Topical Debate: Financial Stability
House of Commons Hansard, 9th October 2008
The Financial Secretary to the Treasury (Mr. Stephen Timms): I beg to move,
That this House has considered the matter of financial stability.
The events in the USA in the past few weeks and in Europe in the past few days have demonstrated once again the global nature and sheer scale of the problems affecting the financial system. What started in America last year has now spread to every part of the world. Disruption in global financial markets has intensified, particularly over the past few weeks, and people are rightly concerned about what is happening. As well as the USA and ourselves, Ireland, Germany, the Netherlands, France, Spain, Denmark, Austria, Belgium and Iceland are affected; these are global problems that need international, as well as national, responses. My right hon. Friends the Prime Minister and the Chancellor of the Exchequer have made it absolutely clear that we will do whatever is necessary and right to maintain stability. Along with Governments across the world, we have the responsibility to support a stable, well-functioning banking system.
Financial transactions are at the heart of everything that we do: they allow people to buy goods, pay for services, buy homes, save for pensions and invest for growth and prosperity. It is essential that we take action both to support the banking system as a whole and to intervene in particular cases when it is necessary to do so. It is not a case of one or the other; general support and individual intervention are needed. We want to work with other countries to tackle the causes of these problems as well as deal with their consequences.
Yesterday, the Chancellor announced to the House the decisive, comprehensive action that the Government are taking to restore confidence in the banking system and put banks on a stronger footing. That has been widely welcomed.
Ms Diane Abbott (Hackney, North and Stoke Newington) (Lab): The House welcomes what my right hon. Friend has said about financial stability. One of the underlying reasons for the weakness in our and America's banking systems is the weakness in the housing market and the fact that increasing numbers of people are unable to pay their mortgages. What will be done, as autumn turns to winter and winter turns to new year, to make sure that our constituents do not find themselves at the mercy of repossession? What will be done to support people in their homes and against arbitrary repossession?
Mr. Timms: I am sure that my hon. Friend will welcome yesterday's Bank of England announcement of a reduction in interest rates. Of course, if we are successful, as we hope we will be, in opening up the lending market again, we will see the housing market—and, indeed, other parts of the economy—benefit from that change. It is essential that we take action both to support the system as a whole and to intervene in particular cases when we need to...
Mr. Jeremy Browne (Taunton) (LD): The context of today's debate is the understanding that every economy needs a functioning banking system. Businesses and individuals have to be able to borrow money to invest. Without that confidence, the economy as a whole and, indeed, our whole society, is adversely affected.
We on the Liberal Democrat Benches therefore welcome the financial rescue package that the Prime Minister and the Chancellor announced yesterday. It was in the national interest; it was the right thing to do. That does not make it any less galling that the greed and excesses of the banks have put us in this position. However, when a house is on fire, recriminations about how it started are secondary to putting out the fire. That is the task that we have now embarked upon.
Changes in the rules of engagement between the taxpayer and the banks are nevertheless inevitable as a result of the Government's intervention, as well as being desirable. It is essential that the taxpayer's investment is as advantageous in its terms as possible. If, or perhaps when, normal order resumes and banks return to profitability, I want to see the return on that investment at the highest possible level for the British taxpayer.
Senior bankers also have to wake up and realise that their old ways are in the past. Unlike the Conservatives, I do not want the Government to micro-manage every boardroom decision. I say this with kindness to the Conservative party: running a bank is not like deciding the location of chocolate oranges in WHSmith. We are talking about the banking sector being free to make innovative decisions, but within the changed context of the different times in which we find ourselves. The City and the wider banking sector must realise that the context is now different.
Ms Abbott: The hon. Gentleman talks about micro-management of boardrooms, but I do not think that anybody, in any part of the House, has talked about micro-management. What we are talking about is effective and substantive regulation, which has not necessarily been in place in the past 10 years.
Mr. Browne: I take the hon. Lady's point about effective regulation, but, as I understand it, the leader of the Conservative party is keen for the Government to intervene and decide the remuneration policy of people working in the banking sector. That is an extraordinary
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transformation. The Conservative party, which wholly embodies the culture of excess and "loadsamoney" banking spivery, is now going to a 1970s incomes policy. I know that many on the Conservative Benches look back to the era of Margaret Thatcher with fondness, but this is the first time that I have seen Conservative Members look back with such enthusiasm to the era of James Callaghan...
