Royal Bank of Scotland

Jon Cruddas Excerpts

Thursday 5th November 2015 Commons Chamber

[Jon Cruddas (Dagenham and Rainham) (Lab)]

I congratulate my hon. Friend the Member for Edmonton (Kate Osamor) on introducing this important debate and thank the Backbench Business Committee for granting time for it. My take on the motion is fairly simple: what is there not to like? It suggests that the Government should

“consider suspending the further sale of its shares in the Royal Bank of Scotland”

and calls for

“a wider review of the UK’s financial sector”,

including

“the case for establishing new models of banking, including regional banks.”

That suggests a mixed economy in the banking sector that does not simply result in a massive loss to the taxpayer—some suggest as big a hit to the public purse as £14 billion.

That does not seem to me to be an especially political suggestion. Indeed, organisations on the right of the political spectrum such as Civitas and ResPublica have suggested turning RBS into a network of local banks, and regulators such as Adam Posen and Martin Taylor have also suggested turning it into smaller challenger banks. The motion therefore appears sensible and not particularly political, so I find talk of abstention quite strange.

In my brief contribution I want to make a few points about the question of alternative ownership models. As far as I can see—my hon. Friend the Member for Edmonton pointed this out—there appears to be a distinct lack of evidence for the Government’s assertion that banks perform better when located solely within the private sector. I want to point out evidence suggesting that other ownership models—what we might term “stakeholder banks”—should have a role to play in fixing our broken banking system.

My basic departure point is this: as far as I can see, in justifying their policy on RBS, the Government have leaned heavily on a two-page letter from the Governor of the Bank of England, which states that

“all the evidence suggests that commercial organisations are more efficient, more innovative and more effective”

in the private sector, and that a privately owned banking system is

“best able to allocate capital efficiently and competitively to grow jobs, investment, and income”.

That is pretty clear and unequivocal, so let us start with some basic questions.

Where is the evidence for those assertions? Neither the Government, nor the Bank has provided any. When questioned, the Minister has simply pointed back to the Governor’s letter, which appears to be a pretty lazy feedback loop. It is not really good enough when we are talking about the future of a major national asset, one of the UK’s biggest banks, with huge implications for our economy and the resilience of our financial system, and indeed our livelihoods and those of our constituents.

Were we to listen only to the Government, we would think that there is simply no alternative to an economy dominated by large, privately owned banks, except perhaps some kind of monolithic Government bureaucracy—a simple either/or choice between a big shareholder bank and a big state bank. However, there is a whole range of other ownership models that work in other countries, from local savings banks accountable to local communities, such as the German Sparkassen, to co-operatives, mutuals and state investment banks.

Actually, as far as I can see, it is the UK that is the odd one out, because it relies exclusively on shareholder-owned banks. For example, research by the New Economics Foundation has found that nearly two thirds of German bank deposits are with so-called “stakeholder banks”. In France the proportion is about 50%, and in the Netherlands it is around 40%. In the UK it is just over 10%, the lowest of almost any developed economy.

[Jeremy Quin]

Does the hon. Gentleman accept that building societies also suffered from problems through the crash? We had our own equivalents in this country, and I am afraid that they fared no better than some of our major banks.

[Jon Cruddas]

I will come to the question of demutualisation in a moment. I simply suggest that Government Members read a book called “The New Few” by Ferdinand Mount, who happened to be Margaret Thatcher’s head of policy. He argued for a more resilient capitalism, including a mixed economy in banking provision, with mutuals, local regional banks and a wider distribution of banking products for communities such as mine in east London. Therefore, I do not think that this is necessarily a left-right debate. I argue that this is a live debate on the right, which suggests that simple neutrality or abstention on the motion is not necessarily going with the grain of more innovative thinking across the right of the political spectrum.

[Dr Rupa Huq (Ealing Central and Acton) (Lab)]

My hon. Friend is a renowned economist, but even before we get into the alternative models of banking, does he agree that one does not have to be an economist to see that buying something at one price and then selling it off for next to nothing—at the current market rate, shares are £3.21 each—does not make good economic sense? That from a party that prides itself on its so-called long-term economic plan. It is more like what George Bush senior called voodoo economics.

[Jon Cruddas]

A collective hit of £14 billion on taxpayers does not seem to be good, rigorous or empirically grounded economics, so my hon. Friend is absolutely right.

Let me return to the question of bank deposits. Apart from anything else, the lack of diversity in the UK’s banking system leaves us extremely vulnerable; all our eggs are literally in one basket. If we look at the international evidence on how those different types of bank perform, it quickly becomes clear that the Minister’s claims simply do not stack up.

Let us take shareholder owned banks first. Let us not forget that in 2008 it was shareholder-owned commercial banks that brought the global financial system to its knees. Yes, they were “innovative”—they created some of the most innovative toxic financial instruments the world has ever seen—but much of that innovation was what Adair Turner has termed “socially useless”; it served no real economic purpose except to inflate the profits of the banks that produced them while quietly spreading dangerous levels of risk to every corner of our financial system.

Members do not have to take my word for that. The Parliamentary Commission on Banking Standards concluded that the shareholder model itself had a large part to play in the story:

“Shareholders have incentives to encourage directors to pursue high risk strategies in pursuit of short-term returns... In the run-up to the financial crisis, shareholders failed to control risk-taking in banks, and indeed were criticising some for excessive conservatism.”

