UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 606-viii

HOUSE OF COMMONS

HOUSE OF LORDS

ORAL EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKING STANDARDS

BANKING STANDARDS

MONDAY 5 NOVEMBER 2012

ANA BOTÍN, DOUGLAS FLINT and ANTONY JENKINS

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Joint Committee

on Monday 5 November 2012

Members present:

Mr Andrew Tyrie (Chair)

The Lord Bishop of Durham

Mark Garnier

Baroness Kramer

Lord Lawson of Blaby

Mr Andrew Love

Mr Pat McFadden

Lord McFall of Alcuith

John Thurso

Lord Turnbull

Examination of Witnesses

Witnesses: Ana Botín, Chief Executive Officer, Santander UK, Douglas Flint, Chairman, HSBC, and Antony Jenkins, Chief Executive Officer, Barclays, gave evidence.

Q449 Chair: Thank you very much for coming in to see us this afternoon. Hopefully this will be a bit less incendiary than some of the sessions that we have had with bankers, even though it is 5 November. We are only going to be concentrating here on the Vickers review and the Government’s proposals to put it into legislative shape, and looking at standards only with respect to structural aspects, not the wider aspects of the commission’s work.

Can I begin with you, Mr Flint? I want to establish what the common ground is between us and you individually, and collectively as banks. Do you accept, for example, Paul Volcker’s claim that trading culture infected the rest of the banks?

Douglas Flint: I think there is some evidence of that, but I think it is broader than that. Rather than trading culture, I think elements of the structuring of products that were a core part of investment banking activities became progressively, through the 2000s, part of retail banking where products were increasingly structured and engineered to satisfy customer needs. While in the wholesale segment both sides to the bargain were ostensibly equal in terms of professional investors, the products in retail that were engineered-in most cases, I believe, with good intentions-probably were then distributed more widely, or without sufficient segmentation, into the broader market. So, yes, to answer your question simply.

Q450 Chair: Does anybody disagree with that view?

Antony Jenkins: I would only amplify it to say that I think a culture of short-termism pervaded the industry, whether it was on the institutional or retail side. I believe that on the retail side in particular, as I have discussed in other fora, the banks lost sight of the importance of serving customers.

Q451 Chair: Do you think that the joining together, or the growth of trading alongside more traditional relationship banking, infected relationship banking for the worse? Has it had something to do with the increasingly transactional relationship between banks and retail customers?

Antony Jenkins: I think the situation is slightly more complex, if I might build on my last point. This is all about culture, how organisations are led and the priorities that are set for organisations. Where those priorities are essentially focused on short-term profitability, you tend to end up with the sort of situations that my colleague, Mr Flint, referred to in retail banking. It was more to do with a culture that affected institutions, as opposed to one part of the institution infecting another part.

Q452 Chair: Do any of you disagree with Martin Taylor’s view that a ring fence would make a big contribution to improving standards?

Douglas Flint: We have to be careful that we do not overstate the benefits. We support the ring fence-don’t get me wrong-but I think the real benefit of the ring fence is that it will aid clarity within institutions and between the industry and the public in terms of better defining the roles of all the individual parts that are today in universal banks, so the separation will actually give greater clarity as to what individual parts of the bank are doing. I am not sure if physical separation in and of itself changes the way that people behave. If it were that simple, it would be a godsend.

Q453 Chair: What about the related argument that the universal banking structure reinforced an implicit guarantee, which in turn led more bankers to take risky leveraged bets, often for their own personal gain?

Douglas Flint: I would take a step back from that and say that the implicit guarantee certainly encouraged those who funded banks on the wholesale side to believe that they were taking less risk than the unsecured nature of their lending represented, and because they were prepared to lend to a greater extent and on finer terms than they might otherwise done, that fund of cheaper money gave a pool of resource to bankers to make money from. The first step is that it was not the bankers who had an implicit guarantee; those who lent to the banks perceived that they had an implicit guarantee.

Q454 Chair: But that would still have had a similar behavioural effect.

Douglas Flint: It certainly meant that the leverage of the balance sheets seemed to grow without constraint. I guess that encouraged people to believe that it could continue to grow without constraint. There was a dramatic explosion in the leverage of bank balance sheets through the five or six years from the turn of the century.

Q455 Chair: Have you heard anything with which you disagree so far, Ms Botín? Or is there anything you want to add?

Ana Botín: No, I agree with most of what has been said. I would just like to reinforce the point that I believe that having different subsidiaries helps to have a different culture. Retail commercial banking and investment banking have very different types of culture. We as a group ring-fence geographical subsidiaries, and have operated in this way for quite a long time-approximately 15 years. In our case, it is not the same, because we are mostly retail commercial banking, but the cultural issue is helped by subsidiarisation.

Q456 Lord Lawson of Blaby: When I was a non-executive of Barclays in the 1990s, I recall that initially the culture of the two parts was very different: the investment bankers had contempt for the fuddy-duddies in the retail bank and the retail bank thought the investment bankers grossly overpaid. Over the years, understandably, that difference diminished. It seems to me that that is natural, so the question I ask is, is it really possibly to have not merely two different cultures, but two diametrically opposed cultures-because that is what they are-within a single organisation?

Antony Jenkins: From my point of view, we have to recognise that different types of banking operate in different ways and have different cultural aspects, too. But I also believe that it is possible to establish a core set of values or principles at the heart of any organisation, including a universal bank, which demonstrates the right sort of behaviours that we expect from our colleagues and employees. Specifically, that requires us to put the customer and client at the heart of what we do; it requires us to have an eye to the impact of our actions on broader society; and it requires us to serve our shareholders. The manifestations of those behaviours may operate differently if you are in a branch or on a trading floor, but at its core, there can be a set of principles that underpin the organisation. That is what we are working to put in place at Barclays.

Q457 Mark Garnier: Antony Jenkins, you have been at Barclays since 1983, I believe, on the retail side. How have you seen the culture change over the past 30 years or so?

Antony Jenkins: I was in Barclays from 1983 to 1989, and again from 2006 to the present day, so I have seen those two periods. In that 30-year span-in the middle, I was mostly in the United States-a lot of change happened to the industry: deregulation, the globalisation of the industry, and the growth of technology, which empowered many of those trends. Particularly in the period post the turn of the century-as I have said before-we saw an increasing focus on short-termism, on short-term profitability, on leverage inside organisations, and on very low levels of capital liquidity. That contributed, along with many other factors, to the issues and the crisis of 2008. What has been important to take away from that crisis is that we need a much safer and sounder banking system, but we need a banking system that also has capacity to support the economies where we do business. We need to strike that balance and modulation appropriately. That, of course, is a big responsibility on the industry itself, in partnership with our regulators and others: we have to get that balance exactly right and move the industry back to a focus on more sustainability. That is not just short-term profitability but the creation of shareholder value through sustainability in a way that is seen to be socially useful.

I believe that banks have a responsibility to be socially useful, as they sit at the heart of economies in a way that other industries-important though they are-do not. Without a vibrant banking system you cannot have a vibrant economy, and without a vibrant economy you cannot have a vibrant society.

I think that there have been a lot of changes in that 30-year period, to answer your question specifically, but I think that there is also a lot of learning that we need to take away from it. A lot of actions have been taken already, but there are more to come.

Q458 Mark Garnier: You talk a lot about regulation being part of this. Do you think that it is entirely down to regulation?

Antony Jenkins: No. I think I said that a lot of parties contributed to the 2008 situation. I think there is an onus on the institutions themselves to manage themselves in the way that I described.

Q459 Mark Garnier: So, corporate governance. Over the course of our deliberations, one of the things that has come up is that there is an ethos where people work at a bank rather than for a bank. You tend to have teams, certainly on the wholesale banking side, of people moving between banks simply looking for the best opportunity and best return in what they see as their own franchise business within a big organisation.

I am trying to get to the bottom of how much you think that this fundamental culture has changed-people no longer see themselves as working for an institution for which they feel pride, but merely see themselves as franchise businesses. You are particularly interesting because you have been on the retail side but now run the whole thing, so you have to look at both sides. I am particularly interested in hearing your views on this.

Antony Jenkins: The truth of the matter is that of the 140,000 people we have at Barclays, the vast majority see themselves as working for Barclays. They are proud of working for Barclays and they see themselves as contributing to something that is bigger than themselves and their day-to-day work.

It is true to say that particularly in the years of heavy growth in investment banking-that was 2005-07 and up to early ’08-there was an element of what you described. Teams were bought away, particularly by new entrants to the industry. That trend has largely abated because of the state and nature of the global economy and the nature of the investment banking industry, but I would say that the vast majority of people at Barclays want to belong to something that is bigger than just a pay cheque.

Q460 Mark Garnier: You say that it is due to the nature of the global economy that things have changed slightly, but what happens when it changes back? We are going to have another boom at some point in the future, so do you think that the culture will go back to being unsavoury?

Antony Jenkins: It is all about how organisations are led, going forward. Of course, part of it is to do with regulation, as we talked about before, but it is also about leadership and the priorities that the leadership sets inside these organisations.

Q461 Mark Garnier: Douglas Flint, you were shaking your head there.

Douglas Flint: I think that this is a generational change-hopefully beyond that. Those who have lived though the last five years have a legacy of experience that they will lay down for 20, 30 or, hopefully, 40 years to come. So long as those with experience of that are around, I do not think the industry will ever want to go back to the way it was. Indeed, I think that regulation has expunged from the industry some of the arbitrage opportunities that drove some of the worst behaviours.

Q462 Mark Garnier: What have you done to encourage a better culture within your organisation?

Douglas Flint: Two years ago, we launched a programme to reinforce values. One of the challenges we all have is that if we look at what we believed we represented, and what we taught, there was nothing particularly flawed in it, but when one looked at behaviours, one could see that not everyone was embracing it in the way they should.

Two years ago-which happened to be upon the change of management-we sat down, thought about what we wanted to do and what our most important priorities should be, and put in place a values programme, which was, effectively, to put everybody in the front, from the top to the bottom, through a series of personal ethics and behavioural values training to reinforce the behaviours that we expect. Indeed, going back to a point you made earlier, because of the particular shape of our wholesale activities, I think we have always been relatively fortunate in having people who have seen it as a career rather than an opportunity to spend three or four years and then go somewhere else. Most of our people have been there for some considerable period of time.