Mr. Browne: I noted that, when the hon. Gentleman had the Floor earlier, the hon. Member for City of York (Hugh Bayley) asked him how the leader of the Conservative party envisaged the Government enforcing an incomes policy in the banking sector. There was no answer from the Conservatives, because they do not have any practical way of delivering their policy. They think that the best way of deflecting attention from the fact that they have no credible policies whatever in this area is to give this nod to populism.
My answer to the hon. Member for Fareham (Mr. Hoban) is that of course the circumstances have changed when the taxpayer is investing so heavily in the banking sector, but the Government cannot decide in every minute detail how the banks should be successful and go forward. There may be circumstances in which a particularly innovative, entrepreneurial banker is so successful at turning round the fortunes of his bank—to the advantage of my constituents and the hon. Gentleman's—that that needs to be recognised. I am sorry if the Conservatives find that frighteningly right wing, but I do not believe that it is possible to run the entire banking sector and the boardroom of every bank from the Chamber of the House of Commons.
Ms Abbott: Will the hon. Gentleman give way?
Mr. Browne: I am getting a bit distracted, but I will give way one more time.
Ms Abbott: The hon. Gentleman does not seem to understand that one of the issues in this debate about the remuneration of bankers is whether banks pursue
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bonus policies that encourage people to make short-term profits without paying attention to the long-term sustainability of their own financial institutions.
Mr. Browne: I do understand that point. I am not saying that I am in favour of all bonuses or of bonuses for short-term behaviour that is disadvantageous to the long-term prospects of a bank. But that is not what the Conservatives are saying; they are saying that they are against any bonuses being paid in the banking sector in any circumstances. Bonuses are also being paid in the public sector at the moment. I do not favour that practice because, by and large, they are being given to people who are simply doing the job for which they are already paid a salary. However, there might be circumstances in which there is such exceptional performance in the public sector that it is right to recognise it financially in order to create incentives to greater creativity, flair and entrepreneurialism and to a more effective delivery of services. I am simply saying that we should keep that scope in the banking sector as well. I do not think that the Conservatives are wise to say that, however good the bankers are, the Government should intervene in all circumstances to prevent a bank from paying a bonus to recognise outstanding creativity, talent and wealth creation.
It is important that there is a housing dimension to the Government's action. The £8 billion of public money that has already been approved for social housing should be used rapidly to acquire the land and property that is becoming available at big discounts at the moment, due to market circumstances. Steps must be taken to protect home owners from premature and unnecessary repossessions.
In addition to the financial package that was announced by the Prime Minister and the Chancellor yesterday, the Bank of England announced a half-point interest rate cut. My party welcomes that decision by the Bank. Its effectiveness was increased by it being part of a co-ordinated international approach that cut interest rates in the leading industrial countries around the world. However, it is fair to say to the Bank of England that this is not the time for cautious incrementalism. We are entering an era in which more dramatic action will have to be taken on interest rates to try to restore greater confidence and to give people the ability to lend and borrow, which they have felt unable to do in recent months. I, and most observers, expect further interest rate cuts to follow.
We do not know whether the Government's action will succeed, but we know that it must do so. The only plan B available to us is to continue with plan A until we are clear of the crisis. Financial stability is essential for the workings of our entire economy, which is why the rescue package announced by the Prime Minister and the Chancellor has our support...
Ms Diane Abbott (Hackney, North and Stoke Newington) (Lab): Obviously, the whole House welcomes the financial rescue package, but it is not the end, or even the beginning of the end, of stabilising our financial and business worries. It is the beginning of the process. The House and Select Committee system will have to continue to question Ministers on many issues, some of which have been raised this afternoon.
There is a lot of talk about individual bankers and their greed, and a lot of talk about toxic assets, as if they were meteorites that came from outer space and landed in the vaults of the financial institutions. I will not talk about individual greed, although it is attractive to do so, because the real issues are structural and institutional and relate to the regulatory system.
In the 1990s I served on the Treasury Committee, and we conducted a major inquiry into the collapse of Barings bank. The reason why Barings collapsed was not that Nick Leeson was greedy or even a criminal, but first because he was trading in derivatives, which no one in the management of the bank understood. They were quite happy for such trading to go on, however, as long as they could trouser their bonuses. Barings folded because of trading instruments that people did not understand and failure of management controls. In that instance, Nick Leeson was not just a trader but covering the back office. The lessons of the collapse of Barings—that management should understand what they are trading and making their profits in, and the lesson about management controls—have not been sufficiently learned.
On the question of regulation, although my right hon. Friend the Prime Minister did many wonderful things as Chancellor of the Exchequer, the tripartite system of regulation, with the FSA, the Bank and the Treasury attempting to regulate the banks, has not been a success. One does not have to be an economist or an investment banker to know that if three sets of people try to do something, it will not be done effectively. It is time to revisit bank regulation; it should not be more complicated or onerous, but more effective.
