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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
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 Governments 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 Governments 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.
Mr. George Mudie (Leeds, East) (Lab): As time is short, and there are many Members here, I shall move quickly through my speech. I shall not, however, take the advice of my Newcastle colleague, my hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson), who has just suggested that, if I wanted more time, I should make my speech in the next debate, when I would get 15 minutes. Of course, you would notice if I did that, Madam Deputy Speaker.
I have heard what has been said in the debate, but I think that congratulations are in order. We cannot go overboard, but I think that the package that was delivered yesterday was a very good one, in both content and presentation. If we compare its content with that of the US package, we see that it is completely different, in that it is far more relevant and far more likely to be successful. Its presentation, despite being spoiled by some nonsense, to which I shall return later, involving discussions between the Opposition and officials, was very good. It has gone down very well, and the Government have certainly played their part in doing what they can in the global fight for stability. Locally, we have certainly delivered a package.
As a member of the Treasury Select Committee, I did one or two interviews yesterday. The media seemed to have moved on to the next days newsor the next hours newsand were asking what would happen if the plan did not work. We put £400 billion into the equation, yet they still wanted to know what would happen if it did not work. The answer has been given by the Prime Minister and the Chancellor of the Exchequer: if it does not work, we will do whatever it takes. That is the only possible answer.
Today, although the markets have stabilised and even gone up, the situation is still volatile. We do not know whether the plan is going to work. We can only hope. Some Members have asked about the cost of the package and how we are going to meet it, but that does not matter. We have to win this battle, because the price of losing it would be so devastating for ordinary peoples standard of living, so we will do whatever it takes. This is not simply about money. It is more about money plus confidence. If confidence results from this package, that will be lovely. If it does not, another package will have to be delivered until confidence returns to the markets and we can get back to normal.
I am delighted to see what is emerging as a result of the package, although it places some pressure on the Minister. When the lending facility for the special liquidity scheme was introduced by the Bank of England, and introduced in the Chamber by the Chancellor, I made the point that we were talking about creating a £100 billion facility to rescue the banksthe very people who got us into this problem. Has any part of the negotiations tied the banks not only to rescuing themselves with the money, but to ensuring that their customerssmall businesses and, above all, home ownersare rescued? The answer that the Governor of the Bank of England gave to the Treasury Select Committee was that that was not his concern. The Chancellor answered that it would be improper for him to take such action.
I am delighted that things have moved on, and that this larger package contains specific reference to freeing liquidity in loans, and to lending to home owners and to small and medium-sized enterprises. However, when the Minister was questioned on the package earlier, he suggested that it should do certain things. I wonder whether we can press him on this issue. I do not fancy going back to my constituency and telling people that, this week, we made £400 billion available to rescue institutions headed by people whose recklessone could say greedybehaviour has endangered the economy of this country and the livelihoods of most of its people. I do not fancy telling my constituents that, without also being able to say that, in moving to save the banks to
stabilise the financial markets, we have obtained an explicit agreement that, as soon as possible, and in defined terms, they will start proper lending facilities.
The chief executive of the British Chambers of Commerce was on television this morning: a survey of 5,000 businesses has been undertaken and every indicator is negative. Above all, we must look at the number of housing repossessions that are taking place. At first, we had a problem caused by the financial markets in the financial markets and the real challenge was to see whether we could prevent it from spreading to the real economy. It looks as though we may fail, but this is our last chance. If we have not nailed these bankers to an agreement that is explicit and that will be honoured, we will not be thanked by ordinary people watching events on television, doing their sums and looking at their household budgets and worries. I press the Minister to tell us whether all this is a hope, trickle-down or something that will happen.
On salaries, I cannot understand the hon. Member for Taunton (Mr. Browne), and there is real sense in questioning both parties that say that something should be done. Something will be done. There is the question of having a bit of fun and saying, Tell us the details, but it is more important that there is political will. If we say to people out there, Weve rescued the ones who caused you these problems, but we havent got an understanding that they will change their behaviour, once again we will not be forgiven. We need that political will.
I hope that, for the first time, the banking and finance industry will show a bit of humility and put its own house in order, but if it does not do so I hope that we retain the consensus to do something about it.
I say to the Minister and the Chancellor that this is a great package, but given the amount of money we put into those institutions I cannot understand why we did not get board representation. Lending policies are being considered and salary policies are on the table. We ought to have our representative in there to ensure that our part of the deal is delivered.
I am sad that the Liberals have departed from Bank of England independence. That independence was given and supported, but when things get tough they want to take it away. The Bank of England and the Government must improve their relationships a bit, including more trust and more partnership, but taking independence away from the Bank would be a wrong step.
Government action has been required to recapitalise the banks for quite a while. It was made particularly urgent by the collapse of Lehman, which sent shivers through the banking system. Cash hoarding and de-gearing by banks was being reinforced by counter-party risk, with the banks themselves fearful that other banks might go bust. Finally and belatedly, the Government have responded to widespread calls for a recapitalisation plan, and I think we should support it.
Mr. Charles Walker (Broxbourne) (Con): One of my concerns is the fact that the Government are positioning what has happened as purely a failure of the banking sector. They have had financial stewardship of this country for the past 11 years. Surely they must take some responsibility for getting us into this position and for the failings of the regulatory bodies that are meant to oversee the activities of the banking sector.
