On the 2nd of February David Ruffley MP questioned Mark Hoban MP, the Financial Secretary to the Treasury on Competition and Choice in the Banking Sector.

Mr Ruffley : Financial Secretary, you will be familiar with table 5.9 of the Bank of EnglandÕs last financial stability review. It has some interesting data relating to the argument that big banks are too big to fail, that successive Governments canÕt afford to let big banks fail, and that because they guarantee them the subsidy in 2009, according to the Bank of England, was about £100 billion a year and in 2008 about £50 billion a year.

Those are Bank of England estimates. Do you think, in the light of that, that the "too big to fail" regime that this Government and previous Governments have operated enhances competition, decreases competition or doesnÕt have any effect on competition at all?

Mark Hoban: I think there is an argument about the extent to which it undermines competition in the sense of whether there is an uneven playing field that that implicit support enables them to operate to the detriment of other players in the market. I think there is legitimate argument there.

I think one of the challenges that emerges from the financial crisis, and Northern Rock is a very good example of this, is that it was very difficult for there to be an orderly exit from the market of a failed financial institution. A lot of work is going on at the moment to look at ways in which there can be a more orderly wind-down of a failed financial institution. There is quite a big international debate about this. We supported in the previous Parliament the requirement to have living wills, recovery and resolution plans. They are all measures that are aimed at seeing how you can wind down a failing institution. In fact yesterday in a Standing Committee we debated rules that would facilitate the orderly winding down of an investment bank or investment firm. So there are a series of steps in place to try to tackle this.

There are other ways in which we are intervening to ensure financial stability: higher capital requirements through Basel III, increased liquidity requirements and a more intensive supervision approach. So I recognise the problem. I suppose in a way the work of Sir John Vickers will help assess some of the wider consequences of "too big to fail".

Mr Ruffley : You said in your answer that there was a legitimate argument, there wasnÕt a level playing field. Can I just clarify: do you think that that the "too big to fail" regime, as it currently exists-forget about the reforms that are in prospect-damages competition or doesnÕt have any effect on competition in the British banking market? I donÕt want you to go off on to international arenas. We are talking about competition domestically in British banking.

Mark Hoban: If I look across the banking sector, there are different levels of competition in different sectors, and I am not sure that the level of competition in some sectors is related to the debate about "too big to fail"; sometimes it is about the functioning of markets in particular segments. As I said earlier on, there has been a lot of competition in personal loans, mortgages, credit cards, but less competition in personal current accounts. I donÕt think that lack of competition in personal current accounts is linked to "too big to fail".

Mr Ruffley : So you would be happy with any new set of arrangements that allowed a British bank to fail?

Mark Hoban: I think there is a challenge about how we minimise the impact of a potential failure on the taxpayer, and that is why there are moves to increase the amount of capital. I think the way in which the goal of Basel III was articulated was that banks should hold sufficient capital to absorb losses of a scale experienced in the past financial crisis.

Mr Ruffley : Without attributing any preference on your part or the GovernmentÕs part to the possible solutions for the "too big to fail" problem, could you just trot through the top five possible solutions to the problem I have outlined?

Mark Hoban: You can have global capital surcharges on SIFIs, which is one way of doing it; you could go through subsidiarisation; you could have a split between retail and wholesale banking; or you could decide to do what Paul Volcker suggested, which was split off proprietary trading, which is a variation on the theme of Glass-Steagall. I think I have got to four at that point.

Mr Ruffley : That will do; four out of five isnÕt bad.

Q1101 Chair: Living wills.

Mark Hoban: Living wills. I am not sure that living wills are necessarily a response to Mr RuffleyÕs question, but they are an important tool to be used.

Mr Ruffley : I asked that for one reason. We are not going to press you on which is the favourite there, but I am just wondering. Whichever of those options or combination of those options the Government comes up with after this very welcome and very laudable investigation and work, what levers, what ability to enforce any of those options or mixes of options, does the Government have?

Mark Hoban: There is a range of options. So, for example, one of the debates that we will have perhaps later in this year at a European level is about capital surcharges for global SIFIs, for example, so there will be legislative option through CRD4. There will be routes like that that will create legislative options. Some of them could be through a legal change. So I think a range of implementation measures-and it will be split, I suspect, between ourselves and the regulator depending on the nature of those rules.

We havenÕt looked at how you would implement these at this stage. In a way itÕs a question that hasnÕt arisen yet because we are awaiting Sir JohnÕs recommendations. He might propose that there isnÕt a route or this is the best legislative or regulatory route to achieve a particular outcome.

Mr Ruffley : Subsidiarisation. Would that be something the banks would have to agree to, or could that be forced through by regulatory or legislative change?

Mark Hoban: It is not something I have looked at in any detail, so I donÕt want to give an outcome, but I am sure there are a range of routes where this could be used.

Mr Ruffley : I ask that because there is public disquiet, I think, about banking generally. There is this huge implicit subsidy, as the Bank of England has calculated, given by the British taxpayer to the big British banks. It is £100 billion a year in 2009 and £50 billion in 2008-Bank of England estimates, not some para-Marxist outfit making all this up.

I think the British taxpayer would want any reform of the banking system to be delivered with despatch and effectively, and I am just trying to understand whether any of the menu of options that you have outlined today-and we are all familiar with them-are all things that could be imposed by a Government on behalf of, frankly, the British people who do want change in this area, and to what extent the banks would have to come willingly and agree. Is that something you are concerned about?

Mark Hoban: Clearly, we need to find workable solutions to some of these issues, and we have also got to think about the practical implications. I think the other point I would make is that we need to balance off the costs and benefits of these measures as well and clearly think not only about the cost to the taxpayer potentially of implicit guarantees or what economic benefits or otherwise would emerge from these reforms. I think there are a range of factors we need to bear in mind in responding to Sir JohnÕs recommendations.