I remember taking evidence from the Bank of England regarding the collapse of Barings and then BCCI—Bank of Credit and Commerce International. We rather mocked the Bank for its notion of regulation, which was, "We're all good chaps in the City of London. We have you in for a nice chat, you reassure us and we send you away again." Banking regulation has moved on slightly from that approach, but perhaps not as far as we would like.
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There is a case for more scrutiny, and to reopen the issue of audits. Many of the banks that are now collapsing have been audited in the past 12 months. The auditors did not reflect any problems with underlying asset values in their audit. When we ask auditors about that, they say that they go on what they are told—if they are told that the asset is worth a certain amount, that is what they put in the audit. If the audit process just allows the big five audit companies to make a lot of money by going through a process, but gives no real information to the public or politicians as to the underlying health of the company, there is something wrong. Such audits are not aiding transparency, regulation or public understanding.
This view will be extremely unpopular, but I am the only person in the Chamber, and one of the few Members still in Parliament, who voted against independence for the Bank of England in 1997. I voted against it because of just this eventuality. The history of the Bank in past financial crises, going all the way back to the 1930s, is that when it is asked to choose between bearing down on inflation, and the growth and health of the real economy, it has always chosen to bear down on inflation. That is the danger of an independent Bank of England, about which I spoke 10 years ago. An independent Bank of England that chases inflation above all is marvellous when the going is good. When the going is bad, however, we will see why some of us would not vote for such independence.
Ann Winterton (Congleton) (Con): The hon. Lady makes an interesting point. Does she not agree that when the Bank of England was made independent, certain of its previous powers were transferred to the FSA? Does she believe that the FSA has acted in the meantime, as it ought to have done, to ensure that the banks had sufficient reserves?
Ms Abbott: It is an interesting question. Historically, the FSA has not been an effective regulator, and the House will have to return to the matter.
I want to comment on my Prime Minister's economic war council. With 28 people gathering as a war cabinet for economic crisis, it is very impressive. For my taste, however, it is overbalanced towards investment bankers, hedge fund managers, former investment bankers, and people who would like to work in investment banks when they finally leave politics. I put it to the House that wonderful as investment bankers are, we need a more balanced source of advice if we are to move forward in this financial crisis. Of course they will suggest that we pour money into the investment banks. As many Members have said, however, there are other issues that our constituents will ask us about when we return to our constituencies over the weekend.
I am still concerned about the situation of parts of local government that have big holdings in Icelandic banks. It is well and fine that investment bankers are happy with the financial rescue package, but if my constituents or those in other parts of the country find that their services or day-to-day expectations of local government are threatened because the Government are unwilling to support local government in this situation, their love for the financial rescue package will start to drain away.
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I was not satisfied by my right hon. Friend the Financial Secretary's answer on the question of repossessions. One of the reasons for our financial problems is the housing bubble in both America and Britain. Ministers need not console themselves that we did not sell sub-prime mortgages. What is a mortgage for 125 per cent. of the value of a house but a sub-prime mortgage? Our constituents will not understand if we can throw billions of pounds at bankers, but can offer people in danger of losing their homes nothing more than the hope that their mortgage holder might be a bit kinder or nicer. We must put in place a practical scheme to make sure that our constituents do not face a rising tide of repossessions while the investment bankers sit back, recapitalised by the taxpayer but under no pressure whatever to resume lending, either to each other or to small business, and certainly under no pressure to have a more long-term and constructive approach to the issue of repossessions.
The availability of loans for small business has been mentioned. I tell the House that the financial rescue package will soon turn into a joke if small business continues to have its current problems with getting bridging finance and finance generally. The possibility of bringing forward public sector spending on housing was raised yesterday. We have promised £8 billion of such spending; why can it not be brought forward? That would do a great deal for the real economy.
I believe that the financial rescue package is right and important, but I also believe that there are many other issues about which our constituents will ask us in the coming weeks and months, which will need to be raised and pursued both on the Floor of the House and in Select Committees. One of the most amazing features of today's debate, meanwhile, has been to see the Liberal Democrats trying to occupy a position to the right of the Tories on City bonuses. I have to tell them that not even the City is defending the current City bonus regime.
We are facing the most serious economic crisis for a lifetime. I hope, as a Back-Bench Member of Parliament, that I shall be able to play my part in the debates and discussions, and I hope that we can arrive at a real and lasting resolution of the crisis in which we find ourselves.
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