Interest Rate Swap Derivatives

Steve Baker Excerpts

Thursday 24th October 2013 Commons Chamber

[Steve Baker (Wycombe) (Con)]

I, too, pay tribute to my hon. Friend the Member for Aberconwy (Guto Bebb), who has led this cause absolutely heroically. I am sure that Members across the House will wish to join me in saying to my hon. Friend the Member for Wyre Forest (Mark Garnier) that I wish I could say that he had anticipated my remarks. I feel sure that his speech will stand as a landmark in terms of making this debate and these products easy to understand.

The system of money and bank credit ought to be the lifeblood of a free economy and a prosperous society, but as we have heard in this debate, and from across our constituencies, the banking system is not the servant of a free economy but has become its master, and a tyrannical master at that. Businesses in our constituencies such as Stewart Linford, furniture makers in High Wycombe, have found themselves treated utterly appallingly.

I hope that my hon. Friend the Financial Secretary will not stay his hand when he criticises the financial system for what it has done. Too often, Government Members treat the banking system gently as if to criticise it were to criticise a free-market system. It is not a free-market system. It is heavily regulated, heavily directed by the state, and awash with implicit and explicit guarantees that produce moral hazard and perverse incentives. Apart from anything else, interest rates have been unexpectedly low because of the interventions of central banks. When Andy Haldane, the executive director of financial stability at the Bank of England, went before the Treasury Committee and explained that the bond market bubble was the biggest threat to financial stability, he clearly stated that the Bank had deliberately inflated it. The fact is that the system of money and banking is state directed.

[Stephen Lloyd]

Given the behaviour of some of the banks, does my hon. Friend agree that the Financial Secretary and the Government should consider adding a further penalty if repayments are not made within a certain time frame?

[Steve Baker]

I am grateful to the hon. Gentleman for his intervention. I want to make the case that I think that, in this regard, the banking system may have crossed from mis-selling into fraud.

This morning I was shown a transaction by its author that was part of a system in which a bailed-out bank hid losses of £1 billion on a £10 billion loan portfolio. It was done lawfully and it was enabled by the accounting standard of the international financial reporting standards. The way in which the IFRS accounting standard treats derivatives allows people to up-front unrealised cash flows as profit and then pay bonuses out of them. That is probably why so many of these products have been sold.

The right hon. Member for Wolverhampton South East (Mr McFadden) spoke eloquently about the bonus system and the incentives it creates. The Government should look extremely carefully at what has been done with regard to the use of IFRS accounting, the incentives it creates and what that means for people who sell products and take bonuses. They should also look at whether the IFRS complies with UK company law.

[Richard Fuller]

My hon. Friend is a defender of a system of true free-market principles. He has identified the twin problem mentioned by my hon. Friend the Member for Wyre Forest, which is that, in addition to the unfunded liability cause, we have now booked the profits and paid the bankers for going through the process that duped the people. Those involved should face criminal sanction.

[Steve Baker]

My hon. Friend makes an interesting point. I want to live in a free society with a free and commercially successful banking system, but we have to ask ourselves whether the current system has incentivised behaviour that is fraudulent under the law as it stands. The last thing we must do is allow ourselves, in a frenzy of condemnation, to start criticising a system on which our civilisation depends, when that criticism is unjustified. We should be looking at the law as it stands and checking—carefully investigating—whether individuals have broken the law. I am particularly concerned about IFRS. I do not think it complies with UK company law and think it has incentivised behaviour that is probably fraudulent.

Banking ought to be simple. It ought to be about connecting depositors with those who wish to borrow in order to invest for productive purposes, such as buying a house or even going on holiday, but predominantly it should be about investing to create real resources and real wealth, and to increase productive capacity and the balance of capital invested per head, so that real wages increase and the cost of living goes down. Instead, we have ended up with a system in which poor state intervention from one end to the other has created so much moral hazard and so many perverse incentives that it has become abundantly clear that a small number of individuals—far fewer than 1% of the population—have captured the state in order to turn implicit and explicit taxpayer guarantees, or bail-out funds, into personal remuneration. It is a disgrace.

The banking system needs to be made honest, and quickly, and part of that is a system of compensation for people who have been treated extremely badly.