Banking

Lord Eatwell Excerpts

Wednesday 9th February 2011 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for repeating the Statement made by the Chancellor of the Exchequer in another place. What a pathetic performance—not, I hasten to add by the noble Lord, who read very well, but by the Chancellor. It was described this evening by “Channel 4 News” as lying,

“somewhere … between charade and sham”.

This was a Statement hatched in a smoke-free room in Downing Street, probably not over beer and sandwiches but maybe over smoked salmon and champagne. It sees the unwelcome resurrection of that distinguished and unlamented figure of the 1970s, Mr Solomon Binding. It is not only in their policies that this coalition Government seek to return Britain to the past; they are returning to the old methods of back-room deals masquerading as proper governance.

Before turning to the fundamental issues raised by the Statement, could the noble Lord clarify some of the aspects of the agreement, as published by the banks? The agreement states that there is,

“a commitment by the Government to the stabilisation … of the relationship between the Government and the banks”.

What exactly does that mean? Moreover, the agreement states that the Government accept,

“the right of self-determination by bank boards”.

What could that possibly mean, other than that the Government agree to let the banks do whatever they want?

Let us turn to the fundamental question: what is this for? More importantly, how will it help the recovery of the UK economy? Take first the question of bonuses. The essential problem with bonuses, apart from the sheer immorality of the quantum of money involved, has been that they embody perverse incentives. They encourage excessive risk-taking and reward mediocrity. They absorb resources that could be used to rebuild bank balance sheets and expand lending to the real economy. They attract to an essentially non-productive activity people with skills that could be deployed to perform productive tasks elsewhere in the economy—less financial engineering, more real engineering. Indeed, by their grotesque distortion of pay relativities, bank bonuses devalue the hard work of talented people in the public sector, in manufacturing and industry, and in non-financial services.

What now is to be done about bonuses, over and above the measures already being enforced by the European Union, such as the requirement that bonuses be paid predominantly in shares? In the Statement the Chancellor claimed:

“Britain has the toughest and most transparent pay regime of any major financial centre in the world”.

Will the Minister confirm that this statement is incorrect? Will he confirm that the US banks in receipt of TARP funds not only have to provide more wide-ranging disclosure of the details of remuneration, but have to do this for past years, too? This is all detailed in the recent report on bank bonuses by Mr Andrew Cuomo, Attorney-General of the state of New York. Finally, in the section of the agreement on bonuses, we find the wonderful clause 3.5, which is destined to have enduring fame as the ultimate get-out clause:

“Nothing in this statement derogates from the obligation of the banks, and their boards and remuneration committees, to manage pay policy in a way which protects and enhances the interests of their shareholders”.

In other words: “Get lost, Mr Osborne, we’ll do what we want”.

Given that nothing of any matter has been achieved on bonuses, what of the much trumpeted agreement on lending? The agreement clearly states that any increased lending—any of it—must be on commercial terms. If it is on commercial terms, would it not be done anyway? After all, that is what the banks are supposed to be for. We are told that the banks will increase their gross lending to £190 billion in 2011. However, this is a deception, for gross lending is not the relevant figure. What matters is net lending—new lending minus repayments. It is net lending that defines the amount of new spending power funding the investments of British industry. If gross lending increases but repayments increase too, the net benefit to Britain will be negligible. Will the noble Lord tell us: is there an agreed target for a net increase in lending? Will refinancing of current financial facilities be deemed to be new gross lending or not?

Then there is the commitment to a new £1.5 billion business growth fund, building up,

“over a number of years”.

Not too much too soon. That is less than 1 per cent of current gross lending and, moreover, it is not at all clear that this will be new money. There is nothing at all in the agreement about the cost of credit, other than the reference to “commercial terms”. However, ask any small business and they will tell you that it is the price of credit, rather than its availability that is often the problem. It is so easy to avoid making a loan by pricing it out of the reach of the small business borrower.

We are told in the agreement that there is to be an appeal mechanism for those denied credit, managed by “a senior independent reviewer”. Who is this reviewer to be? Who will appoint him or her? What will be the terms of reference? What sanction will there be on those banks that the reviewer deems to have failed in their commitment? Will the reviewer be able to assess all the terms of the credit, including the price? What arrangements have the Government made for the publication of the banks’ lending data to include data on credit refused, so that lending behaviour can at least be subject to some public scrutiny?

This is not the way to make economic policy. Three facts must be obvious to all. First, this crisis was inflicted on the economy by the profligate lending policies of the banks. Secondly, a sustainable recovery of the British economy requires a steady secure flow of affordable credit to British industry. Thirdly, to attain this goal there must be a fundamental reform of banking in this country. Those three propositions will be shared on all sides of this House, other than probably on the coalition Front Bench. This Statement addresses none of those three challenges. It does nothing to limit profligate lending—indeed, I suppose it tries to encourage it—it does nothing to secure a steady flow of affordable credit, and it is irrelevant to the cause of fundamental reform. Let us hope that this tawdry so-called deal will stimulate Sir John Vickers and his committee to address these issues with enhanced vigour.

The Government’s overall policy towards the banks was summed up perfectly in today’s Financial Times, which stated:

“With much noisy showmanship, the Conservative-Liberal Democrat coalition is puffing demands that are little more than cosmetic. A slight change in a levy on bank balance sheets and a commitment to greater small business lending and transparency in bankers' pay may play well politically. But they are no way to fix the banking system”.

I agree.