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Undoubtedly the individual actions of senior bankers have been frankly disgraceful, whether at Lehman Brothers, Merrill Lynch—I worked at both—or RBS. I think that
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some clearer sanctions should be in place to deal with such individuals. If somebody is guilty of medical malpractice they are struck off by the BMA; indeed, the same approach applies to other professions. In theory, the FSA has the power to apply financial, civil and criminal sanctions, but I am not convinced that it is the right body to do so.

There is a danger that in the current atmosphere either a lynch mob mentality descends or ultimately that new and counterproductive regulations seek to satisfy public outrage. To pre-empt those outcomes, I suggest that a new body be created with the express purpose of dealing with such individuals, so that next time some master of the universe decides to agree to market a new product that he cannot understand, he might first pause to consider the consequences.

We have seen a whole series of bank mergers in this country over the years, hastened by a number of dramatic shotgun weddings of late. Vast banks are difficult to regulate and their importance means that we have seen what is often described as moral hazard, including the nationalisation of risk. Of course we are where we are, and our most important challenge is to re-liquify our banking system and return it to profitability and to the private sector, but if there is one lesson we need to learn about this, it is the need to open up banks to effective competition. If that means breaking up in due course some of these mammoth institutions, so be it. The present structure is both oligopolistic and unhealthy.

The G20 working group has quite rightly advocated convergence towards a single set of high-quality accounting standards. It is truly astonishing that credit agencies have been able to triple A ratings in the most cavalier fashion, perhaps in part due to conflicts of commercial interest, with all the consequences for investors in Icelandic and other banks. Also, if we are going to have more common accounting standards, we are entitled to ask for improved accounting methods among the practitioners, who—to put it mildly—have not challenged some outlandish valuations.

We have seen an almost neurotic flow of Treasury announcements and misjudgments such as the VAT cut. The decline in our competitiveness has led the people of this country to a view of the future that is not optimistic. For everything that the Prime Minister is doing is about political survival; it is compounding the strength of the recession into which his catastrophic economic mismanagement has led us.

The G20 will not save this Government and neither will the Budget. Frankly, the only thing that will save this country now is the return of a Conservative Government to do what Conservative Governments have had to do time and time again throughout history—unpick the very shambles they have inherited.

7.53 pm

Mr. James Plaskitt (Warwick and Leamington) (Lab): I want to return to the daunting agenda in front of the G20 and in particular—this will come as no surprise to my right hon. Friend the Financial Secretary—to focus on finding a way forward for the future regulation of the global banking system, coming away from the problem we have at the moment, which is a Balkanised regulatory system trying to deal with global institutions.

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As Lord Turner says in his very welcome report, the seams in this garment first split in the United States. It is interesting to see the response of the US Government, which is to try to begin harmonising their own regulatory platform within the United States, a much more fractured system than we had. That will lead them to come up with something rather similar to our FSA. But as Henry Paulson, the former Treasury Secretary, said recently, that in itself is a multi-year undertaking. It might just bring the USA more or less to where we are now. At the same time, we are part of negotiations within the EU to bring forward the capital adequacy directive. This will be fairly slow progress, yet the task is urgent and the solution required is on a wider and global scale, and not on the scale currently being addressed.

I want to urge the Government that, in their talks on this, they look not just at the scale on which regulation must be achieved in the future, but the method. In doing so, I want to urge caution about relying too much on the Basel approach, which has informed the process up to now. We should remember that that approach has no legal basis and is silent on the issues of compliance and systemic risk and that, within it, the banks have been setting the terms of trade. The system is built on internal risk basing, which involves banks defining and measuring their own risk and their own extended cover. It relies on value-at-risk measurement, which is simply a mathematical approach relying on inferences from past behaviour and was rightly described by Lord Turner in the report as “highly misleading”. It also relies too much just on the instrument of capital adequacy ratio. There is no oversight of accountancy methods or of liquidity. It is simply a conventional device that is inappropriate for regulating what are now a swathe of very unconventional financial instruments.

Finally, the Basel agreements also have a narrow view of what constitutes banking. They are silent on the issue of shadow banking and on off-balance-sheet banking. They have not been able to keep pace with the degree of leverage or securitisation in the system. In fact, a lot of banking activity has gone on outside the boundaries of the Basel system, but even the banking activity that has taken place within it has resulted in country regulators engaging in a race to the bottom to prevent financial flight to other countries, because national competitive advantage in the end always trumps regulatory concerns.

The question is where we go now. The first thing that needs to happen, and is beginning to happen, is the restructuring of the banks themselves. That is happening on an institution-by-institution basis via recapitalisation, extracting the toxic assets and underwriting inter-bank activities, all of which are essential. However, they will not in themselves be enough, which is why we are also now beginning to hear resurfacing the argument about whether we need to separate out retail banking activity from investment banking activity and in some way or other re-introduce the now famous Glass-Steagall-style legislation that emerged in the United States after the 1929 crash. The argument is simple: the US banking system worked pretty well while the Glass-Steagall legislation was in place; the problems that have arisen came post-repeal; so let us reintroduce Glass-Steagall. That is a very simplistic misreading of the chain of causality, because some of the banks that failed were not crossover banks at all. The structure that has now emerged is in any case far too complex to unpick, but
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there are some principles within the Glass-Steagall-style regulation that are relevant. There is a need to look at firewalls in the system, not simply firewalls between retail and investment banking, but ones that will help to address the issue of proprietary trading and the activity of hedge funds.

