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I am delighted that the hon. Gentleman has said that we should take pride in the City and what it does. The City does an honourable job. Its 340,000 workers come from around this region-some 6,000 of them are my constituents. They do a fantastic job and probably create more for Britain's economy on the international scene than any other sector. I accept that there are major problems, particularly with bonuses, but only for the very highest-paid in the City.
Mr. Grogan: The hon. Gentleman puts his case in a balanced way. Let us not think that it is only Lord Turner who says such things. Incidentally, Lord Turner was also criticised at one point for being "Red" Adair Turner, and it was said that he was only speaking as he did because of his links with the current Government. However, having read the Sunday papers, I note that he is also held in high esteem by the Opposition Front Bench and is perhaps destined for a role in the Bank of England. His views cannot be dismissed so easily.
"The industry collectively owes the real world an apology for what has happened and it...owes the real world a commitment to learn the lesson,"
"We can't give meaning to our lives and have a financial system and economy of integrity purely on the basis of self-satisfaction... We need to have a sense that what we're doing is socially acceptable."
Another report, which I recommend to hon. Members, was produced in the summer by the centre for research on socio-cultural change at Manchester university. Manchester is a traditional centre of all sorts of industries, including manufacturing, and services and perhaps has a slightly different perspective. The report was written by a variety of people, including some academics and some people with experience in venture capital and so on. They came up with a number of reflections and I shall go through a few of them and then make one or two concrete suggestions.
First, the authors of the report reflected on the fact that, in this generation, the reports done on the financial crisis have largely been insider jobs. The Bischoff report was commissioned by the Treasury. Of the eight people who were the secretariat or the sherpas for that report, seven came from the City of London; only one was a civil servant. Looking at some of the previous inquiries on finance, I think that the Wilson committee was active in the 1980s, Macmillan did a report in the '30s, and the Radcliffe committee worked in the '50s. A much wider range of people were involved in the reports and in coming to the conclusions that those committees reached. Those reports stood the test of time for a generation-I studied them when I was doing my economics A-level and degree. In this generation, there perhaps has not been an outside look at the City following the financial crisis.
Secondly, the report from the centre for socio-cultural change at Manchester university produced interesting figures on tax and employment. Of course the City of London has been a big generator of tax-£203 billion in a five-year period-but, to put that in perspective, there has obviously been a big financial cost, because the City has operated in a very procyclical way. The International Monetary Fund calculates that the direct up-front financing cost to the UK taxpayer has been £289 billion in the past year, which includes the cost of the bank recapitalisation fund, the special liquidity scheme and nationalising Northern Rock and Bradford & Bingley. The IMF calculates that if all the Treasury loans and guarantees are added to that, the figure could be more than £1,000 billion. There has been an economic cost, which has been felt by ordinary people in my constituency.
Dr. John Pugh (Southport) (LD): It is probably worth observing also that in the City there are a number of very highly paid organisations that specialise in telling other people how to avoid paying tax.
Mr. Grogan: Indeed, that is true. The tax benefit from the City is not all one way; we can summarise the position like that. There is a big employment impact from the City and it is not just in the City of London. The financial services sector is an important employer throughout the United Kingdom, although many of the very high-value wholesale jobs are concentrated in the City of London. I generalise, but there are more retail banking jobs in the rest of the country. Some academics have argued that our economy has become imbalanced: Baumol, for example, argues that there is only a certain number of natural entrepreneurs in an economy, and if the economic rent is greater than the value in a particular sector of the economy, it sucks in so much of the entrepreneurial talent that there are fewer entrepreneurs in other sectors of the economy. That may have happened in the City in recent years.
