to Mr Osborne’s letter, Mr Carney said that because the Basel Committee is finalising its definitions for the leverage ratio early in the new year, “the time is now right to commission such a review”. He added that the leverage ratio had been critical to bank resilience in his native Canada.
The BoE has already been willing to make tough demands on leverage – it pushed both Barclays and Nationwide to reduce their indebtedness this year when Lord Mervyn King was still governor of the central bank.
But while the BoE’s Prudential Regulatory Authority has control over the amount of debt at individual banks, the FPC does not yet have a “power of direction” of overall leverage in the banking sector.
Testifying to MPs, Mr Carney said banking reforms were essential to ensuring the UK could continue to support a large financial sector. “If we are not successful in implementing these measures, it will have consequences for the size of the financial system that can be sustained in this country,” he said.