We also need major regulatory reform, in my opinion. I think that there is a G20 consensus on the fact that that is needed, but the approaches that I see various key players taking are quite different. The right issues have been identified: capital adequacy, credit ratings, accountancy standards, remuneration policies, counter-cyclicality and the need for early warnings are all on the agenda, and they all should be. But the questions are what tools there are for tackling that challenge and whether the required geographical scope that is required can be met. What will replace the now failed and defunct Washington consensus? Some say a revised Basel system, but that is fatally flawed and will not in itself do the job. Others say that the IMF should be strengthened, but we need to remember that that too has no legal remit over regulation and is in itself tainted by its association with the Washington consensus.

Alternatively, there is reference to the Financial Stability Forum and the introduction of the new colleges, but that in itself is not the answer. The colleges have no legal basis. They cover only the largest financial institutions, and the supervision that they carry out is built around the structure of the large firms individually. Even the colleges are not looking at the risk of systemic failure. They meet only a couple of times a year and they do not change the relative responsibilities of the supervisors. They have no formal decision-making powers. It is still a case of the financial institutions driving the agenda of regulation, not vice versa.

The colleges are certainly better than the gaping hole that currently exists, but on their own they are still only a paper-thin safety net. That might feel all right while the banks are on the defensive or on the back foot, but it will not last unless we take the opportunity to address the fundamental imbalances in the system.

We need to go much further than the devices that have been suggested and consider the possibility of achieving a treaty-based international agreement on minimum standards, particularly in relation to transparency and information sharing, which in future will be critical if we are to have effective safeguards against systemic risk. Risk taking by an individual player in a genuinely open competitive system might not be so bad, but we have learned that when all players are taking the same risk simultaneously, that presents the threat of systemic failure. The problem is that we do not have a regulatory structure that operates on the same scale.

I am not suggesting some form of world regulation or a world Government to do that, which would be impractical, nor do I want over-regulation. In the architecture that I propose, there will still be national regulators and the colleges, but if we can achieve something like that, which is essential if we are to avoid a repeat of the present crisis, for the first time there will be some basic rules of operating on the same scale as the operating of the major players. We have not had that, and we will need it in the future. It is the only way of correcting the fundamental imbalance.

I hope we will not try to rely on the working of the Basel system alone, or on the IMF alone, or on the Financial Stability Forum or on the colleges. They all
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have a part to play. I entirely agree with that, but the total that is needed is greater than the sum of their parts. For that reason, I hope the G20 will consider the opportunity that is now presented to devise some form of treaty-based, and therefore international and genuinely global, banking regulation. Without that, I fear that at some point we could end up repeating what is happening now.

8.3 pm

Mr. Graham Brady (Altrincham and Sale, West) (Con): It is a pleasure to follow the hon. Member for Warwick and Leamington (Mr. Plaskitt). It was also a pleasure to listen to earlier contributions to the debate, notably those of my hon. Friend the Member for Chichester (Mr. Tyrie) and my right hon. Friend the Member for Hitchin and Harpenden (Mr. Lilley), who have been involved in the discussion about the framework of financial regulation much longer than I have.

My 12 years in the House have rather reflected the experience of new Labour. I spent my first six years entirely focused on schools and hospitals. I then became absorbed in foreign affairs. It is only in the past couple of years, since I had the privilege of joining the Treasury Committee, that I have had to confront the horrible reality of the current economic situation.

There have been a number of comments from Members on both sides of the House about the real implications of what is going on in the economy. One of the early remarks was about the failure of some of the schemes that the Government have put in place to try to support business and make sure that lending is happening and that credit is moving in the economy. In particular, the enterprise finance guarantee is not operating as effectively as the Government or the business community had hoped.

As members of the Treasury Committee who went to Leeds, Halifax and Edinburgh heard from banks and business people, one of the problems is that the banks have been charged with assessing the viability of a business as a threshold for giving the enterprise finance guarantee. As one banker asked, “How are we meant to assess the viability of a business which may have been operating profitably until just a few months ago, but suddenly doesn’t have an order book on which to base its future projections?” What is really needed may be gap funding for businesses, rather than such a viability-based guarantee.

The Forum of Private Business and some other business organisations have been quoted this evening. In its recent survey, the Forum of Private Business found that nearly a third of its members needing finance have failed to obtain it. The forum also found that among its members, from October to December the cost of overdrafts had gone up by 1.4 per cent. and the cost of commercial loans by 1.6 per cent. at a time when interest rates were being cut. That has clearly not fed through.

There are three main aspects that I shall address briefly in the time available. The first is how we look at the management of the bank assets that the taxpayer now owns, which have been put in the hands of the new organisation, UK Financial Investments. A number of Members have raised concerns already about the way in which the publicly owned or part-publicly owned banks
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are behaving, and whether they are fulfilling the remit given to them by the Government or the remit that Members might see as appropriate for them.