Q463 Mark Garnier: I will come to that in a minute. You very helpfully sent us your chart-HSBC’s values and business principles behavioural guide. I remember back in the good old days when I was working for a big investment bank, and to be honest, if someone had presented me with that, I would have looked at it, converted it into a paper dart, chucked it across the dealing room and got on with trying to generate some business to get a good bonus. I am not, of course, suggesting for a moment that I did not have high ethics myself, but my point is important. Trying to instil this in people through just a complex bit of flow chart is not a particularly easy way of doing it, is it?

Douglas Flint: I think it is quite effective because, effectively, what we then did was put in place two filters. There is a behavioural values filter that people are judged on, on a 360° basis. Unless they pass that filter, they are not considered for any other reward. There are two elements to performance appraisal. One is values: you do not get to level 2, which is whether you get promoted and how much you get paid, unless you pass that filter. It is really important and it is 360°, so above, beside and below you. If your peers do not think you are playing to the values, you will not get paid.

Q464 Mark Garnier: Who is policing those values? Who are the people looking to ensure that you do pass through the filters?

Douglas Flint: First of all, everyone around you, above you and below you.

Q465 Mark Garnier: So you are appraising your colleagues.

Douglas Flint: Or not. And then it is reinforced by the group management board and the HR function. It is effective.

Q466 Mark Garnier: But people could game it, couldn’t they?

Douglas Flint: No. Maybe people will try but I think the evidence is that people have left the firm because they have not embraced the values. That is public and visible, and it has impact.

Q467 Mark Garnier: You said earlier that people worked for you for a long time. What is the profile of your typical employee? When do they join? What training do they get? How long do they last? Not necessarily a typical employee- the ideal employee.

Douglas Flint: We always say that the top 30 people in the firm have been in for between 800 and 1,000 years between them. Most of the people in the senior ranks have been there for 20 to 35 years. People in the old Hong Kong and Shanghai Bank joined at 23 and left at 53; they did three tours of 10 years. Nowadays, people stay a little bit longer than 53 and probably join a little bit later than 23. People join in their 20s. Typically now, if they make a career move, they do so in their 40s, or they stay there until they retire. I sign lots of certificates for people who have done more than 30 years in the bank.

Q468 Mark Garnier: That brings me pretty well to my next question on the correlation between high standards and the number of people who get 25 years long service watches. You are saying that you get a lot of people who stay for a long time.

Douglas Flint: Absolutely, and they are the best employees.

Q469 Mark Garnier: Do you move them within the culture? Do they stay within one part of the organisation?

Douglas Flint: Typically, yes.

Q470 Mark Garnier: So there would not necessarily be any cross-pollination of excellence within the institution. You just leave them in one area.

Douglas Flint: Nowadays, people are more and more specialist, so cross-pollination later on in your career gets more difficult. People cross-pollinate geographically; the high-flyers certainly do. There is movement between the businesses, but less once they get senior, because they become very specialist at one particular thing.

Q471 Mark Garnier: Can you define a high-flyer? A high-flyer is usually somebody who is quite good performing either in generating commission income or selling lots of loans, or whatever it happens to be, but it doesn’t necessarily mean that a high-flyer on that basis is a good manager.

Douglas Flint: No, the high-flyers in our organisations are good managers. They have to be good with people because they are running hundreds, then thousands, and then tens of thousands of people. The attributes we are looking for in later career are their ability to run a complex matrix of control functions, service delivery, revenue generation, compliance and legal; and keep the whole thing together.

Q472 Mr McFadden: I would like to ask you all a few questions about the implementation of the Vickers proposals and the draft Government Bill. To begin with, I’d like to ask Ms Botín about the representations that you have made as a bank about this. We know there have been a lot of discussions between all the major banks and the Government as things have gone on. What are the two or three key things that you have been saying to the Government that you want to influence or that you are worried about, or are the changes you want? Can you give us some shape of that?

Ana Botín: First of all, we are very supportive of the overall principles, both of Vickers and the proposed Vickers implementation through the Government’s White Paper. We are absolutely supportive of the principle that banks should be more resilient, that no bank should be too big to fail and that taxpayers should not pay the cost when banks have problems. We are also very supportive of the competition side and allowing customers to have choice and, of course, the role that banks have in supporting economic growth. Having said that, we believe that this is a major change and a major structural change for the industry. Therefore we are very supportive of the White Paper proposal that implementation should have some flexibility around the shape of the ring fence. We believe this is very important for several reasons. First, because it is profound change and it is hard for any of us to predict exactly what our customers will decide and where they will decide to bank, so it is important that there is some flexibility in that. Going back to customer choice, there are three types-Mr Volcker referred to that in his testimony, which was very interesting; it is very important that all bank customers have access to payment services, to deposit services and to general banking advisory needs. That is where we think flexibility is important. Again, the core principles as proposed have to be very clear and in primary legislation. However, we believe that this flexibility should be left in the hands of the regulator to implement.

Q473 Mr McFadden: So in simple terms, are you saying you are happy with the Bill as it stands or are you still pushing for change in any area?

Ana Botín: There is one specific area in terms of where the ring fence should be drawn that we consider important. Ninety-nine per cent of Santander UK’s balance sheet-our customer assets-are UK individuals, families and small businesses. We are bringing competition especially on the current account and SME side of our business. Our aspiration is to become the SME bank of choice. As we think about small companies, we believe that certain products and lending interest rate management and foreign exchange management-simple products; we are not proposing that complex products should be within the ring fence-are very important to service our customers from the retail ring-fenced bank.

Q474 Mr McFadden: We have been asked specifically to consider that point, as you may know. Mr Flint, could I ask you the same thing? What are the key areas that you have been stressing to the Government in your discussions about all this?

Douglas Flint: I guess three or four. I would echo what Ms Botín said about the flexibility of the ring fence. We were pleased to see the independent commission basically say that some things have to be in and some things have to be out and for the rest there is flexibility. We support that. I think it makes it more workable. We were very concerned about distinguishing between business models that were largely through subsidiarised foreign entities and those that were branch based because we think the resolution models for the two distinctive types of international structure are different. That was reflected. In particular, we were concerned to ensure that the Treasury took sufficient account of the extension of its responsibilities to overseas entities, particularly when those entities were separately capitalised and separately regulated and therefore we did not believe that the Treasury should extend its cloak of accountability to overseas operations like that. The draft Bill, with appropriate caveats, set that out.

We were concerned to say that we should be careful about the extent to which we want to make the rules within the Bill extraterritorial outside Europe. In other words, do we want it to apply to the European operations of institutions based here or do we want them to apply to the global operations of institutions who happen to be headquartered here because again that has a differential impact? I guess the final two major points were talking about whether there was capacity to deliver some of the proposals in terms of bail-in capacity. It was not a question of saying "We don’t agree", it was a question of saying, "Be careful to calibrate appropriately whether there is the capacity to do all the things that were in some of the ICB proposals and at the end of the day you have a banking sector that is investable", because in my judgment the most important form of capital to absorb losses and restore an institution to full functioning again is its own internal capital generation. If there is internal capital generation-even if it is exhausted-and if the model is sustainable, outside investors will recapitalise the institution without it having to ever address the possibility of whether it would get public support.

As a final detailed point-I know this has been grappled with hugely by those drafting the Bill-the complexity of pension-scheme funding when you split an institution in two between the ring-fenced bank and the non-ring-fenced bank, and indeed timing push out that has been accommodated from the joint and several liability, adds a complexity that is not yet fully understood.

Q475 Mr McFadden: You have had a lobbying success then, have you not? They are even referring to it as the "HSBC carve out" in terms of the treatment of capital in your overseas subsidiaries.

Douglas Flint: I should think that is a UK success. I would say that we were responding to consultation, but we were saying that the way that the ICB proposals were drafted could have led foreign depositors to believe that they had a line of access to HM Treasury, because they were within a group that was headquartered within the UK. We explicitly did not believe that that was the intent of the original guidance to the ICB, which was to protect in all circumstances the UK taxpayer from having to bail out banks. It seemed to us that extending that even tangentially or contingently to foreign operations was going beyond the scope that Parliament wanted the ICB to find a way to avoid.

Q476 Mr McFadden: But it does mean that your capital abroad would have to be made available in the event of a resolution scenario, does it not?

Douglas Flint: No, some of the comments reported were somewhat curiously stated. Our overseas subsidiaries are separately regulated and therefore the capital that they have there-to the extent that it is needed in foreign operations-is not available to any other part of the group unless it is excess, so the capital in all the overseas subsidiaries is protected by the regulators in those countries. It is not available elsewhere.

Q477 Mr McFadden: It is not available.

Douglas Flint: Save for the holding company selling the subsidiary, but you could not decapitalise one subsidiary beyond its regulatory minimum and send the capital somewhere else. Absolutely not.

Q478 Mr McFadden: Mr Jenkins, what has your bank been lobbying on in terms of the Bill?

Antony Jenkins: First, we support the concept of the ring fence. As with all regulatory change, it is easier for us when there is certainty, so we welcome the progress that the legislation is making. Of course, the proposals do not exist in a vacuum, so much of the discussion in Europe, for example, on Liikanen has the ability to impact this. For us as industry participants, the greater certainty there is, the better. That is not a request for anything other than we have to work the process actively.

Secondly, flexibility is very important. We broadly support the definition of the ring fence, as outlined. We believe that it picks up the vast majority of both individuals and businesses that would want to be protected by the ring fence. We also believe that it should be possible for the non-ring-fenced entity to provide funding to the ring-fenced entity. That is an important element of flexibility. We do not see why that should not be allowed. We think it is actually a positive in providing another source of funding for the ring fence.

Those would be the sorts of things that we would think about.

Q479 Mr McFadden: As the Bill is structured, it is largely an enabling Bill with a lot of the detail to be left either for regulators or for secondary legislation. You all say that you want certainty and clarity. Were you surprised when you saw the Bill? Did you expect more detail? Are you quite content about the pace at which information is coming out?

Antony Jenkins: The topic is inherently complex and significant, as Ms Botín has said. I believe that the faster we can move to certainty, the better we would be served, recognising the complexity.

