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As I see it, we face three categories of problems, the first of which is access to affordable mortgages. It particularly affects first-time buyers, who are benefiting
from a fall in prices but are not able to get a mortgage because banks and building societies now often ask for loan-to-value ratio of 75 per cent. A 25 or 30 per cent. deposit is nigh-on impossible for first-time buyers. The second category of problem is the lack of normal credit facilities for small and medium-sized businesses; we have heard about that from a number of hon. Members. The third category is more long term. I foresee a possible long-term negative effect on public confidence in saving per se. That will affect pensionsreturns on equity investment are being hitand financial inclusion. People look at what is happening in the banking system and are clearly suffering anxiety about the safety of their savings and investments. They are also experiencing a tightening of credit as a result of the crisis.
Those trends are particularly acute in the UK because of the absence of local and publicly owned savings banks, which are a typical element of the banking system in many European countries. The UK has a highly concentrated banking sector, in which there are a small number of very large institutionsinstitutions that, as we have seen, have unfortunately engaged in highly risky and slightly exotic investment activities over the past few years.
The banking sector is also concentrated geographically, in the sense that it is essentially focused on London and, to a lesser extent, Scotland. There has been a withdrawal of regional banking facilities, so the traditional role of the banking managereven the business banking managerwho had a personal relationship with their customers has disappeared to some extent. The linkage between banks and the communities and businesses that they serve has become weaker in recent years.
The crisis gives us an opportunity to shift the balance again. There is a need to have local and, I would say, publicly owned banking institutions as part of the mix. In particular, there is a need for banks that focus more narrowly on traditional banking and do not get involved in some of the investment banking activities that were an important contributor to the current crisis. In Wales, which lacks a local banking institution, there is an opportunity to create indigenous financial institutions. The Welsh Assembly Government, through their activity with the economic summit, are looking at increasing their ability to impact positively on the economy in Wales. Having an indigenous banking institution that is directly owned by the public sector, or over which the public sector has some leverage, is an important component of a medium-term economic strategy in Wales. As Geraint Talfan Davies wrote recently in the Western Mail, in some waysalmost perverselythis is quite a good time to consider launching a new banking institution. A bank that does not have toxic assets on its balance sheet because it is a new institution could be a favourable proposition.
There are models out there. The Sparkassen, for instance, are local savings banks in Germany, rooted in local communities. Some services are provided by the Landesbanken, which operate as an umbrella institution owned at Land level by the regional governments. They have been very successful: about half the retail sector in Germany involves the Sparkassen. They have been unaffected by the financial crisis. Indeed, many have increased their lending because they are seen as a safe beta credit-worthy, trusted institution.
Many European countries have a mixed economy in banking. In Germany, the private sector represents only 12 per cent. of the overall banking sector. Even Switzerland, which is famous for private institutions which may or may not be involved in nefarious tax-evading activities, has cantonal banks which are owned by local government, and which deal with 30 per cent. of the banking business of ordinary individuals. That model offers us a way forward in Wales.
According to a recent Financial Times survey, 81 per cent. of people in the United Kingdom support the idea of the locally owned, publicly owned savings bank as an alternative to what has been on offer. We used to have that in the UK, of course: we had the Post Office Savings Bank, which became National Savings, and we still have the remnants in National Savings and Investment. We also had Girobank, the peoples bank, which was launched in the late 1960s and was very successful. It was the first bank in the world to launch telephone banking, and was also instrumental in launching the Link ATM network. Unfortunately it was privatised, perhaps because it was too successful.
There is still a residual element of the municipal bank movement. There are six municipal banks left in Scotland, and Birmingham city councilBirmingham was the site of the first municipal banksays that it is considering creating a new one by means of a private Bill with which the House would deal later in the year. Ceredigion is considering the possibility of creating Waless first- ever municipal bank in order to provide credit for local businesses.
Local authorities have the ability to offer mortgages. Birmingham city council is considering providing a top-up scheme in partnership with building societies. If the building societies were willing to lend the first 75 per cent. to first-time buyers, the council would provide perhaps 15 per cent. to make the purchase affordable. The Welsh Local Government Association is conducting research, as are the Welsh Assembly Government, to establish whether an umbrella product could be created through local authorities, possibly in conjunction with a new institution. I hope that it will be possible for the Westminster and Welsh Assembly Governments to act in partnership, but clearly the Treasury would have some decisions to make.
Albert Owen: The hon. Gentleman is right to refer to localism. A network that already exists in Wales, based on the Irish model, is the credit union network. Credit unions offer personal finance opportunities, and because of the safety mechanism that they represent, they are growing during the recession. Does the hon. Gentleman welcome that, and does he believe that the Welsh Assembly Government and others should do more to promote credit unions?