We need real clarity, which is currently lacking, about the powers of UKFI and the independence of its operation. It made a bad start—a point that I raised in the Select Committee—by being seen to act on behalf of Ministers in the matter of Sir Fred Goodwin’s pension, even though UKFI admits that it did not have a specific remit to do so. If, as I think we all hope, the taxpayer is to emerge eventually bearing as little cost as possible from the ownership of those bank assets, UKFI needs a clear mandate, clear independence and clear objectives to that end, looking at how, ultimately, we will extricate ourselves from the present position.

I shall not go over the ground that has already been covered regarding the depths of the financial crisis, the efforts that have been made to combat it through monetary and fiscal policy, and the quantitative easing that is being embarked upon by the Bank of England. Some of those measures may be entirely necessary and appropriate, but they do not come without a cost in the longer term.

The G20 has been mentioned, as it is meeting in London over the next couple of days. We have heard about the importance of the co-ordination of policy from different countries or, as my right hon. Friend the Member for Hitchin and Harpenden put it, the need for bifurcation of policy—a co-ordination of different approaches by different countries.

Crucially, the situation is still getting worse. As we look at the way different recessions have been charted over time, and the projections and predictions about the route that they would take, we find there is a long history of progressive forecasts being proved wrong, usually because they are too optimistic. They tend to project an early and steep emergence from recession, and then they are revised to suggest that that will be much more gradual. That seems to be happening now. The Governor of the Bank confirmed to me last week that the Bank’s view is changing, having originally envisaged a fairly steep V-shaped recession. As he said, “That was our view in February,” which seems a fairly explicit recognition that the view is changing monthly.

Secondly, one of the crucial problems that we face, which has been alluded to this evening, is the unprecedented rate at which unemployment is rising, and the fact that that rate is itself accelerating. In my constituency, the unemployment increase from January 2008 to January 2009 was 88 per cent.; from February 2008 to February 2009, however, it was 105.4 per cent. All the surveys suggest that the situation will continue to get worse. As the hon. Member for Northampton, North (Ms Keeble) mentioned, a large part of that unemployment increase has affected young people in the 18 to 24-year-old age group. That is a particular concern and a particular problem. If we do not address the problem of increasing unemployment, we will quickly get into the second-order effects and problems for other aspects of the economy. A greater number of people facing unemployment, negative equity and housing repossessions will impact again on the toxicity of bank assets, and make all the problems worse again. It is a worrying spiral.

My third point is about public debt, which Members—on both sides of the House, I hope—are increasingly coming to see as something that will dominate the national debate for a long time. It will do so regardless of which
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party wins the next election. We have already seen the level of net debt as a percentage of GDP go rapidly back up to 43 per cent. after a period in which it had been rather lower. However, the rises projected for the next few years are truly frightening. By 2013-14, the level is projected to go up to 57 per cent. or more. As has been noted, that is due to a combination of the operation of fiscal stabilisers, the fiscal stimulus that has been applied and the high and increased levels of public expenditure in the past few years.

Some of the warnings have been stark. Writing in The Times, Robert Chote says that the continuing cost to the Exchequer could be about 3.5 per cent. of national income. Professor Colin Talbot looked at the cost of bringing debt back to sustainable levels in the next spending round. He said that that would be tantamount to real-terms reductions of 5 per cent. a year in public expenditure, which by 2013-14 would amount to a cut of almost 17 per cent. or £125 billion in public spending, roughly equivalent to abolishing the national health service.

The real test of the Government will not be what they say on 22 April about the next financial year, but how plausibly they start to chart the course for the medium and longer term to bring the levels of debt down to sustainable levels, with which the country can live in the future.

8.13 pm

Mr. Mark Todd (South Derbyshire) (Lab): I hope that the House will bear with my slightly croaky voice, which would certainly stop me singing and will abbreviate what I say. Coincidentally, my speech will follow on precisely from that of the hon. Member for Altrincham and Sale, West (Mr. Brady).

In this debate, our immediate focus has understandably been on the process of restarting the economy. Others have been bold enough to talk about the world economy and our role in that. We have yet to consider, beyond the inclusion of broad figures in the already wildly outdated projections of the pre-Budget report, the harsh task that lies ahead of us if we are to rebuild a framework of sound public finance in this country.

The debate has been useful because we have attempted to educate each other in what we have been talking about. Frankly, some of the more informed Members have said that the much-debated fiscal stimulus is pretty small in comparison with the other means that have been employed to boost our economy. The automatic stabilisers are far more substantial, and the steps taken in monetary policy and the devaluation of sterling are also much more material.

Even according to our current relatively conservative way of counting, the impact on public expenditure as a whole will leave us with net borrowing of more than £125 billion in 2009-10, the year that we are just starting, and with total borrowings of more than £1 trillion. Others have speculated that if we included a variety of other things, the figure would be much greater still. Hidden within the figures is the fact that from 2002 onwards, we operated with what would seem to have been a structural deficit.

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