Q480 Mr McFadden: Do you think implementation should be brought forward from the 2019 date? Would that be helpful for banks?

Antony Jenkins: I think it would certainly be impossible to bring it forward without greater certainty. A process that runs through to 2015 would give us four years to effect implementation. It may well take that long because it requires significant corporate restructuring. The sooner that we conclude the process to get to definitive regulation, the sooner we can begin the process of implementation. It may be that there are some steps we can take ahead of complete certainty. We are looking at that at Barclays.

Q481 Mr McFadden: But your written evidence said: "Barclays believes the importance of these reforms…demands faster implementation."

Antony Jenkins: What I am saying is that we have to go through the process to get to the regulation before we can do the implementation.

Q482 Mr McFadden: Sure. But you are calling for implementation before 2019.

Antony Jenkins: We would like the option of that, yes.

Q483 Mr McFadden: Do you have a view on timetabling?

Douglas Flint: The sooner we can get these things done, the better, but there is a long lead time. If we are not going to have the detailed legislation and the rules around the legislation until 2015, it is pretty unlikely we will be much before 2019. The sooner we can get final rules, the better able we are to begin to implement them, but we will then go as fast as we can. One of the challenges to that will be the extent to which there are extraterritorial aspects of what happens in America and whether the proposals that finally emerge from Liikanen are consistent.

Q484 Mr McFadden: Ms Botín, what is your view? This crisis started in 2007-08 and here we are five years on, talking about legislation that will be implemented in 2019. Is there not a point at which banks want to know what the rules are?

Ana Botín: As we go through this, it is important for us all to remember-this is considered in the White Paper and the proposed legislation-that the key in getting the banking system to work properly again is to find the right balance. We need to find the right balance between the prudential side, which is about making banks more resilient and increasing competition and choice for customers, and the growth and responsibility to fund businesses. That ultimately depends on our ability to raise capital. As Mr Flint was saying, we need a sustainable business model. We need to bear those three things in mind any time we write any part of the law. It is easy to have a banking system that is very resilient, but then we are not doing the right thing for the economy.

I believe that banking, regulation and the environment in which we work-the social and the economic-have fundamentally changed over the last five years. Santander UK went through a crisis, acquiring two failing banks. We had 6% core capital at the beginning of the crisis and today we have 13% core capital. We are, I think, better capitalised than all the large banks in the UK. That does not mean that we could not run our business with, maybe not 6%, but 9% or 10%. I have said that publicly. That is only an example. We need to get a balance between growth-

Q485 Mr McFadden: What about a date? I am trying to press you on a date of implementation.

Ana Botín: What I am saying is that we have undergone a lot of change and we are undergoing even more change, as per the proposed Bill, which is a major structural reform. For us to implement that in the right way and get the balance right, I do not believe that we can do it faster. Clarity as to how we are going to do it will allow us to plan ahead and make the changes in the best possible way, thinking about what we are supposed to be doing, which is helping our customers get a mortgage or fund a business. We need clarity, but we also need time. We are supportive of the implementation timetable, because we do not believe that it can be done faster. Again, it is not a question of doing it fast; it is a question of getting it right and getting it right on all three fronts.

Q486 Chair: Mr Jenkins, are you confident that an acceleration of the timetable will not interfere with efforts to restore an organisation of lending into the retail and small business sector, by tightening the overall conditions of lending because you have to put more by to protect yourself?

Antony Jenkins: I do not see why the implementation of the ring fence should affect, from first principles, the lending capacity of the institution. This institution, Barclays-

Q487 Chair: Well, your earlier evidence suggested that it would.

Antony Jenkins: No, I don’t believe that-

Q488 Chair: Your original evidence suggested that a ring fence would risk impairing recovery. This is right at the start of the Vickers proposals.

Antony Jenkins: My personal view is that we can accommodate the ring fence without affecting our capacity to lend. I would say that Barclays has, throughout the crisis, been one of the largest lenders to the economy, and continues to support small businesses, large businesses, consumers, mortgages and so on. It will continue to do that.

Q489 Lord Turnbull: I want to turn to the governance of the ring-fenced bank. The ICB set out two basic requirements: one is that there should be a majority of independent directors, and the other is that those directors had a duty to sustain the integrity of the ring fence.

Each of you answered our questionnaire-thank you for that. On question 17, I detect a slight difference of view. Santander says, "We do not believe that there should be prescriptive rules about the composition of boards." On the other hand, the response given states "There are a variety of mechanisms available to regulators, and so do not need overly prescriptive rules on board membership." Barclays seem to share that view and Volcker’s concerns that you cannot really have an independent bank. The key subsidiary of the bank that is independent within a group, and hence independent, should focus on ensuring it separately meets its regulatory requirements. The two of you seem to put more emphasis on its duty than on the composition of the board. HSBC recognise the need for a degree of independence. You state that you have already appointed the independent director, but then you caution that an additional duty to maintain the integrity of the ring fence makes the role increasingly complicated, so there is a slight difference there.

Can I start with you, Ms Botín? You operate one of these subsidiaries. Indeed, you have a chairman who is a member of the House of Lords-he is well known to us. Do you really think it is necessary to make major changes to the kinds of boards that you are operating, presumably all round the world, provided you rely on the second assurance about maintaining the integrity of the ring fence?

Ana Botín: Yes, we do operate a subsidiary model on a geographic basis-so not by business-in the major markets, and we have listed subsidiaries. I run one of those subsidiaries, which is still not listed. We strongly believe that with clear principles, with robust governance and with effective regulatory supervision, these subsidiaries can work independently-I would say autonomously-from the parent company and from other companies in the group. In our case, we have subsidiaries that are independent in the way they fund themselves, the way capital is assigned and in corporate governance, as you mentioned. We have experience in the UK, among other markets, where we take that one step further. We have formal agreements, like we had with the FSA in the UK, so they actually monitor and effectively supervise those firewalls. We have agreements in place that restrict the kind of inter-company business we can do. We believe the regulator in the UK has the capacity and the skills to do this effectively.

Q490 Lord Turnbull: So you do not think it is necessary to say to some of your directors who have other roles in the group that they should give them up, or that different people should be appointed?

Ana Botín: We believe that as long as there is a clear mandate and clear principle for the local subsidiary-again, we have many years of experience in running this kind of structure-it does work, and even more so where we have a regulator that has the experience and the skills to monitor this. We actually think it has benefits because we get benefits from the wider group but without compromising the mandate that our first accountability is to the UK bank.

Q491 Lord Turnbull: Mr Jenkins, how independent does a ring-fenced UK subsidiary need to be, and how far do you rely on the duty to maintain the integrity of the ring fence?

Antony Jenkins: We have run a number of subsidiary banks around the world-not in this country, but in other parts of the world where we have, in some cases, publicly quoted banks in which we are the majority shareholder-and in those cases we do have independent boards where the majority of directors are non-executive directors and independent of the institution, so clearly it is possible to run such a model. I think it is going to be a challenge, as a practical matter, to find people of the right calibre to man these boards, but I think that will be dealt with. I believe it is possible to craft a charter of responsibilities for the board of the ring-fenced entity that is very specific with regard to its governance responsibilities.

Of course, the ring-fenced entity will be a subsidiary of the parent, and therefore the interests of the shareholder company will have to be taken into account and balanced against the interests of protecting the integrity of the ring fence, but it seems to me that that is an achievable challenge.

Q492 Lord Turnbull: Mr Flint, do you see a problem here, or have I misrepresented your slightly different-

Douglas Flint: No, we run a subsidiary structure. All of our major banks have fully independent boards with a substantial majority of non-executive directors. We would have a non-executive board, but a chairman for most of the banks from within the group. We have gone one stage further for the UK-the UK chairman is now a fully independent non-executive director.

Q493 Lord Turnbull: But you have not gone as far as having a majority of independent-

Douglas Flint: Yes. They are all majority non-executives. We have 120 non-executives throughout all our subsidiaries. The point I am making-just to question mark it-is to be careful to define the integrity of the ring fence. What we should not do is make it more difficult for the ring-fenced subsidiary to do business with any other part of the HSBC group than it would be for it to do business with Santander or Barclays. It should treat the rest of the group on third party, arm’s length terms, with no more or less constraint than it would have to exercise with a third party.

Q494 Lord Turnbull: In the Barclays submission, you point out that in some ways it would be a good thing if the non-ring-fenced bank could make capital available to the ring-fenced bank, particularly in a resolution situation. Do you envisage that that might not be permitted in the plans as they are?

Antony Jenkins: It is unclear, so it is one of those areas where we would seek clarity. If the essence of the challenge is to protect the ring-fenced entity under all circumstances, were the ring-fenced entity to be in difficulty, it would seem logical for the parent to support it, and we would not want that to be precluded from any legislation or regulation.

Q495 Lord Turnbull: Is there a problem, though? If money can be put into the ring-fenced bank, it is the non-ring-fenced-bank that gets into difficulty and is then trying to pull money back. Is that where the problem lies?

Antony Jenkins: That then does compromise the ring fence. That is where there has to be clarity about what can come out of the ring fence and under what circumstances. It would be important, for example, for the ring-fenced entity to be able to, under some circumstances, upstream dividends, for example, to the parent company, but that would have to be once the capital regime and other requirements of the ring-fenced entity were passed and maintained.

Q496 Lord Turnbull: You pointed out that the ring-fenced bank cannot own a non-ring-fenced bank, but the opposite could be the case. Should that be allowed or not allowed?

Antony Jenkins: That a non-ring-fenced bank can own a ring-fenced bank?

Q497 Lord Turnbull: Yes. Could that be desirable, as opposed to the group or both of them being subsidiaries of the group as the alternative?

Antony Jenkins: Yes. I think that is almost certainly going to be a requirement.

Q498 Lord Turnbull: Finally, I am struck by the degree to which all three of you in a sense have come to terms with the ring-fence melee. Have you been converted by the arguments of the ICB, or do you still believe that it is not really necessary if you had the right capital ratios. In other words, you do not really need this, but you can see reality on the ground and have decided to stop campaigning against it and get on and make it happen.

Douglas Flint: Do you want to go first on that?

Ana Botín: I’ll go second.