I absolutely agree. Credit unions could be part of this new mixed economy in banking and financial services. I mentioned Germany; the third element in the German tripartite banking system is the co-operative movementthe Volksbankenwhich is its equivalent of the credit unions. We need to build up the credit unions, and they might form partnerships with municipal banks. Municipal banks can legally take deposits, but they cannot offer loans. If membership of a credit union were linked in with holding a retail deposit in a
municipal bank, one could have a complete array of financial services, and with local authority mortgages as well. These are exciting possibilities, and it would be relatively simple for the new savings banks to link up with the plumbing of the wider banking industry through the SWIFT system. They could provide other financial products from other institutions. This could be done on a low-cost basis and relatively quickly.
As hon. Members will know from their own experiences, there is a gap in terms of business banking. Finance Wales provided just 110 loans in 2008. There is an issue to do with European law, in that it has to offer those loans at between 4 and 10 per cent. above the European reference rate, so they can be relatively expensive. Finance Wales is, essentially, a quasi-investment bank or kind of venture capital organisation, in that it looks at a small number of high-growth-potential firms, which leaves a gap in the market in terms of ordinary business banking for the vast majority of enterprises. Birmingham and Essex in England are looking at using local authorities ability to offer loans on an unregulated basis. Birmingham is talking of offering £200 million in loans to local businesses. That could address some of the problems in the short term, but we need to create something similar to the Landesbankenlocally owned savings banks in conjunction with local authorities, and then an umbrella national institution that aggregates that and is able to provide a higher level of loans, pooling risk and providing expertise.
We could also pool some of the reserves held in the public sector, both in the Welsh Assembly Government and local authorities. Instead of putting that in Icelandic banks, and suffering as a result, why not keep it and invest it in a Welsh-owned institution that could then offer loans to Welsh businesses and that could also take deposits from retail customers? Too often in the past, what has happened is that retail deposits given by Welsh customers have not been reinvested in the Welsh economy, but have been used by financial institutions based elsewhere, and we have seen very little benefit.
Finally, if we did create this new architecture of Welsh financial institutions, it would greatly help if the Welsh Assembly had borrowing powers. I understand that the Labour party in Scotland has now made a submission to the Calman commission making the case for borrowing powers for the Scottish Government, and the Northern Ireland Executive already has them. It would be positive if the Labour party in Wales were also to back having borrowing powers, perhaps in its submission to the Holtham commission, because that could underpin any new financial institution we were able to create.
Mr. Don Touhig (Islwyn) (Lab/Co-op): No one could have predicted that a problem that began with banks in America would lead to people throughout this country sitting at their kitchen tables worrying about their finances. Although the economic downturn we face is correctly described as global, its impact is local in the sense that every family in Wales has been affected.
It is right of our Government to act now to boost the economy. Whatever the doom and gloom merchants say, that means borrowing more in the short term to help keep the economy moving and to help businesses
and families during these tough times. Some have argued that we should not borrow to boost the economy. They would leave it to the market, but that would mean us abandoning families and businesses in Britain who are facing difficult timesfamilies who struggle with the loss of a job or to pay a mortgage, and the small business man or woman who has put everything into setting up the business. To stand back and do nothing to help them would have terrible consequences.
We have to learn the lessons of the past. Laissez-faire policies are not the answer, as we saw in the two recessions in the 80s and 90s. Those recessions tore into the very fabric of society, causing massive damage. In my constituency, young people leaving education had no job to go to. People who had worked all their lives in the same industry were condemned to the scrap heap, and pensioners were expected to live on £69 a week. In the south Wales valleys, the experience that some called Thatcherism we called despair.
If anything, the credit crunch has made us all realise how interdependent we all are. The very last thing that we in Wales need now is to turn in on ourselves in a narrow, nationalist sense and embrace the separatist agenda. However, I note that these days new Plaid has very little to say about independence, and it certainly does not mention the arc of prosperity to which it once said we should belong. Frankly, when someone is worrying about how they are going to put food on the table and whether they are going to meet this months mortgage payment or even keep their job, the last thing they want from their political leaders is a sterile constitutional debate. I therefore hope that we can have some respite from more bids for powers for the Welsh Assembly. Now that the eminent diplomat charged with running the convention on whether or not Wales should have a referendum on more powers is busy in the Balkans, perhaps those who want to balkanise Britain will now leave it alone for a while.
Adam Price: I should be interested to hear the right hon. Gentlemans response to my practical and relevant suggestion that additional borrowing powers for the Welsh Assembly Government would, in fact, help us to combat the economic crisis that we face.
Mr. Touhig: I was very happy to give way to the architect of new Plaid, and I think that he had some positive and important things to say. I am sure that they will be listened to by Ministers, because these problems will not be solved unless we all work together. I recognise that that is an important point to make.
One of the vital strengths of the Welsh economy is the readiness of our companies, both large and small, to use flexibility and to make and take opportunities for enterprise and innovation. Although we have made great strides in encouraging people to establish businesses in WalesWales is still a great place to invest and to grow a businessthere is much to do. We have to believe that we are going to come through this economic downturn. That belief is important to our future.