In other words, the ownership model to which the Government are so keen to return RBS is the same model that helped to bring the bank down in the first place.

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

Perhaps the hon. Gentleman could remind the House which party was in government when the financial crisis took place and what it was doing with the regulator.

[Jon Cruddas]

Labour was in government, and many of us were arguing that we should have created this opportunity to diversify forms of banking products. The hon. Gentleman might have meant the debate about the future of the Post Office, and many of our colleagues were involved in trying to articulate the case for a Post Office bank that could offer robust, bona fide financial products to communities such as mine, which were being vacated by the big commercial banks. We have a consistent theme developing among the contributions from the Opposition side of the House, and it is not an either/or political point-scoring exercise.

[Helen Goodman (Bishop Auckland) (Lab)]

My hon. Friend will no doubt recall that the bank that backs the Post Office bank is Ulster Bank, which is owned by RBS.

[Jon Cruddas]

My hon. Friend is exactly right, so let us talk about stakeholder banks and look at some of the evidence. I refer colleagues to the NEF document “Reforming RBS” and some of its findings. First, stakeholder banks tended to be better capitalised and less volatile before the crisis, and they were less exposed to the risky and speculative activities that caused it. Co-operative banks suffered just 8% of the total losses incurred during the banking crisis, despite accounting for around a fifth of the European banking market. To put that in context, HSBC alone was responsible for 10% of those losses. Secondly, stakeholder banks were also more likely to keep lending after the crisis. In fact, German public savings banks, Swiss cantonal banks and credit unions in the US and Canada all kept expanding their lending to businesses right through the crisis and the resulting recession.

[Jeremy Quin]

Does the hon. Gentleman accept that our own experience with the Co-operative bank has not been that happy?

--- Later in debate ---

[Jon Cruddas]

I agree. I was talking about co-operative banking across the whole of Europe, not the specific case of the Co-operative bank here in the UK, which does have problems. [Interruption.]

[Mr Adrian Bailey (West Bromwich West) (Lab/Co-op)]

It never had to be nationalised.

[Jon Cruddas]

Point taken. The stakeholder banks across Europe kept the real economy going while commercial banks’ lending was crashing.

The third point is that in the UK we paid the price for having deliberately dismantled stakeholder banks in the 1980s via demutualisation. We left ourselves with nothing to break the catastrophic fall in lending by the big banks, and since the crisis we have done next to nothing to address that fatal structural flaw. I would have thought that we could all agree that a more resilient capitalism is a desirable outcome.

[Catherine West]

Does my hon. Friend agree that Government policy has helped the larger players? According to commentary in the financial pages in the past few months, there are things that the Government could have done to help mutuals, but instead they just continued to play with big business and help it at the cost of mutuals. What are they doing to help the mutual sector?

[Jon Cruddas]

That is a good point. What are they doing to build a more mixed economy that is more resilient and is not prone to the catastrophic speculative attacks and collapse in lending that we saw at the back end of 2008?

It is not just in times of crisis that we suffer from our lack of a stakeholder banking sector; it is a problem for us in good economic times too. Research by NEF has found that stakeholder banks devote twice as much of their balance sheets to real-economy lending as commercial banks. Meanwhile, commercial banks invest more than twice as much in derivatives trading. Stakeholder banks also outperform commercial banks on lending to small businesses in Austria, Germany, the Netherlands and Canada, perhaps because they are rooted in local communities and can invest in local relationships, or because they do not have to worry about satisfying shareholders with double-digit quarterly returns. All this might help to explain why the UK banking system is the least effective in the G7 at supporting the real economy, with just over 20% of bank lending going towards productive activity, compared with more than 60% in Germany. Obviously, financial crises are the other side of the same coin, since the types of unproductive and speculative lending that dominate our banking system will tend to blow up bubbles which inevitably burst.

I could go on to list many other measures on which stakeholder banks appear to do better: higher customer satisfaction, higher deposit rates, lower loan rates, bigger branch networks, more job creation, and so on. Suffice it to say that if we want banks that put customers first, support the economy and manage risk sensibly, we could do worse than look to our European neighbours. I invite the Minister to publish the opposing evidence. Let us lay it out and have a discussion about the comparative views on the evidence underlying our public policy.

[Mr Steve Baker (Wycombe) (Con)]

I agree with the hon. Gentleman that this is a live issue on the right, and I, too, would like to see a much more diverse banking sector. Let me bring him back to the point made by my hon. Friend the Member for Horsham (Jeremy Quin). Is it not a problem for the hon. Gentleman and me, and for all those who want a more diverse, more co-operative and mutual banking sector, that the entire atmosphere of co-operative banking in the UK has been established by the circumstances of our own Co-operative bank?

[Jon Cruddas]

The hon. Gentleman seems to be hiding behind one example when all the evidence across western market economies suggests that more co-operative banking does indeed have a part play in creating a more resilient modern capitalism.

What does all this mean for RBS? The Government have presented an artificial choice between business as usual with taxpayer ownership and business as usual with private ownership. This could be deemed outdated thinking. We need so much more imagination and so much more ambition if we are really going to build a better banking system. We urgently need to nurture new kinds of bank that exist in almost every other developed economy—banks that are rooted in local communities, accountable to more than quarterly profit figures, focused on supporting real economic activity, and run with an ethic of public service attached to them. The reason this debate is so obviously important is that with economists the world over warning that the next financial crisis could be just round the corner, the stakes literally could not be higher.