Douglas Flint: You have got Volcker, Vickers, and Liikanen. They are all trying to do the same thing. Some are trying to say there are bits that we really want to protect. Others are saying there are bits that we do not want to leach into the rest of the institution, but essentially, it comes to the same thing. There are bits that we like-that all the models like-to give preference to, as opposed to other things.

There are varieties of ways of doing structural reform, and I do not think any of them are 100% flawed. Who knows which is better? Maybe time will tell, if we end up seeing them all in operation. You could easily make a case that a structural reform is not necessary around all the capital, liquidity, governance, regulation, central counterparty and so on, and that reforms are being done. That would leave the industry to self-determine what it would look like in the future, and I think we have lost the right to self-determination. The fact that ring-fencing is going to give greater clarity to the business models inside two pieces of the bank in a way that Parliament, in this case, or the European Commission, in Liikanen, decides is appropriate, gives the transparency that Parliament is looking for and makes the industry justify what it is actually doing, and I think we need to fit into that. It is a perfectly legitimate model. It doesn’t really matter whether any of us think it would be our optimal choice. We have lost the right to determine ourselves what we think the optimal choice is. We can work with this, and I think the transparency will be good.

Q499 Lord Lawson of Blaby: If you go for a ring fence-let us leave complete separation to one side, because obviously that is a very clear-cut option that has some advantages and some disadvantages-there are various different possibilities. One is that there is a Liikanen-a sort of holding company-which owns both what Vickers would term a ring-fenced bank and a non-ring-fenced bank. Then there is the option in which one would own the other, and that could go either way. What would your preference be, of those various options, and why?

Douglas Flint: I think that there is going to be more clarity with a holding company owning two sisters.

Q500 Lord Lawson of Blaby: Do you all agree?

Ana Botín: One of the key objectives, I believe, as we implement the proposed reforms is that we leave some space for different business models. I don’t see why it always has to be a holding company with two sisters. It depends on the weight that the non-ring-fenced bank has in the business. For example, in the case of the Santander group model, most of our business would be within the retail ring-fenced bank. It is actually more complicated-I know that this is maybe not intuitive-to salami-slice a small piece of the business because that could fundamentally change our business model as we service small companies, as we said in our evidence. We need to consider space to accommodate different business models, which are very positive for the economy.

Antony Jenkins: I would agree with that sentiment. From our point of view, we believe that it would be more practical for us to go with the parent/daughter model.

Q501 Lord Lawson of Blaby: With what?

Antony Jenkins: With the second model that you articulated, as opposed to the two parallel entities. We think that would be a practical place for us to start implementing the ring fence. It does not preclude moving to a different model over time, but the key here is flexibility. As long as we maintain the integrity of the ring fence and achieve the objective of protecting the interests of those within it, that is the most important thing.

Q502 Lord Turnbull: I have one other question. In the two European models, the ICB and Liikanen, the totality of what banks do at the moment come in one part or the other. The Volcker system is distinctively different. There is a view that there is some part of this that should not be with either, or in the same thing as deposits. Do you believe that there is any part of your current activities which these banking groups ought not to hold at all, as is being enacted in America?

Antony Jenkins: We at Barclays broadly agree with the so-called Volcker rule on proprietary trading. We don’t think that that does makes sense for a large, universal bank.

Q503 Lord Turnbull: Do you think you can define what is proprietary trading?

Antony Jenkins: That is a technical complexity, but I think it is pretty clear when an institution is trading-

Q504 Chair: Sorry, can you speak up? I just didn’t hear what you said.

Antony Jenkins: I am sorry. That is a technical complexity, but I think that when an institution is trading for its own book as opposed to market making that is pretty obvious.

Q505 Lord Turnbull: Mr Flint, do you agree that, first, you can make this distinction and, secondly, that kind of trading ought to be outside the bounds of the group?

Douglas Flint: Yes, I absolutely agree that if there are activities that are not societally valuable and not something that should be done within an institution that accepts deposits or is related to one, then it shouldn’t be done at all rather than stuck in a separate piece. So, again, I have no difficulty with what Volcker says. I think there are huge definitional problems and I think there are huge communication challenges, because even though we might be able to very keenly distinguish between market making and proprietary trading, I am not sure the public would understand when an institution has seen a significant profit or loss accrue from activities-

Q506 Lord Turnbull: Effectively, we have a three-box model, not a two-box model-

Douglas Flint: Yes.

Q507 Lord Turnbull: So it is ring-fenced, non-ring-fenced in the group and then there is another box, which is neither?

Douglas Flint: Possibly.

Q508 Chair: Well, you’re saying, "Yes."

Douglas Flint: Yes to what?

Q509 Chair: Three-box model.

Douglas Flint: There is a risk in Liikanen, although it’s not yet fully developed, that you could end up with a three-box model, because you could end up with a narrow ring-fenced bank under Vickers, and then the residue having too much trading book to contain other activities, so you would end up having to separate that non-ring-fenced entity into two and you would end up with three banks. I think at that point you would put the rest back into the ring-fenced bank, but it is conceivable-I do not think anyone would attempt it-that you could end up with three boxes, yes.

Q510 John Thurso: Can I follow up a little bit more on this question that we’ve started on of the location of the ring fence? First of all, on the legislation, the current draft Bill pretty much leaves everything to secondary legislation. Can I quickly ask each of you if you think there is anything that ought to be in primary legislation that is not in there?

Ana Botín: The short answer is no.

Q511 John Thurso: So you are happy that everything be left to Ministers and the Treasury?

Ana Botín: I think that the core principles are very clearly stated and as long as that is the case, which it should be in the primary legislation.

Q512 John Thurso: That is an interesting point, because they are clearly stated in a White Paper but not necessarily in the legislation. So what you are really saying is, "Make sure and get the key principles set out properly in the legislation", and then you trust the secondary legislation?

Ana Botín: Absolutely, yes.

Q513 John Thurso: Can I come now to the detail of where the ring fence might be? Miss Botín, in your written evidence you stated quite clearly that simple derivatives should be within the ring fence, as something that should be sold. I think that was a position that both the other banks took as well. Can I ask you why?

Ana Botín: We believe the primary guidance, in terms of what is within the retail ring fence, should be what our customers need from banks, in terms of our servicing their financial needs through their life cycle, whether they are individuals, families or businesses. Having simple derivatives, which refers to simple interest rate and foreign exchange derivatives, we believe are important for the retail ring-fenced bank to have, as opposed to the non-ring-fenced bank, even within the same group, the reason being that small companies that have between £500,000 and £10 million in revenues in the UK today are a total of approximately 290,000. There are even companies below that that are actually using these kinds of simple interest rate and foreign exchange products. The UK exports to approximately 150 countries in the world and there is more and more activity even within the small companies.

So, having access through their normal relationship banker, which is what the retail ring-fenced bank will have, is important. It is probably likely that the bigger ring-fenced bank, or the big London bank that offers these products, will not offer them and, if they do, they will not be through a relationship banker. It will be more a transaction-based approach, where you go and buy the product from some other bank or from the non-ring-fenced bank and, if they do offer it, it would probably also be more expensive, as small companies tend to have lending arrangements, so they would post collateral and therefore would save on the cost. So we believe that small companies should have access to this through the retail ring-fenced bank because of the way this is delivered and because of the likely higher cost if it is not offered through the retail ring-fenced bank.

Q514 John Thurso: Mr Flint, can I ask you the same thing?

Douglas Flint: I totally agree. We are encouraging businesses to do more internationally. We are encouraging them to do better risk management. They need to protect themselves against unexpected moves in interest rates and need to hedge foreign exchange flows from sales they make or from commitments they make to buy things. It is an absolutely plain vanilla piece of business finance, whether you are a £200,000 turnover company or a £200 million turnover company.

Q515 John Thurso: Can I just explore that plain vanilla concept? A small company borrowing a relatively small amount of money-£500,000 or something-in corporate terms, wishing to have a straightforward, plain vanilla interest hedge makes a great deal of sense, but we know, from evidence given by quite a large number of people that what they were sold in the past was not a plain vanilla interest hedge, but an extremely complicated instrument, involving collars, caps and all the rest of it. Should we allow all of those to be inside the ring fence as a product or should we say that there are rules that should apply to the product and the vanilla line-if that is a technical term-can be drawn at some point?

Douglas Flint: I think you can define vanilla and it might go a little bit beyond a straightforward foreign exchange deal or a straightforward interest rate hedge. At its most basic, a collar or a cap is relatively simple as well. But by legislation you could define simple products and I do not really mind where that ends up.

I think simple interest-rate hedging projects and simple foreign exchange hedging products are essential for businesses, otherwise they are going to end up with greater costs because they will have multiple providers-and they want to go to one-stop.

Q516 Lord Lawson of Blaby: It’s called competition.

Douglas Flint: No, it would add to cost. They would need to have two relationships. They can have plenty of competition getting everything from one place. So the competition is there.

Q517 John Thurso: Can I take you back to my questions? The purpose of the ring fence is mostly, in part, to make a bank resolvable if there is a problem and in part for protection of the basic, individual small SME customer. There is a bit of both. If you have a complexity of product, then surely the degree to which those functions are able to be undertaken is challenged.

Douglas Flint: No, I don’t think it encumbers resolution. In fact you can define the product set that you want the ring-fenced bank to offer, given that the real role of the ring-fenced bank is to ensure there is a sustainable supply of finance to the segment that you are defining, or is being defined, as the one that we want to protect retail and small businesses. Sustainable finance to them means access also to risk-management products. Once we define that product set appropriately, it helps the UK economy, because it means that a whole bunch of risks that might not be dealt with, or would be dealt with more expensively, can be accommodated from the relationship that the small company trusts.

Q518 John Thurso: That point brings us back to the point that was being made earlier. How important is it at that point that the person offering the product is not also the manufacturer of the product?

Douglas Flint: There is nothing wrong with the distributor-the seller-of the product and their relationship being the manufacturer. For simple interest rate and hedging products, the pricing is transparent. There is nothing complicated.

Q519 John Thurso: Do you agree with that, Mr Jenkins?

Antony Jenkins: Broadly. I would say that there is clearly a need for small and medium-sized enterprises to have access to these types of products. I absolutely believe they should be simple, easy to understand and have clear value for the customer. Our view is that you could manufacture those products inside the ring fence. We would probably not do that. We would manufacture them outside the ring-fenced bank but deliver them on an agency basis for our customers inside the ring fence.