Our economy will grow and our standards of living will improve, but we must be cautious about putting up what some may say could be barriers to investment. Here, of course, I am referring to the proposed Welsh
language legislative competence order, which will be considered by this House in the coming months. My right hon. Friend the Secretary of State referred to a BBC reporters blog; it is good to see that the licence payers money is being used to help BBC journalists in Cardiff to promote their own political prejudices. We all know the BBC and its prejudices.
That LCO could be the biggest shot in the arm for the Welsh language in modern times, so I welcome the announcements by the Secretary of State for Wales and the First Minister, who have promised the widest possible consultation. Certainly, for my part, I am content that the Welsh Assembly should have the responsibility for dealing with matters relating to the language, but such a power, should it be given, must be exercised in the interests of all Welsh men and womenthe 20 per cent. who are bilingual and the 80 per cent. who are not. In the coming months, I intend to ask a number of questions about the LCO, because it is not simply about the Welsh language; it will have an impact on our economy. Macro-economic policy is not devolved, and we have a proper duty and a right in this place to ask questions.
Mr. David Jones: The right hon. Gentleman is making an important point about the Welsh language LCO. Does he agree with me that it is a proper function of the Select Committee not only to scrutinise the bid itself, but to scrutinise, by taking appropriate evidence, the measures that might be brought forward under the terms of the LCO, if it is passed?
It is not good enough in this instance for us to be told that the Assembly will decide the measureshow it will use the new powersif the LCO is passed. We cannot take a suck it and see approach. We need to know now and in some detail the implications of the measures for jobs, the economy and the voluntary sector in Wales.
I have many friends whose first language is Welsh, and I celebrated with some of them at a 40th wedding anniversary party last week. They do not want to become part of some linguistic crachach, in which jobs are reserved for the 20 per cent. of our countrymen and women who are bilingual and denied to the 80 per cent. who are not. Let us have the consultation and the debate we needlet the people of Wales speak. I encourage every business, voluntary group and individual to write to their MP and AM, the Welsh Secretary and the First Minister and ask questionsstarting with questions about what the LCO will mean for them, their company or the charity they work for.
Mrs. Madeleine Moon (Bridgend) (Lab): Does my right hon. Friend agree that it would be helpful to have a clear understanding of how much we spend every year on implementing existing legislation on the Welsh language, so that we know how much it costs the Welsh Assembly, the voluntary sector and the business sector? Then we could estimate the future spend as well.
Mr. Touhig: That could be a question for scrutiny by the Welsh Affairs Committee. I am sure that hon. Members on both sides of the House will receive letters from their constituents about that matter.
With the country facing serious economic challenges, along with the rest of the world, it would be a serious step indeed to impose even more regulation on companies in Wales. I have one final word on this matter. Over the years, we have had very successful Welsh language policies. My right hon. Friend the Secretary of State referred to the Wales Offices language policy; I was the Minister who oversaw the introduction of that very successful policy. Such policies have been adopted by companies and the voluntary sectorI emphasis the word voluntary. I hope that during consideration of the LCO, the idea of making any language scheme voluntary will be considered and ultimately adopted. I think that that would be supported across Wales.
For all the challenges that the present economic downturn brings, we must never lose sight of the fact that Wales is part of a global economy that will double in size over the next 20 years. The ideas expressed in the debate so far will contribute to the debate on how we approach that growth. There will be great opportunities in the future, but we must be ready to grab them. Our underlying purpose should be to make Wales a global leader in all those industries and services where our skills, our creativity, our enterprise and particularly our flexibility is known and is world-class.
The Work Foundation has published a report called Manufacturing and the Knowledge Economy. It argues that the old way of separating manufacturing and services does not reflect the interconnected, interdependent nature of modern manufacturing, and I agree. Companies such as Rolls-Royce make more money from service contracts, sales of licences and hours of flight time on their engines than from manufacturing the engines in the first place. Car makers run finance houses offering loans to people who want to buy cars, and pharmaceutical companies offer health care services as well as selling drugs.
The great challenges that we will face in the coming years are not Welsh but global, and we have to be able to compete. Our real competitive advantage will be our knowledge base and capacity for innovation. In simple terms, we have to be smarter, quicker and more adaptable than our competitors. The world is undergoing a new industrial revolutionthe knowledge revolutionfuelled by the pace of technological change, and Wales must be at the forefront. The only way in which countries such as Wales will be able to compete is to retrain and upskill our work force to face the challenges of the future. We have to stay ahead, with new and innovative ideas, which we can fully exploit only if we have the skills to do so. Put simply, we have to stake a claim to be the linchpin of the new knowledge economy.
With those challenges come great opportunities, and Wales could and should be at the forefront of making the most of them. I have always believed in our great strength as a society and in our capacity to respond rapidly to changing circumstances. However, we are facing challenges that may be greater than any that we have faced before, and we cannot be found wanting. There is too much at stake.
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