Finally, the authors of the Manchester report question whether some banking activities are what they characterise as a "great transaction machine". They do not say that there has been too much lending, but that there has been the wrong sort of lending-not a bubble economy, but certain bubble sectors, with about 40 per cent. of bank lending on property and more than a quarter on financial intermediaries. What they characterise as productive business investment has stayed much the same throughout the period, at about 10 per cent. of GDP. They calculate that the amount of bank lending that goes to productive business investment has declined from 30 to 10 per cent. They would say that the very highly paid employees in many of the integrated banks have had a common interest with some of the shareholders in the banks in having as many transactions, often obscure transactions, in derivatives as possible. The banks have certainly produced a lot of our profits. At one stage, about a third of all profits of the FTSE 100 were produced by banks. Again, however, that has not been stable and there has been a cost for many of my constituents who have faced the downturn.
When in doubt, a politician should produce a 10-point plan, so I shall rattle through 10 suggestions that have been made for reform of the City, concentrating on
some more than others. The first, which is very much the Government-sponsored idea, is to increase capital requirements in the banking sector. That is good as far as it goes, but we have to reflect on the fact that, just before many of the banks were brought in to see the Government, they were saying that they were meeting all the capital requirements at the time. As we saw in the various television programmes over the summer, bemused bankers were brought in to meet the Chancellor of the Exchequer, assuring him that they did meet the capital requirements. Of course it is easy to get round capital requirements, as various observers have pointed out. One danger is that banks may take on even more risk to sustain high returns on equity. Another is that banks will find a way round higher capital requirements via off-balance-sheet vehicles and exploitation of derivatives strategies and so on. That is a risk.
Moving on to my second suggestion, a variety of people have commented that banks are now too big to fail. Given that they are essentially backed by a state guarantee and that things such as the Glass-Steagall Act in the United States have long since been abandoned, a number of people have advocated a return to simpler banking-narrow banking, as some academics refer to it. John Kay, a distinguished economist who taught me economics many years ago, is a strong advocate of narrow banking-of separating casino banking, if I can characterise it like that, and utility banking. He says, for example, that we should have a system in which a Lehman Brothers should be allowed to fail. A bank should not be so interconnected with the rest of the banking system and counterparties and so on that the consequences of its failing are so disastrous for the rest of the economy.
Mr. Mark Field: Although broadly I very much agree with that point and I think that in time the failure of Lehman Brothers will not be seen as the great mistake that conventional wisdom suggests it is, is not the problem the nature of the guarantee? Whereas all of us would accept, I think, that depositors should have their interests guaranteed-there is now an implicit if not an explicit guarantee that all deposits will be guaranteed by the Government-the difficulty that arose in relation to many of the banks that have had problems in the past 12 months is that bond holders also had that guarantee. The extension of that guarantee is relevant in relation to the idea of institutions being too big to fail. The issue is not simply size, but the nature of the guarantees that any Government give.
Mr. Grogan: I accept that point absolutely. The problem will not go away. I was referring to whether we should divide the banking system so that the public are less at risk from failures in investment banking, essentially, and so that there are fewer links into the retail banking sector. Let us consider, for example, the failure of the big insurance firm AIG in the United States. Basically, most people in that firm were involved in conventional insurance. It was perhaps 100 people in one unit, involved in more speculative activity, who brought down the whole firm and put at risk the world economy.
In fact, I shall give one lesson from God's own county, if I may-there will be only one mention of Yorkshire in the entire debate, Mr. Fraser. The Yorkshire bank has adopted a simple banking strategy down the
years. Rather than a pro-business cycle strategy, it uses a through-the-cycle business model. It says that it has stuck to its knitting in recent years. It never became involved in sub-prime lending and self-certification for 100 per cent. mortgages. Indeed, it was criticised, as many traditional or more conservative banks were, for not being innovative enough. Therefore banking structures such as Yorkshire bank do have a future. The Chairman of the Treasury Committee, my right hon. Friend the Member for West Dunbartonshire (John McFall), has tabled an early-day motion on separating retail and casino banking, and that debate will be part of our economic debate for some years to come.
Some commentators say that things cannot be done in an individual country; they have to be done around the world. I wish that we had made some banking rules like those in Canada or Spain, for example, before the banking crash, because even though the rules were not universal, their banks have benefited from the fact that they had a more conservative approach.