Q520 John Thurso: One of the biggest threats faced by a lot of our constituents, who come to us to talk about it, is something that appears to be in all the banks. I don’t single out one in particular. You are obliged to take a product, even if you judge you’d like to self-insure, in order to get the loan. Having been obliged to take the product, you are obliged to take that bank’s product.

There is a great deal of difference, it seems to me, between the relationship manager saying, "I advise that this is a jolly good thing to have and here are five different products from five different people; this one does that, this one does that," and together selecting one; and the relationship manager saying, "You can’t have half a million unless you buy my product that goes with it." Can you see the concern that exists if you put something inside a ring fence that actually is a hot line straight through to the trading desk basically?

Antony Jenkins: I understand the concern, but I think you could have that concern in any event around, "You have to take this product to get that product." The important thing is how the ring fence is run, how the colleagues within the ring fence are measured and motivated, so that they are not required to sell add-on products. They are required to do the best thing for the customer. The two issues are tangential to each other in some ways. One is about the prudential stability of the ring fence and the other is about the conduct of bank personnel and what they are required to do.

In my view, the customer should get the best product for them. That could be a fixed-rate loan; it may not require any sort of derivative at all. Or it may be a very simple forward foreign exchange contract, because the customer sold some goods to the United States and is not going to get paid for 90 days, and wants to be protected from interest rate fluctuations. It is entirely possible to stipulate the circumstances in which those products are marketed.

Q521 John Thurso: I ask for your comment. It seems to me that what we all want to achieve-what Volcker, Liikanen and Vickers are all trying to do in a nutshell-is if you take deposits and do the basics at that end, don’t trade at the other end. If you trade-proprietary or for clients-at that end, don’t take deposits. Is that such a difficult ask?

Antony Jenkins: No, I don’t think it is a difficult ask. That is why from our point of view we would not manufacture those products inside the ring fence. We would manufacture them outside the ring fence, but we would make them available to customers if they wanted them and needed them.

Q522 John Thurso: One last question. Mr Flint, in your evidence you commented that you felt that the de minimis level was wrong. How would you like it varied and why?

Douglas Flint: It seemed quite high: £25 billion is quite a chunk of money. That was for regulated deposits or protected deposits. So the size of the institution could be a good bit bigger than that. I thought the point we were making was that it is worth reflecting as to whether there is a segment, or whether a segment could be established, where you had a whole series of banks set up to stay below the limit, that were systemically important in aggregate because they were all lending to commercial property or real estate in a particular geography. Therefore, they had the same weigh risk. I am not sure that I would want to exempt many people from the ring-fence rules.

Q523 John Thurso: If you had all those people, there would be quite a lot of competition, which doesn’t exist now.

Douglas Flint: Indeed. It is a different question, but you would also have the correlation impact of lots of small institutions with the same weigh risk. When you add them all up they are quite important. The Irish banking system would be a classic example of banks that were small by international standards but they were all invested in exactly the same asset class so when it fell, they all fell. I do not think the size of an institution is particularly relevant for looking at the systemic risk to the UK economy. I think it is the asset classes that institutions invest in that is the important consideration.

Q524 John Thurso: But on the question of size, if you look at the ones we allowed to go broke and resolved, which effectively were Bradford & Bingley, Northern Rock and so on, their size meant that we were quite happy just to deal with them. They proved not to have a particularly systemic risk. The systemic risk was that everybody else was doing the same thing and all the ones that were too big to fail were the ones that actually created the systemic problem rather than the ones that were small enough to go under.

Douglas Flint: Yes, but there are other examples in other countries of an aggregation of small institutions being quite important. We have a kind of bifurcated market with four or five very large institutions and then not that many small institutions. Savings and loans would be the example from history where you had lots of institutions, individually small, all exactly the same way round.

Q525 Lord Lawson of Blaby: I would like to follow up something that Mr Jenkins said. He gave a different answer-there is no reason why he shouldn’t-from Ms Botín. She said it is very important that the ring-fenced Santander should be able to offer these derivative products. We all agree that the customer needs them. The question is how they are going to be supplied and who supplies them; whereas you said that Barclays ring-fenced bank would not supply them and you would somehow arrange for them to be supplied on an agency basis. I was not quite clear what you meant by that and I wonder whether you could explain.

Antony Jenkins: I think what Ms Botín was referring to was that the ring-fenced entity would manufacture the derivative product itself, in other words, take the risk that goes along with the derivative on its own balance sheet. In the case of Barclays, we would not do that. We would have that in the non-ring-fenced entity. The products would be made available to customers of the ring-fenced entity should they need them. I think that again is an element of a reflection of the different business models that various banks have. I don’t think it is operative on the key point about the sustainability and effectiveness of the ring fence.

Q526 Lord Lawson of Blaby: I am still not quite clear. Would this be exclusively from the non-ring-fenced part of the Barclays group or would you in fact get them on an agency basis for your client from whoever you thought offered the best deal?

Antony Jenkins: I think it is an interesting point that the ring-fenced entity could conceivably shop around for the best hedging products for its customers and that could be beneficial.

Q527 Chair: But if they are going to implement a code to do the best for their customers, they will have to do that, won’t they? That was a point you made earlier.

Antony Jenkins: Yes. That is a possible consequence, absolutely.

Q528 Chair: It is an inevitable consequence, not a possible consequence. If you don’t do that your customers are not being given the best deal. At least, the terms on the basis of which you are taking their business within the ring-fenced bank are not being fulfilled.

Antony Jenkins: I would agree with that. Yes, I would.

Q529 The Lord Bishop of Durham: I apologise for being late. I was unavoidably detained. I have a question for Mr Flint. You commented that it would increase costs for customers if they were forced to go away from their relationship bank to buy some of these derivative products. Is there any study showing this is the case or is it an intuitive sense that that is what would happen?

Douglas Flint: It is more than intuitive in the sense that if a customer has multiple relationships it means it has to have supplied financial information to several counterparties. They have got to have created credit lines for it. So instead of having a single relationship into which it is putting everything it does, it now has two, three or four relationships, to manage different bank accounts, to have reconciliation. It is more complicated for a business. One of the benefits of SME banking today in this country is customers buy everything from one place. Now, the question then is how do we make sure that they are buying things at the right price. Assuming that they could get them at the right price from a single institution, it ought to be cheaper, because it is one relationship to management-one customer relationship-to understand.

Q530 The Lord Bishop of Durham: That is the argument for universal banking, essentially, and for selling them insurance and, for that matter, airline tickets, paperclips and almost anything else you care to name.

Douglas Flint: We don’t do any of that. It is an interesting idea, but I do not think that we will pursue it.

Q531 The Lord Bishop of Durham: But the same argument-

Douglas Flint: No, I don’t think so. Our business model is finance and the related products that go around it. The hedging products that go around the lending relationship, which is the big risk, are essentially all part of a discussion with a customer as to how best to service their need for a particular financial situation. Whether it is the importation, the exportation of goods or whatever, they are saying, "How do I do this and what packages do I need?"

Q532 The Lord Bishop of Durham: Okay, I take the point, although I am not sure.

Mr Jenkins, the Chairman has covered this to some degree, but I want to explore it slightly further. Every transaction that you do entails a decision not to do something else, obviously. If you go fixed rate, you have chosen not to go floating rate. There are some very well known formulas about how you calculate the risk of going fixed rate at a higher rate and how quickly floating rates have to rise to make it more expensive to have gone floating rate. By going fixed rate, you are not avoiding risk; you are just taking a decision about how you manage risk. Do you agree with that?

When you are talking to one of your smaller clients and you are suggesting they take a fixed-rate loan or they use some simple derivative product, you are in fact advising them on an investment decision. Where is the remuneration coming for that? It seems to me that there has to be a huge change of culture within the bank for that to be done on a purely disinterested basis, compared with how it has worked more recently and even back into the ’80s and ’90s. It is an absolutely massive change in culture. How does that happen?

Antony Jenkins: The industry and particularly Barclays is in the middle of a big change in how we incentivise all our colleagues on the front line, whether it is a consumer or a relationship manager dealing with small businesses. Over the past three years, we have moved away from incentives for sales towards incentives for services, and three weeks ago we announced the abolition of all sales incentives across the branch network.

Q533 The Lord Bishop of Durham: And you think that that will have sufficient impact.

Antony Jenkins: My requirement of everybody in Barclays is to put the customer first and do the best thing for the customer. We have reinforced that by signalling to our colleagues that service is what matters, and that is how we will compensate them. The conversation that we had earlier on how you change the culture in big organisations is an important one. Of course, it is not sufficient just to write down a set of aspirations or values and behaviour. You have to align all your management systems behind that and you have to signal to the institution what is really important. That is why the change that we have made is so incredibly operative, because it signals to people what matters. What matters is doing the right thing for the customer. In the context of this discussion, we need to have a ring-fenced entity that operates with the customer’s best interests at its heart, and that is what we are committed to doing.

Q534 The Lord Bishop of Durham: Ms Botín, I think that Santander has long experience of working on a subsidiary basis-a subsidiary model around the world. If we move towards the ring fence here, it will be a new experiment in how we work within the United Kingdom. One of the key questions when there is a problem in any part of a bank is that of confidence. From my memories of when I was a corporate treasurer, if any name had a problem somewhere, you tended to avoid it because you wanted to sleep at night. It was no more complicated than that. What has been the experience of Santander in seeing how the subsidiary model runs on confidence, rather than merely the legal side of who is obliged to support whom?

Ana Botín: The subsidiary model for us, as you know, is a geographical ring fence. Essentially, we are a retail ring-fenced bank in the UK. As I mentioned, we have very small parts of the business, because we work for customers on very simple-before I answer your question, if you will allow me, on the simple interest rate products, we have proposed in our evidence a set of principles for how those products are sold and a set of principles to limit their interconnection. We believe that can be done, and we have worked for the last four years in the UK selling these products with very clear rules, accountability and supervision. We have one complex derivative. We have said this publicly. There were a handful, actually-today we have one-which is not sold by Santander but by one of the institutions we inherited. We are currently in an FSA process, so I cannot comment any more, but we believe that the process has worked effectively to protect customers, and we believe that the series of principles we have offered can be very effective in ensuring that the interconnection and resolvability side is also protected, by limiting it basically to traded instruments that are already being used to manage the balance sheet of the retail bank and by making sure that these products are only traded in deep and liquid markets. A set of very precise rules are in the evidence we sent to the Committee.

