Royal Bank of Scotland

Debate between Guto Bebb and Ian Blackford

Thursday 5th November 2015 Commons Chamber

[Ian Blackford]

I agree with the hon. Gentleman and I could probably bang on about that issue for a considerable time. He is right. Banks that are lending, particularly to the business community, must understand the businesses to which they are lending. Too often that has been done by matrix, spreadsheets and ticking boxes, and not through a clear understanding of where the growth opportunities are in the economy. That must change, which is why I referred to the investment bank in Scottish Enterprise. We need sectoral skills and an understanding of where growth opportunities are in the economy. There must be more of an alignment of the interests of the country, the Government and the banks, and an appreciation of what we need to do to deliver long-term and sustainable growth.

[Guto Bebb]

The hon. Gentleman mentioned the investment bank in Scottish Enterprise. Wales has a similar institution, Finance Wales, which is operated by the Welsh Government. It charges penal rates of interest. Will the hon. Gentleman mention the rates of interest charged by the similar organisation in Scotland?

[Ian Blackford]

I confess that I am not aware of the individual rates charged, but the investment bank in Scottish Enterprise is quite constrained by its access to capital. I hate to make this point, but if the Scottish Parliament had more powers, it would increase our ability to ensure that that investment bank was properly funded.

We all understand the importance of improving capital ratios and establishing a more sustainable banking platform, but at the same time there has been a choking-off of credit to businesses and consumers, restraining our ability to grow our economy. The need for quantitative easing was clear, but it is right to ask how wider society has benefited from the Bank of England’s £375 billion asset purchase scheme.

Quantitative easing demonstrably helped the banks, but it has not fed through to greater activity to help the wider economy. If we contrast that with the pre-financial crash period between 2006-8, we see that M4 was increasing at an annual rate of close to 15%—levels that should have made alarm bells ring in the Government and the regulator at that time. Today we are living with the consequences of that failure, and that is why we are having this debate. The issue of banks being too big to fail, and the dislocation that took place in our economy as a result of the financial crisis, meant that the public were, rightly, angry at the behaviour of those responsible. We cannot and must not return to the circumstances that led to that crisis.

Of course, none of this was unprecedented. There was a significant banking crisis in the UK in the 1870s. It took a long time to recover from that crisis, and at the time it led to substantial change. In the US the Glass-Steagall Act was introduced in 1933. It prohibited commercial banks from participating in investment banking after the excesses of the 1920s, and that legislation remained in place until repeal under President Clinton. The Glass-Steagall Act was introduced for good reasons, and in my opinion its repeal added to the toxic cocktail that led to the financial crisis of 2007-08. In that context it is right to debate the relationship between commercial and investment banking, although we seem to have settled on ring-fencing as a solution to the challenges.

I understand why many people have supported ring-fencing, and perhaps it is worthy of ongoing debate. We know, however, that investment banking was not the only source of the financial exuberance that brought our economy to its knees. It is worth remembering that Northern Rock was the first failure in this country. That bank had absolutely no exposure to investment banking, and, as was the case elsewhere, simple bad practice—or indeed malpractice—was the issue. We must ask whether it is necessary or appropriate for our commercial banks, such as Royal Bank of Scotland, to engage in investment banking. There is no question but that we need a thriving investment banking industry in this country, and it remains today a source of jobs and wealth. The critical question, however, is whether such practices are appropriate for our high-street banks.