Banking (Responsibility and Reform)

Michael Meacher Excerpts

Tuesday 7th February 2012 Commons Chamber

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

No one can seriously doubt that Britain urgently needs fundamental banking reform, but what has been done so far, since the crash of 2008-09, is timid beyond belief. Hardly any of the factors behind the crash have been effectively dealt with. Extreme light-touch regulation left too much to the markets; a vast global market was created in credit derivatives, which were not well understood but were recklessly securitised throughout the world because of their huge profitability; the selling frenzy was stoked even further by enormous bonuses, which drove the recklessness; the banking structure was so over-concentrated in the lead banks that, when disaster struck, they were judged too big to fail, with catastrophic and desperate consequences for the national budget and debt; and the business model linked speculative investment with retail deposit-taking, with the former as well as the latter protected by an implicit taxpayer guarantee.

All those problems, which were familiar to all of us, need to be dealt with, but none has been, partly because of the intransigence of the banking lobby in resisting reform, and partly because of the weakness of political supervision. That makes another crash quite likely, but if there is one we might find it much more difficult to get public support for a bail-out.

First, no significant action has been taken to curb complex financial derivatives, which were, perhaps more than any other factor, central to the collapse. Derivatives are the obvious candidate to trigger the next crisis, because they add opacity and leverage to the financial system. The obvious requirement is transparency, and in the United States that was provided by the Dodd-Frank Act, which requires that all derivatives be traded across public exchanges. We all know that in this country some highly dubious securities gained a spurious status due to the scandal of the credit-rating agencies, which were paid by the very institutions whose creditworthiness they were supposed to assess. That ought to be made illegal; better still, the function should be transferred to the public sector to ensure integrity and transparency.

Secondly, there is public outrage—even now at this late stage the Government find it difficult to accept it—at a banking system which owes its continued existence to massive Government intervention, paying itself mega-salaries and bonuses, and at the fact that 90% of investment bank profits are, in an age of austerity, directed not at strengthening balance sheets, not at shareholder dividend, not at lower fees for customers, but at gigantic personal pay-offs.

Ministers say that to do what some countries such as France are doing, with a mandatory cap and the removal of the bonus guarantee, is impractical, but there can be no doubt that, if the G20 Governments insisted on limits and made continued liquidity provisions dependent on compliance, no bank could refuse.

Thirdly, to avert financial crises, the Government have placed far too much emphasis on enhancing capital controls, and they have done so in a manner that is unlikely to be effective. At the outset of the 2008-09 financial crisis, almost all financial institutions across the globe had capital adequacy at least equal to, and in some cases even twice as much as, the minimum Basel regulatory requirements. But, despite the near-global collapse of the system under those provisions, Basel III proposed in 2010 that the core top-tier capital requirement be only 4.5% and the contingency capital requirement be only 2.5%. Of the EU's top 50 banks, 45 had already met those requirements, and Basel III does not even require them to come into force until 2019. For the Government to accept that is incredibly feeble. It is far too little, far too late and it reflects the Government’s connivance with the banks in minimising reform.

Fourthly, the Vickers commission proposals that the Government, unsurprisingly, have accepted are weak and deeply flawed. Trying to separate retail banking from investment banking with some kind of internal Chinese walls is doomed to failure because of regulatory arbitrage. Financial institutions always invent ever more sophisticated products simply to get around regulatory controls. That is the argument for a clean break between retail high-street banking and investment casino banking. That would have the key advantage of removing the implicit taxpayer guarantee, which allows financial conglomerates safely to use retail deposits for proprietary trading.

Britain arguably retains the most profoundly dysfunctional banking system of any G7 country. It came closer to collapse than any other in autumn 2008. The banking sector in this country is twice as large, relative to the rest of the economy, as in any other major EU country. It is stuffed with mega-banks that are addicted to property, mortgage lending, offshore speculation and tax evasion. Barclays Capital is only the most obvious example of that. Britain needs a much more diversified banking structure with smaller banks, in particular specialist business banks such as infrastructure banks, housing banks, green banks, creative industry banks and knowledge economy banks.

[Jim Shannon (Strangford) (DUP)]

Does the right hon. Gentleman share my concern and that of many people inside and outside this House over bank charges for the ordinary account holder? The ordinary account holder seems to pay a higher price every time, whereas those at the top of the banks get the dividends.

[Mr Meacher]

I wholly agree with the hon. Gentleman. The mega-bonuses go along with small businesses having to pay exorbitant interest charges, if they can get a loan at all. The Financial Secretary says that the Government are doing their best with RBS, but why do the Government not tell RBS what level of business lending there should be and what the conditions on it should be?

[Margot James]

In fact, RBS has a reasonably good record of lending to small and medium-sized enterprises. It just missed its Merlin targets. It launched a new product at the end of last year for businesses with low fixed interest rates, no early repayment charges and no fees for the first three months. It is above the market average for small business loans. Some 40% of all SME loans are from RBS, which is—

[Mr Speaker]

Order. I say gently to the hon. Lady that interventions must be brief. There is substantial pressure on time and I would like to accommodate Members.

[Mr Meacher]

The hon. Lady has obviously received a detailed RBS briefing. However, what she describes is very different from the experience of our constituents, who complain about how difficult it is to get loans and about the prohibitive conditions that are attached to them.

I want to make one more point. It is little recognised that 85% of the British public’s money is held by just five banks, which are able to use that money with little or no accountability to the public. Investment in the UK economy therefore reflects the interests not of the public or of society, but of the senior decision makers at the five largest banks. Given that the total gross spending of the banking sector in the run-up to the crash exceeded by far total Government spending, the decision makers in those banks potentially have more spending power to shape the UK economy than the whole machinery of Government. That is a significant fact. In effect, control over the money supply and the allocation of credit has been largely privatised. That is central to Britain’s problems.

Britain needs above all to escape the dangerously mounting deficit in our traded goods account, which in the last two years has been up to £100 billion a year or 7% of GDP. The allocation of credit cannot be left in the hands of private commercial banks, which currently channel only 8% of the money supply into productive investment. Instead, they generate colossal asset bubbles through mortgages and household borrowing.

What is needed is the re-adoption of the rationing of bank credit through official guidance, enforced where necessary through quantitative ceilings. That prevailed successfully in this country until the 1971 competition and credit control measures, which inaugurated the era that said that the market always knows best and in which the deregulation of finance depended almost exclusively on the price mechanism and variable interest rates.

Bonus figures released last week show that the top 1,250 executives in the eight leading London banks received an average of £1.8 million in 2010. That is £34,000 a week. What is really needed in banks, as elsewhere, is whole company pay bargaining, whereby the pay at each level, including at the top, has to pass the examination and approval not just of shareholders, but of the employed staff who are the bedrock of the organisation.