Going back to the specific question on geographical ring-fencing and how it has worked, it has worked for 15 years, and its main strength is that it is a strategy and principle of the group. Management and the board believe that it is the right strategy for running big retail banking operations in major markets like the US, Germany, the UK or Brazil. It is a formal mandate from the board at the group level. Secondly, it is reinforced by the local boards, where we have senior independent directors and non-executive chairmen, as we do in the UK. Thirdly and very importantly, it is enforced by the regulator. That is something we have also done in the UK.

Obviously, it has to be communicated to all the stakeholders, rating agencies, investors and markets. It is critical, of course, that the regulator has both the tools and experience to monitor it, and as I mentioned before, we believe the FSA does. Going back to the big change that the banking sector has undergone over the past few years, today our regulator has enough information, tools and expertise to monitor this effectively. In a way, our experience is valuable, because we also do some inter-company business, but it is restricted. It is probably much the same kind of business that would happen between a ring-fenced bank and the markets, in terms of certain hedges for the balance sheet and so on. In my view-we have direct experience of implementing this, monitoring it and going through the process-it does work.

Q535 Baroness Kramer: I want to follow up quickly on this before I move on to different questions. As a general observation, wouldn’t you agree that the main reason why small businesses do one-stop shopping is that in order to turn to an alternate provider, they have to rely on their main bank to both release collateral and provide waivers in a timely manner, which is nearly impossible to achieve in the UK at the moment? Would not the narrower drawing of the ring fence force a more general protocol that would allow multiple providers to become a reality for small businesses?

Ana Botín: If I may volunteer to answer that as a bank that is bringing competition to the SME space in the UK, it is very difficult for smaller banks to compete effectively, because of the resources that you need in terms of people, teams, risk models, expertise and so on. I believe that to reach tens of thousands of small companies, you need to be a scale competitor. For many reasons, things such as investment in technology and a diversified portfolio reduce the risk, thereby allowing you to offer and be competitive with the big banks in pricing. In our case, we are basically a retail ring-fenced bank. We have a very small piece that would not fit in it, and what we are trying to propose in the interest of our customers is that we can compete with such products. I believe that the flexibility in the White Paper allows for a diversity of models. We have heard some institutions will have a much bigger non-ring-fenced bank. In our case, I think it is in the interest of competition that we are able to offer such products to small companies within the ring-fenced bank. So I do think that, first, you need size to compete effectively nationally in the SME market and, secondly, that flexibility in the ring fence will provide more competition and allow banks to choose the business model.

Q536 Baroness Kramer: That is a fascinating comment, and the sense is that you are reinforcing the model of a handful of large institutions, whereas you are well aware that other countries have a diversity of many small institutions to sit alongside large institutions that we lack here. Would you be willing to release data-Barclays must already do this in the US-that is sufficiently granular for us to be able to see where there is market failure and where groups of companies or areas cannot get access to services, so that we can see if there is scope for a very different general model to sit alongside the large banks?

Antony Jenkins: What data would inform that decision?

Q537 Baroness Kramer: The same stuff that you would release under the Community Reinvestment Act in your United States branches? Those data are not available here.

Antony Jenkins: In the United States we do not operate a retail bank other than a credit card business.

Q538 Baroness Kramer: I have walked into banks called "Barclays" in New York.

Antony Jenkins: Honestly, there is no retail bank in New York. There might have been decades ago, but we do not have it anymore.

You have heard the aspiration of one of our competitors is to be very active in the SME space, and we are very active in the SME space. We continue to add record numbers of SME customers. One of the issues for SMEs, of course, is complexity, because they are busy people and they have a lot of things on their plate. They want to deal with an institution that can meet their needs. I do think there is competition, but we would certainly consider very seriously any data requests that this commission or other bodies would want to make in this space, because we support competition. We want competition, because it keeps everyone sharp and focused and it is good for customers.

Q539 Baroness Kramer: Perhaps I should go on to the issues of resolution, which we have not had a chance to talk about. Within this Committee there are many of us who have seen more than half a dozen financial crises, so perhaps we are slightly cynical, but if we are we say, "Hope this never happens, and hope that everything we do makes sure that it does not happen." May I ask each of you whether, if your bank were to fail tomorrow morning, there is a resolution mechanism in place and what would be the consequences?

Ana Botín: In our case, we have presented resolution and recovery plans, both at the group level and at the UK level. So we have a plan, and we have said that we do not believe that any bank should be too big to fail. We have very specific plans in place, and they have been presented to the regulators.

Douglas Flint: That is a hypothetical question, and it would depend on what had caused it, but, yes, we have recovery and resolution plans covering the group and all of our subsidiaries.

Antony Jenkins: As do we.

Q540 Baroness Kramer: Would any of those plans require the use of taxpayer money?

Douglas Flint: No.

Q541 Baroness Kramer: As you have been going through this year and developing those recovery and resolution plans with the FSA and the Bank of England, obviously you have been required to set out any barriers to resolution. Are there any remaining barriers to resolution, or are the statements you have just made a way of telling me that there are no barriers?

Antony Jenkins: The piece of resolution and recovery that remains to be worked on is this question of operational subsidiarisation. That means putting the key systems and property of the institution that spans different lines of business into one entity that could survive any kind of event that was catastrophic for the institution. That piece of work is still ongoing.

Ana Botín: In our case, we have a subsidiary model that includes subsidiaries for technology, for administration and for operations, so we have this subsidiarisation of all the support functions. We have shared those with our regulator. It is quite a unique model, and we believe that it makes the entity resolvable. We do not have that operational issue.

Douglas Flint: I think the area that is still a work in progress-although a tremendous amount of work has been done to define the nature and scale of the problem-is getting protocols and a legal framework for cross-border resolution. The competing legal claims in multiple jurisdictions are not as clear as they ought and need to be at some point in the future. Anything with a cross-border dimension is still a challenge. The problem has been well defined now, but it will take a considerable number of years and a great deal of inter-governmental co-operation to put in place legal frameworks and protocols, which is to say that some people are going to have to give up preferential rights, and some people will benefit.

Q542 Baroness Kramer: Does ring-fencing have any impact on the effectiveness of your resolution programme?

Douglas Flint: I think it will do in the UK. It will give the ability to have a different approach to a ring-fenced bank and to a non-ring-fenced bank. It will give you the ability to choose.

Q543 Baroness Kramer: I suppose that, within the UK, one of the issues has always been the question of the extent of Government’s implicit guarantee to depositors. This is now obviously within the ring-fenced bank. What actual benefit does that give, from your perspective? What impact has that had on the cost of capital that you have had to raise in the past? How would that play out in future?

Antony Jenkins: We believe that the consequences of ring-fencing and other regulatory changes are already being priced into, to a large extent, our cost of debt.

Q544 Baroness Kramer: Because of its bail-in character?

Antony Jenkins: Because of the nature of the ring-fence proposals. I am talking about the regulatory changes; I am not talking about the implicit guarantee. That change is being foreseen by the markets and has affected the funding costs of the major institutions.

Q545 Baroness Kramer: UK banks are rated lower on a stand-alone basis than when the prospect of sovereign support is included. In July 2012, the uplift from sovereign support in Moody’s ratings was a two-notch uplift for Santander and HSBC, and a three-notch uplift for Barclays. I am just trying to understand what the actual benefit is to you as an institution of that much more favourable view from the ratings agency.

Douglas Flint: I am not sure that there is a favourable view now. The ratings agencies are rating us all on the basis that we would not get severance support. The vast majority of the benefit of implicit severance support went to customers, because the expression of the support was in our funding cost, and our business model is to take our funding cost, add a margin, and charge our customers that. If our funding costs are lower, the margin is the same; the benefit of our implicit subsidy is essentially passed on to customers. Arguably, therefore, the implicit subsidy that the Government gave was passed on to customers, because it was in the funding round.

Q546 Lord McFall of Alcluith: Taking up Susan’s question, can I take it from what you said that the issue of "too big to fail" has been solved in the UK, but because we have a global banking system, if there is a future banking crisis, we will have to deal with the problem of "too big to fail" on a global scale?

Douglas Flint: I would put it another way: I do not think any bank is small enough not to be important enough to be resolved safely and in a predetermined way that does not cause a ripple in the outside world. I would not say "too big to fail". I would say that no bank should be so big that it cannot be resolved in a predetermined way without a ripple to the rest of the marketplace, and without requiring sovereign support.

I believe that the proposals that will be put in place in Europe, and are already in place in the UK in relation to bail, in are the biggest contributors to that capability that we now have. Ring-fencing adds greater clarity, but the biggest impact is more capital and bail-in.

Q547 Lord McFall of Alcluith: It is work in progress.

Douglas Flint: I think in the UK we have gone a long way.

Q548 Lord McFall of Alcluith: Okay, fine. Ms Botín, why has the industry argued for the Government not to adopt the Vickers recommendation of a 4% leverage ratio?

Ana Botín: I believe it has now been set at three, and I believe that is positive. In the UK, Santander UK is a former building society-actually, three former building societies-so I think mortgage lending would be affected by the four. I think three is a good number. Overall numbers are okay, as long as they have a range of flexibility to allow for different types of balance sheet structures, and I think that for building societies that have 80% of the balance sheet in mortgages, three is probably a good number.

Q549 Lord McFall of Alcluith: But three means you have leverage of 33:1-the equivalent of someone having a 97% mortgage, which people were pooh-poohing. Do you think it is safe to let banks have 33:1 leverage now, in the light of the crisis?

Ana Botín: It depends on the shape. If you have a balance sheet that is 50% SME lending on corporates and 50% mortgages, it is not the same as if you have a balance sheet of 80% mortgages that you could not effectively fund through securitisations cheaply to allow you to give mortgages. On the other side, also there are attractive rates. One number does not give you the whole picture.

Q550 Lord McFall of Alcluith: You believe 33:1 is a safe ratio.

