Interest Rate Swap Derivatives

Debate between Steve Baker and Stephen Lloyd

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.