Independent Commission on Banking

Baroness Valentine Excerpts

Thursday 15th September 2011 Lords Chamber

[Baroness Valentine]

My Lords, I am chief executive of London First, a not-for-profit business membership organisation that includes businesses from a range of important London sectors, including banks, professional services firms and their customers.

I start by joining others in thanking the noble Lord, Lord Myners, for introducing this debate, but I thank him more for his swift action back in 2008. The Independent Commission on Banking has two aims: to increase stability and to increase competition. Clearly, both objectives are important and, like other noble Lords, I pay tribute to the approach that the commissioners have taken and to the experience and judgment they have brought to this difficult and contentious task.

Recent events in the eurozone have reminded us that the battle for financial stability has not yet been won, and factors beyond our control may yet have serious economic consequences. Within these constraints, the ICB has made credible recommendations about limiting the impact on UK retail banking, and therefore on the taxpayer, of any future shocks. The commission has also proposed welcome measures to encourage more banking providers to enter the marketplace to deliver more choice to businesses and consumers, pressure for lower prices and improved service, and a spur to innovation. That will support the one thing that we all want—growth.

However, a third and vital consideration has not been given equal billing: the need for the UK to maintain its global competitive position. My concern is that both in perception and in reality, Government must create a tax and regulatory framework that ensures that the UK remains an attractive place to do business. The Basel committee notes that the increased stability from higher capital adequacy ratios comes at the price of reduced economic growth. Concern has been voiced that the unilateral creation of a ring-fence and the imposition of higher capital adequacy ratios on retail banks will disadvantage the UK economy. However, it is unacceptable for taxpayers to bear the cost of poor lending decisions by banks, and better regulation can also be a source of competitive advantage, giving a more stable and reliable environment in which to do business. Confidence and trust are intangible but essential components of a successful business environment, particularly in the current climate.

The Government now have the important and complex task of finding the right place on the yield curve between risk and reward and stability and growth, and much of this devil will be in the detail. In this context, the debate about the timing of implementation is pertinent. The challenge is to do this as quickly as practicable but also to get the implementation as right as possible, and to do so based on a thorough understanding of the law of unintended consequences and the impact on growth. Not only do policy-makers need to understand the impact on bank customers and on UK and EU-regulated banks, but the changes sit alongside wider changes in tax and regulation, nationally and internationally, and an unsettled economic backdrop.

In the UK, we have strong reason to exercise particular care. Our success as a financial services centre is a vital component of our economic recovery and an Achilles heel in our reliance on the sector and our exposure to future shocks. Finance accounted for 10 per cent of GDP in 2009, which is significantly higher than in the US, almost double that of the Japanese and French, and well over twice that of Germany.

I commend the Chancellor's Statement in the Commons explicitly welcoming London's status as the pre-eminent global centre for banking and finance as well as supporting UK-headquartered universal banks. They form a key plank of our economic infrastructure, particularly given the experience of the repatriation of liquidity at the time of the last crisis, and government policy must not be indifferent to their fate. Similarly, real commitment to maintaining the City as the premier international global financial services centre is key. Although focused in London, financial services have a nationwide presence and national importance. They account for a million jobs directly, with another million in professional services, two-thirds of which are outside London. As the world's leading supplier of financial services, UK financial services contribute a net £36 billion to reducing our trade deficit. As the biggest taxpayer, accounting for 11 per cent of revenue paid in 2010, they also fund the services we hold dear.

Other countries eye our success covetously. The Chinese Government are attempting to establish Shanghai as a leading international financial centre by 2020. During the Prime Minister's trip earlier this week, the Russians sought UK expertise in setting up an international financial centre in Moscow. Others, closer to home, have long dreamt of usurping London.

With these thoughts in mind, I commend the Independent Commission on Banking for having navigated a difficult course. It is critical that we prevent any future recourse to the taxpayer. However, we must regulate so that it is safe for the UK to host a globally dominant financial services industry and attractive for that industry to call the UK home. I urge the Government to continue their dialogue with UK and foreign banks as well as with the businesses that are their customers. We must be mindful of the overall effect of the full range of post-crisis reforms, whether at national or international level, and our objective must, of course, be better, not just more, regulation, and therefore the reinforcement of the UK's competitive position.