Ana Botín: I believe that is reasonable, yes.

Q551 Lord McFall of Alcluith: Mr Flint, your submission to us today stated that the HSBC group operates on the basis of a common culture across its global business in both retail and wholesale banking, and the principles underlying that were approved by the board. There has been a strong process led by the group’s CEO, ensuring that everyone in the company understands and abides by those principles. Today, your problems with the American regulator have been demonstrated, in that you have had to increase your provision from $700 billion to $1.5 billion. You have doubled the sum, and have said it could be significantly higher. I just wonder how your statement to the Committee marries up with what is happening in the United States at the moment. Is it not the case that some banks are too big to manage, and that that illustrates that?

Douglas Flint: It is a good question. I hope it is not the case. I talk for HSBC. We are still dealing with a number of legacy issues in that case, and the control environment in a bank we bought in Mexico 10 years ago. The events that are giving rise to the examinations took place more than five years ago, in the first five years of our ownership. We have apologised for them-

Q552 Lord McFall of Alcluith: I do not want to go into that too much. In terms of standards and the process, do you think it is still a challenge for HSBC?

Douglas Flint: I think one of the things that it has highlighted, certainly to us, is that if one is going to be able to assure our board in the first instance, and through the board our shareholders, that the business is not too big to manage, we must be more focused and simpler. Part of what the ICB was about-and part of what I think the multiple inquiries that are going on, and a number of things that are looking at what happened historically, are about-is that if we are going to be confident that we know as much as we could about what is going on, we need a simpler business model, and that is what we are doing. That is what it is forcing in multiple areas.

Q553 Lord McFall of Alcluith: Okay, there is work in progress. Mr Jenkins, on the issue of Barclays, you have mentioned the derivatives, but if you look at the derivatives market over the past 20 years, you will see that it was responsible for 10% of GDP in the world in 1987. Now it is responsible for 10 times the world GDP. I have Mr Andy Haldane to thank for this, but he says that if you assume that you have 150 mortgage-backed bonds in every CDO, 125 CDO bonds in a CDO-squared, and 200 pages in every bond prospectus, with 300 pages in every CDO prospectus, then to read all the relevant documentation relating to a CDO-squared, you need to read 3,787,800 pages. It is good if you are a speed-reader, because that would only take you seven years. So my question is, notwithstanding your legal and compliance management in Barclays, whether Barclays and such banks are now too complex to manage.

Antony Jenkins: I do not believe that Barclays is too complex to manage, but the statistics that you have quoted beg a very interesting question that comes back to this notion of the social utility of banking, which I happen to think is a very important concept. Derivative products can be very useful to large companies that want to hedge their foreign exchange exposures and protect themselves against interest and credit risk, but there have to be limits to the amount of trading undertaken that has no utility other than creating economic value from moving the pieces across the chess board.

One of the things that we are engaged in at Barclays under my leadership is a review of all our activities, across the group, to determine which pass that test of reputational and social utility and which do not. Where they do not, we will refocus our business. I think it is incredibly important that that activity happened post-crisis, as it is incredibly important that we have a set of core values that everyone lives by at the heart of the institution.

Q554 Lord McFall of Alcluith: You accept that complexity is a big issue for you going forward-trying to make things simpler.

Antony Jenkins: Any large organisation has complexity, but I do not believe that that complexity cannot be managed. I think it can be managed. In fact, in investment banking one of the key issues is what is called market risk. Market risk is well understood and well managed. What tends to cause problems in investment banking is operational risk, and that is more difficult and challenging, but, to answer your question, it is a combination of the business lines that we operate and how we operate them.

Q555 Lord McFall of Alcluith: The reason I ask that is that eminent accountants and practitioners in the banking industry illustrated the complexity of this issue to me. Would you agree that it is?

Antony Jenkins: I think we would all agree-

Q556 Lord McFall of Alcluith: Another question: have the Basel rules turned banks into black boxes?

Douglas Flint: Yes.

Antony Jenkins: The modelling is very complex.

Ana Botín: I believe that the Basel rules are helpful, but you have to understand also that you cannot just manage risk based on models. You need a combination. I think risk weightings under Basel are useful and, going back to your previous question on leverage, just looking at one number is not enough; you need a more holistic view of the business, of the balance sheet. I think models help. Basically, things are based on historical evidence and certain trends, but you need more than that.

Q557 Lord McFall of Alcluith: You have lost out two to one.

Douglas Flint: One thing that is slightly encouraging is that under the auspices of the Financial Stability Board there was an enhanced disclosure taskforce, which has just published. One of its recommendations is that there needs to be a greater line of sight between the balance sheet and the risk-weighted assets. What is absolutely clear is that the intent of the black box was to be more sophisticated, but people have lost faith in it, because they cannot see the line of sight to how the calculations were done.

Q558 Lord McFall of Alcluith: That is a good answer. My last question, Mr Flint, relates to your own company. The Government suggested that banks need not hold additional capital against overseas operations if they pose no likely threat to UK financial stability. What do you think is an appropriate test for assessing whether your overseas operations are sufficiently autonomous and resolvable for this to apply?

Douglas Flint: Looking at the recovery and resolution plan for that institution, and seeing whether there is any reasonable prospect that it would not be able to be wound down without recourse to the parent.

Q559 Chair: You are not giving much of a thumbs up for Basel III, are you, Mr Flint?

Douglas Flint: I think we need to get confidence back into regulatory measurement. There has been a tremendous amount of doubt by investors as to whether they can understand the divergences that seem to be in the marketplace between banks that look the same but have very different ratios of risk-weighted assets to assets.

Q560 Chair: So you broadly agree with Andy Haldane’s point that we need to get back to simpler regulation?

Douglas Flint: I think you need both. Clearly, if you went back to the five risk weights of Basel I or the simple leverage ratio, then a leverage ratio on one bank could be 100% UK Government bonds and on the other bank, 100% sub-prime credit card customers. The leverage ratio would be the same. You need to have a combination of leverage, which is more to do with funding, and then risk weighting, which is more to do with capital. You need both; there isn’t a single prism you can examine a bank with.

Q561 Chair: A moment ago, Mr Jenkins, you contrasted what you said was social utility with just moving pieces around a chess board. Can you explain what you mean by just moving pieces around a chess board?

Antony Jenkins: I think the question was are banks trading simply between themselves in order to generate a profit in what is essentially a zero sum game. There has to be a winner and a loser in that circumstance.

Q562 Chair: The old argument was that that created liquidity, which therefore brought greater market efficiency for the real-world participants. Do you no longer accept that argument?

Antony Jenkins: I think it is a question of degree. It is rather like the conversation we had previously on what constitutes proprietary trading and what constitutes market-making.

Q563 Chair: So you need a bit of moving around the chess board, but not too much.

Antony Jenkins: You need some liquidity, yes. The example that was quoted was that one of the drivers of the financial crisis was really where this was taken beyond the point of excess, and that was clearly socially destructive. As somebody responsible for running a large bank, I believe that it is my obligation to pass our activities through the test of value creation and social utility.

Q564 Mr Love: Starting off with a backdrop of the scepticism that you have all expressed-certainly, Mr Flint expressed it-in relation to Basel III, you have all argued, either in front of us or in your submissions, that the leverage ratio should be reduced to 3%. Two of you have suggested that simple derivative products should be accepted into the ring-fenced bank, with the implications for the balance sheet. I assume that you all continue to argue that primary loss-absorbing capital should be kept as low as possible. The question that was put to us last week by Martin Taylor was: does the combination of all of those changes affect the balance between legitimate profitability and prudence in banking?

Douglas Flint: I think the most important thing is to develop a model that is investable; in other words, if there is a level of sustainable credit supply to the real economy that makes the economy work in line with the way the economic planners in Government foresee, it is very important that the banking system, as a transmission mechanism of that policy, has the ability to generate the amount of credit capacity to deliver on that. To the extent that it is lending more than the deposit that it gathers, which it does, it needs to be able to generate wholesale funding. The extent to which that wholesale funding is explicitly at risk through bail-in will mean that investors-this is the real benefit of the bail-in proposals-will take careful thought in the future, perhaps more than they have in the past, because it will be explicit; there is no implicit guarantee. They will think about the extent to which they want to fund the individual models of individual banks and they will also look at the capital support banks have that is the first barrier before their bail-in capital gets hit. Then investors will look at the cost of the bail-in debt and the return that is made on the capital and decide whether they want to invest in that model. It is a very complicated equation at the end of the day. It is not a question of how do we stop banks ever failing or what is the best way to resolve them when they do fail. Both of those are really important, but the primary question is can we create a financial system that holistically is able to self-finance through external capital so that the Government is never likely to have to support it again because the outside market believes it is a model that is investable. I think that is still a work in progress, as with the iterations around the size of bail-in capital, the shape of the industry, investors are still fairly perplexed as to what the long-term sustainable returns from this industry will be.

Q565 Mr Love: I don’t want to pursue this, but you said earlier on that resolution plans were in place that would mean you could be resolved without recourse to taxpayers’ funds. Are you saying that is a work in progress?

Douglas Flint: In your ideal world, you want a resolution plan where the resolution is not the liquidation of the institution but the recovery of the institution; because outside capital will come back in again and refinance it. You don’t want to destroy the system; you want to refinance it, because ultimately the system has to exist.

Q566 Mr Love: But we have to go on the basis that sometimes you might need to dissolve-

Douglas Flint: Indeed-

Q567 Mr Love: Ms Botín, you mentioned earlier about the safety of the assets on your balance sheet being mainly mortgages. Of course, that depends on the particular circumstances, and if interest rates were to change you might be less risk-averse as an institution. How do you respond to the concern that 3% leverage is enough for an organisation like yours when in slightly different circumstances, you may well be tested in terms of the risks and your assets?

Ana Botín: I think prudence, being safe for depositors and resilient, and not costing the taxpayer money, is one of the key pillars in managing a bank, as I mentioned before. Again, competition, choice and being able to support growth and give a return to shareholders, so that they can give you capital, is also important; so I think that is the balance we need to find when we think about leverage and capital.