Mr. Tyrie: I strongly agree. It is important that we alert people to the myth that is being propagated, which is that, somehow, this crisis blew over on a transatlantic breeze. Of course, it was partly made here as a result of excessive borrowing by the Government, the corporate sector and individuals.
Furthermore, the crisis has been made worse by the failure to act quickly. Throughout, we have had a reactive policy from the Government. This is the first time that they have been prepared to look comprehensively at what has been a deepening crisis. The package was not the product of several weeks of hard work, still less months, and one has only to look at the Treasury press release to see how thin it is. It is absurdin fact, it is an insult to the intelligence of us allthat the Chancellor and the Prime Minister should suggest that it was the product of a lot of deep work.
So we are left with a lot of questions that now need to be answered. My hon. Friend the Member for Fareham (Mr. Hoban) asked quite a lot of them, but I will add a few in general terms. First, is this really a voluntary scheme, or were the banks, as appears to be the case, dragged to the table to agree to it? What will the Government do if the full £25 billion window is not taken up? There is first-mover disadvantage to taking up such deals. The banks that ask for the money are perceived by the markets to be made weaker as a consequence.
Secondly, will the facility be drawn down and will it be allowed to be drawn down primarily by the weakest banks? Will there be limits as a proportion of market capitalisation for each bank? There are great risks to the taxpayer from pouring most of the money into the weakest banks. The upside for the taxpayer will obviously be much smaller, but, on top of that, the strengthening of the balance sheets, and therefore the propping up of the management of the weakest banks, might get in the way of the consolidation of the banking industry, which is what we need. We need the sector itself to run that consolidation around the management of the strongest and best banks. For those reasons, in Mondays edition of The Times I advocated a comprehensive scheme in which the Government would take a stake across the whole sector.
The third question revolves around shareholder activism. I strongly support greater shareholder activism in the corporate sectorthe hon. Member for Leeds, East alluded to thatwhich should include oversight of compensation and small business lending. Should the Government be involved in that process? I would much prefer them not to be. I would like them to commit to handing all the corporate governance functions and aspects of the package to the Financial Services Authority.
Furthermore, I would like the Treasury to make it clear that in exercising that shareholder influence the FSA will act on the same basis as all shareholdersthat is, long-run profit maximisation. The reason for that is
something we should not forget: the health and prosperity of those banks represent the countrys savings and pensions. The last thing we want is the recovery of the banks, which will come, to be suffocated by politically inspired excessive regulation.
That brings me to another issue. We have heard a lot of vague talk about more regulation. We do not want to find ourselves being drastically over-regulated by a panic response. Furthermore, it is quite possible that the United States will engage in exactly that overreaction. We should ensure that we are well placed to benefit from it. That is what happened over Sarbanes-Oxleywe picked up some of the listing business. It is what happened many years ago over what was known as the interest equalisation tax, which enabled the eurodollar deposit market to come to the UK. Regulation needs to reflect the lessons of the crisis, but it also needs to have in mind the fact that there will be opportunities in the recovery phase for the UK and for UK businesses. That recovery phase will come.
The fifth question is, what will be the criteria for judging whether the Governments package is a success? The Government should give us confidence, and give confidence to the markets, that we know how to measure that success. They should also give us some indication of contingency planning for what we would do if it turned out that those criteria were not being met. I could throw out a few examples, but obviously I am not trying to devise anything remotely full or comprehensive. Will it be a return to normality in the inter-bank market or the commercial paper market, or in relation to commercial lending generally? We need to be given some indication of what constitutes a return to normality. The absence of guidance on what the Government would do in such circumstances has been damaging the markets further in recent weeks, prior to the announcement of the package.
I would like to raise a number of other issues, but I shall raise only one to enable other hon. Members to speak, although I suspect I may burn up the remainder of my speaking time. The issue of lower interest rates has already been mentioned today. The half-point cut is welcome and I completely agree with the criticism made by the hon. Member for Leeds, East of the policy of the Liberals: at the first sign of difficult anti-inflationary gunfire, they want to start to tear up the system that has been put in place. That is what it would mean if we were to alter the inflation target.
On the other hand, although I do not make a habit of trying to second-guess the MPC, I do not think that they have got it right this time. Interest rates should always be set at the equilibrium point between a balance of risks. We can easily ask ourselves what those risks are at the moment. Is the risk of a sharp economic downturn, and the accompanying monetary contraction, bigger or smaller than the dangers of deeply embedded and prolonged inflation? That is the choice that the MPC needs to consider. I think it is clear that the balance of risks lies on the side of the danger of contraction, and that points to lower, not higher, interest rates. Cuts can always be reversed if the economy recovers quickly and confidence returns, and if there is a return to a risk of embedded inflationary expectations.
However, that is not the crucial issue for the country at the moment. The crucial issue must be to get through this crisis by showing vigorous Government actionwhatever is required to ensure that confidence returns to the banking sector. I strongly welcome the package, but I regret that it has come so late, and only after strong pressure, especially from the Conservativesover the weekend, and in some detail in the press on Monday and elsewhere, completely contrary to what the Liberal spokesman suggested. The Government must now start demonstrating that they are doing far more of the contingency planning to bring confidence to the market than they have shown in the previous 14 months of this deepening crisis.
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 Baringsthat management should understand what they are trading and making their profits in, and the lesson about management controlshave 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.
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