Banking Reform

Alison McGovern Excerpts

Monday 29th November 2010 Commons Chamber

[Alison McGovern (Wirral South) (Lab)]

I begin by congratulating the Backbench Business Committee and my right hon. Friend the Member for Oldham West and Royton (Mr Meacher) on securing this debate, which has been illuminating and measured. I join the hon. Member for North East Cambridgeshire (Stephen Barclay) on the important point that he made at the beginning of his speech: in the City, there has been a lack of recognition of the depth of anger among many of our constituents. The hon. Gentleman is right about that, and I hope that this debate can start to set that issue right in some way.

I want to make three swift remarks. My first is about the tripartite arrangements. I want to take the House back in time. I well remember when interest rates were set by politicians. In many ways, our tripartite arrangements have been a success. As economists predicted before the change, Bank of England independence aligned to inflation targets has allowed an independence, a clarity, a robustness and a rule-based approach. It is important to recognise that. We have been discussing a lot, and people have rightly raised, some issues to do with the failures of regulation, but we need to recognise why we changed to the tripartite arrangements and consider the importance of that change in 1997.

However, today I want to suggest that we cannot just question and consider regulation, important though that is; we need to look for a change of culture in the financial services sector as well. Many people have already recognised the imbalance in respect of the major role that financial services play in our economy, but I do not think that that imbalance is mainly regional—it is not a case of London and the south-east versus the rest of the UK at all. We know of the importance of banking in Scotland, and in my own area of Merseyside, many people work in the financial services sector or in organisations that contract to it. In 2007, such activity amounted to 14% of PAYE and 27% of corporation tax.

I want to make the point that the impact of the sector is not just that regulation might help or hinder small business; as we have all seen, it also has a massive impact on public services. Getting right the structure, regulation and culture of the sector is one of the most important jobs that we have to do.

I turn to the importance of the changes that we all want. First, on regulation, the issue is about not just capital requirements but the work that Basel III might—and must—do on liquidity requirements. In many ways, the credit crunch is misdescribed; it should be described as a “liquidity crunch”. The question that we need to ask of all banks relates to their access to liquidity as much as to capital.

Whoever has the supervisory powers, whether the Bank of England or the Financial Services Authority, it is important to determine what those macro-prudential powers actually are. Furthermore, we must have a credible means, transparent and understood by all, of dealing with failed banks. A process needs to be in place. People have mentioned living wills. We need to make sure that what happens with failed banks is understood by all, so that the risks lie with shareholders and people within the system rather than with an implicit taxpayer guarantee. We will see that as the place that we are trying to get to.

Finally, I leave the House with this thought. If we are to understand the crisis that we went through in 2008-09, we must realise that it was not merely a crisis of regulation. The commission on banking reform that the Government rightly set up should listen to the Chartered Institute of Bankers in Scotland. It has warned Sir John Vickers that new regulation will fail if it is not combined with

“a firm commitment to embedding a culture of high ethical, professional and technical standards amongst bankers throughout the industry”.

That point is really important. Those of us who see the importance of the financial services sector want a change in its culture as much as a change of regulation. That has to be about high ethical standards.

In conclusion, I hope that the measured nature and thoughtfulness of this debate will send a message to all about the seriousness in which we hold these reforms.

--- Later in debate ---

[Andrew Bridgen]

The hon. Gentleman makes that point, but the previous Government encouraged and took part in an orgy of credit: in fact, they led it, and invited individuals and corporations to join in, safe in the knowledge that the former Prime Minister said that he had ended boom and bust, which now sounds as ridiculous as King Canute claiming he could turn back the tide. The taxpayer now has the hangover from that 10-year orgy of credit.

Under the former Prime Minister’s watch, the Bank of England deliberately stoked a consumer boom that led to spiralling house price inflation and massive levels of personal debt. This is not just my opinion, but that of the previous Governor of the Bank of England, the late Lord George, who said of that period:

“We knew that we were having to stimulate consumer spending. We knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term.”

That approach led to 20% house price inflation when the consumer prices index was running at 2%, led to financial institutions such as Northern Rock offering 120% mortgages, and ultimately led to a run on a British bank and the financial crisis of 2007. Opposition Members might blame America, global markets, or even the fact that we are not in the euro, as ridiculous as that sounds, but this misguided belief, and the hubris of the previous Prime Minister in believing that he had ended boom and bust, helped to contribute to the banking collapse. It is fascinating that the shadow Home Secretary—or perhaps I should say the shadow shadow Chancellor—stated that the cause of the deficit was not the previous Government’s borrowing, but rather the collapse of tax revenues. He failed to recognise that tax revenues based on rapid house inflation and excessive consumer credit are totally unsustainable.

The failure of the previous Prime Minister’s regulatory regime also contributed to the problem. It was clear in the early part of the decade that the UK had an unsustainable consumer credit funding gap: the IMF said so, as did the previous Governor of the Bank of England. The power to regulate had been transferred from the Bank of England to the Financial Services Authority and the Treasury, with an inadequate definition of roles and responsibilities. It was an absolute disaster, as was shown at the height of the Northern Rock crash, when Mervyn King was asked, “Who is in control?” and his answer was, “That depends on how you define ‘in control’.” The answer was that nobody was in control, and no one could see who was in control. One cannot have a third of a problem—one wants all of the problem or none of it. That was part of the difficulty.

So where do we go from here? I am a firm believer in sound money. A sustainable banking system is one where lending policies are closely in sync with the projected economic activity of the people it serves, not driving them.

[Alison McGovern]

Does the hon. Gentleman recall, as I do, that the previous Conservative Government left the country with a deficit of 3.4% which was going towards ongoing spending, unlike the debt in 2008, which accorded with the “borrow to invest” rule? In relation to sound money, what does he think about that?

[Andrew Bridgen]

I thank the hon. Lady for her point. She, like me, was not in this place at that time. I was in business running a corporation. I fixed the roof while the sun was shining, and I put my company into net credit three months before the banking crash happened.

We need a Government—and a regulator—who do not deliberately go to sleep at the wheel for political advantage, as the previous Government did. We must never let a bubble like the one that built up under the previous Government build up again. Our plan for growth depends on a sensible and sustainable banking system alongside more powerful incentives from Government. We must never return to the bubble that ended in the financial crisis and allowed banks to lend unsustainably under a tick-box regulatory system and a short-termist, feckless Government concerned more with political advantage than with the long-term interests of the country. In short, we need to look at creating a body that is solely in charge of financial stability and has responsibility for macro-economic supervision.