In terms of the balance sheet, Santander UK is 85% mortgage-prime mortgages. It is a portfolio that has performed very well over the last 10 years. We were the first bank to reduce interest-only lending at the beginning of this year. So we are very conscious that this is something you need to have in mind as you manage your mortgage portfolio. I believe the industry is very conscious of this at this time; but I do think that you need to find a balance between leverage and capital, and also providing growth and being able to provide loans; and I believe three is the right number, for a mortgage bank like Santander UK is, essentially, today.

Q568 Mr Love: On an entirely different subject, the proposals before us in terms of this Bill: how will they impact on the competitiveness of UK banks, and on the position of the City of London as a financial centre? Mr Jenkins, will they make any difference; will we still be competitive?

Antony Jenkins: If we think about domestic competition for a moment, I think the creation of a ring-fenced entity in the UK probably does not, in and of itself, create more or less competition in the marketplace, and we continue to see competitors seeking to enter various spaces in the marketplace within the UK. I think internationally there are concerns that if we create a banking system that is too highly regulated, that could cause London to lose business over time; but, as we know, other parts of the world are also engaged on their own regulatory activities. We have the European proposals; we have Dodd-Frank in the US. It is not clear to me that this proposal, in and of itself, will create less competition for London.

Q569 Mr Love: I am going to come on to the issue of different proposals in different jurisdictions, but let me turn to you, Mr Flint. There is some concern that if the Liikanen proposals go ahead, European banks might come to London on the basis of being part of the European Union, and set up in competition on the basis of Liikanen rather than on the basis of Vickers.

Douglas Flint: Well, not just European banks; I think in the wholesale space customers will have a choice, going forward, between taking their business to a UK Vickers wholesale bank, a Liikanen wholesale bank, which may be branched in London, or a US broker-dealer model that has a major branch in London. They will decide which of those models is most attractive to them. As things look today, there is an advantage for those banks that will continue to have a universal model, because they will have access to a liquidity pool and the cost of capital is likely to be better. We will see how that plays out over time.

The reverse of that argument is that if the market believes that the safety and soundness, or the benefits, of the proposals that are being put forward are evident, then the banks that own that model will have a lower cost of capital. We will see how the market reacts. I suspect that they will still like the universal banking model that will be available to them from non-European banks.

Q570 Mr Love: Let me ask you this, Ms Botín: everyone is saying, "We will get together, and there will be a similar system across different jurisdictions," but let us go on the basis that there will be Volcker rules in the United States, Vickers rules in the UK and Liikanen rules in Europe. Can that cause other problems that you can foresee?

Ana Botín: Everybody in those different jurisdictions that you mentioned-the US, the UK and Europe-is conscious that there are certain areas that have to be co-ordinated. For example, the primary loss of sovereign capital or bail-ins: if that is not co-ordinated in Vickers with the other international regulation, let us say, it could affect the way UK banks fund themselves. We fund ourselves in euros and dollars and therefore we are accessing those markets. It would be very disadvantageous for UK banks, and for the individuals in the UK who are getting mortgages every day, if that is not aligned. There are certain areas of Vickers, Liikanen and Volcker that need to be aligned. That is probably more the case for Liikanen and Vickers, as the Volcker rule is very specific on property. The European and UK systems need alignment on those specific areas, and probably on deposit of preference and a couple of others.

I don’t think any of us can know what is going to happen with customer choice. Where are the large corporates going to prefer to bank? Some of the large corporates are very mobile and could move across countries quite easily. That is why, at the end of the day, we need to ensure that small companies are not put at a disadvantage. I always say that a small company in Newcastle or Leicester is competing with a small company in Germany. If that small company in Germany is funding itself at 4% and my customer here in the UK is having to pay 6% or 7%, because of different regulation or different structural models, that is something we need to take a very close look at. We must understand the consequences, or at least try to. Again, our proposal is to allow that flexibility, so that, as these rules are implemented across jurisdictions, we take special care of individuals, families and small companies. In the case of small companies, indirectly-we might not see it today-they could be affected by international competitiveness and alignments. That would be my concern.

Q571 Mr Love: Mr Flint, you mentioned earlier that you could end up with three separate parts of a bank: if Liikanen goes ahead as it is at the moment and Vickers goes ahead, you could end up with two ring fences. Would that be an appalling prospect for everyone?

Douglas Flint: Yes, it would be, and I don’t think it would happen. I think you would expand the UK ring fence to accommodate what could not go into Liikanen. What it really reinforces is the fact that the sooner we can understand whether we are going down a Liikanen proposal or a Vickers proposal, the sooner we can get on with the work of segregating the customer base and building the infrastructure. At the moment we cannot do that because we do not know whether we are going to be doing Vickers. We don’t know whether we are going to be doing Liikanen. We don’t know whether there will be any extraterritorial dimension from Dodd-Frank. I would really love to choose just one and move one.

Q572 Mr Love: Mr Jenkins, if you were to choose one and move on, which would it be?

Antony Jenkins: I think we are committed to implementing the ICB ring fence.

Q573 Mr Love: So we need to persuade the Europeans?

Antony Jenkins: I think the overarching comment from all my colleagues is, certainty is good. When we know what we have to do, we will get on and do it.

Q574Mark Garnier: When we first met at the Treasury Committee in January 2011, I asked whether you were considering moving your domicile offshore. The answer you gave at the time was that HSBC has a decision-making process once every three years to decide where your domicile is going to be. When you came before the Treasury Committee earlier this year, I asked you how you had got on with that and you said you had decided to defer it for a year, in order to make that decision. We are now getting to the end of 2013-[Interruption.] Yes, 2012, even. We are now getting to the end of this year and we have had the Banking Reform Bill published. The Financial Services Bill is on its way through the House of Lords, and it will come back to the House of Commons. How are you getting on with your decision and where do you think all of this will leave HSBC at the end of it?

Douglas Flint: We are in London because it is the best place to headquarter an international group today, and we will continue to be headquartered where it is the best place to have an international group. We have deferred the decision again.

Q575 Mark Garnier: So you are not convinced that London is the best place: is that what you are saying?

Douglas Flint: We are convinced it is today.

Q576 Mark Garnier: But you are not convinced that it will carry on being.

Douglas Flint: I hope it will be, but we still have to see the European proposals that could affect London and the finalisation of this legislation and its implementation. You just could not make a decision today. I am not making any judgment.

Q577 Mark Garnier: So you will defer it for another year.

Douglas Flint: I would think that it will be deferred until 2015, probably, because it will take until 2015 to get all this enabling legislation in place. There is no way one makes these decisions ahead of having the complete framework before us.

Q578 Chair: This commission will not be around, but the Treasury Committee certainly will to ask you the same question again.

Douglas Flint: I look forward to being here to answer it.

Q579 John Thurso: Antony Jenkins, may I come to you? I think your predecessor, giving evidence to the interim Vickers, was pretty lukewarm about the concept of a ring fence. I completely understand that both you, and corporately, Barclays, have moved to where you are now, but in the early days there was quite a lot of resistance. Both Paul Volcker and Martin Taylor in their evidence-this is a bit of a caricature, but I sum it up briefly-said, "Watch out, because what the banks want to do is get this agreed, and then pick away at the ring fence and extend it over time." What guarantee do we as legislators have that the banks will not just move the ring fence over time, or even destroy it?

Antony Jenkins: The guarantee resides in the way that the legislation and the regulation are crafted, and the way that that regulation is subsequently policed. It seems to me to be entirely possible to specify how the ring fence should work and what passes into and out of the ring-fenced entity, and to hold the banks accountable to delivering that.

Q580Chair: You think now that there is some value to a retail ring fence in terms of enhanced financial stability, do you?

Antony Jenkins: I think the decision has been taken on the ring fence and we should proceed and implement it in the best possible way that creates stability.

Q581Chair: Was that a yes or a no?

Antony Jenkins: We should get on with the job of implementing the ring fence. I am not obfuscating.

Q582 Chair: Let me have another go. Are we going to get more or less stability with this ring fence?

Antony Jenkins: You will certainly have more confidence in stability and that in itself is a good thing, but we are committed at Barclays to implementing the ring fence.

Q583 Chair: I heard that. That was the same answer you gave a couple of goes ago and to the last question. I am just trying to get to the point. Are you sticking by or resiling from what was said to the Treasury Committee just a year ago: "We remain un-persuaded that a retail ring-fence offers enhancements to financial stability"?

Antony Jenkins: I believe that the ring fence-

Q584 Chair: Okay, but do you support that, or have you moved away from that view? That was the view of Barclays, admittedly not under your charge, a year ago.

Antony Jenkins: If you want my candid opinion on this topic-

Q585 Chair: Only candid opinions at Banking Commission hearings.

Antony Jenkins: Why do banks fail? Banks fail because banks do not understand risk. They do not allocate capital to risk and they misprice risk. Eventually markets discover that, and liquidity dries up. That is why banks fail. Anything that creates more understanding of risk inside banking and appropriate allocation of capital will protect the system. The doubling of capital requirements-for us, at least-post the crisis, the reduction in leverage and the increase in liquidity are all helpful in that regard. Those things are important.

The additional capital requirements-although we have discussed some of their challenges under Basel III-are also important to adding stability to the system. I think the ring fence can play an important part in enabling greater confidence in the system as part of that overall regime. Does that answer your question?

Q586 Chair: Not really. Does a ring fence deliver better understanding of risk?

Antony Jenkins: It potentially can provide more transparency, because it is all in one place, so activities are in one place and can be viewed as such. But at the end of the day, this depends on how the ring fence is managed. Ring-fenced banks will be capable of failure. There is no way you can eliminate that. Risk is inherent in banking, but if that risk is understood and managed properly, then the system will be safer.

Q587 Chair: This is not a bright-eyed and bushy-tailed dog leaping out of the door for a nice run-around, is it, Barclays? This is a bull being pulled by the nose towards a ring fence.

Antony Jenkins: I think that is-if I may say this, with all due respect-an unfair characterisation. I think Barclays engaged fully in the discussion with the Vickers commission. We made our case. We were not successful in establishing our initial position, so I think our position has shifted to one of, not just pragmatism, but wanting to embrace and support the proposal.

Chair: We are grateful for that. We are grateful to all three of you who have come in to give evidence this afternoon. You have been very helpful. We will be seeing more of you in connection with other aspects of the commission’s work later on. Thank you very much.