The third point is that there should be consideration by the authorities when making regulations of the impact on smaller banks such as Yorkshire bank. Clearly, if there are flat-rate costs, smaller banks will be affected more than larger ones. We must remember that smaller banks often have to use the clearing systems of larger banks. Although the Government have, naturally, been distracted in recent times by the affairs of bigger banks, they should also be interested in the smaller banks.
I will move on to the mutual sector which, looking back, has been a success. It is interesting that our current biggest building society, the Nationwide, was perhaps the least-favoured building society when it came to demutualisation. It was not seen as the most likely candidate and was not demutualised, but it is now a successful mortgage lender. Our building societies have obviously struggled as a result of the financial turmoil, but in many ways they have weathered the storm better than their banking counterparts. A focus on the protection of their members, and lending that is based strongly on money deposited by their customers, has meant that they have been far less exposed than most of the banks.
Building societies have raised a couple of technical points about the Financial Services Compensation Scheme. That is a vital safety net, but it impacts on building societies in an adverse way compared with banks, and the financial regulators need to consider that. For example, Nationwide was hit with a bill of £241 million at a cost of £17 per member as a result of some of the regulation. There must be a case for returning Northern Rock to the mutual sector when it goes back to the private sector.
The fifth point is a suggestion that has been made by commentators far more eminent than myself. There is nothing wrong with securitisation of loans and so on, but in many ways, the shorter the chain, the better and more transparent it is. Various people, including Dominique Strauss-Khan from the IMF and Lord Turner, have revived the idea of having some sort of tax. The Tobin tax was thought up a generation ago as a tax on foreign exchange. I do not think that that would work in today's circumstances, but some sort of tax on financial transactions would reduce liquidity but also reduce that chain.
Mr. Field: There are two points. Clearly, we already have a tax of stamp duty on general share transactions. Many of the markets-the eurobond or eurodollar market in this country for example-came about simply because of American taxes. Does the hon. Gentleman not recognise that having a range of taxes, particularly on a regional rather than global basis, might see potentially risky transactions being moved to some of the more wild-west elements of the financial services world? Historically, going down that tax route has not tended to work.
Mr. Grogan: I agree with the hon. Gentleman in so far as I think that such a tax would have to be done internationally. Other measures for banking structures and so on could be done domestically, but all those who advocate such a tax, from the IMF to Lord Turner, recognise that it would have to be done internationally.
Moving on to bonuses and remuneration, I am reminded of the phrase, "We're all in it together", which has much to be said for it. We are now at the point where some of the remaining banks, such as the Royal Bank of Scotland, Goldman Sachs and others, have done pretty well in recent times. They have done well for a number of reasons: first, because of the Government guarantees, which mean that they have as much liquidity as they need or want, but also because many of their competitors have been knocked out of the market. In the coming days, they are potentially going to announce quite enormous bonuses for some of their staff. I think that Lord Turner was right to muse in the pages of the Financial Times on whether that is right and whether those bonuses have been earned.
The Manchester study that I referred to earlier stated that a lot of those banks have compensation schemes that cover about 50 per cent. of their total financial turnover. It suggested a tax on such bank profits. The last party to do that was the Conservative party in 1991. Again, the banking sector would be wrong to believe that it should be business as usual, and the Government have made certain proposals regarding bonuses.
Mr. Richard Spring (West Suffolk) (Con): I must apologise on three points: for disturbing the hon. Gentleman's thought patterns in the House of Commons Library last night, and also for working at some point at both Merrill Lynch and Lehman Brothers. I have a certain amount of form on this.
I would like to point out that in the eyes of many, both in this country and abroad, we have a very oligopolistic structure-I am sure that the hon. Gentleman will agree. One of the keys to addressing the points that he raises, such as excessive bonuses, is the lack of competition, or potential competition, in terms of access of new financial institutions. I am sure he will agree that after the various mergers that have come about, either spontaneously or at the behest of the Prime Minister or someone else, it is very difficult in this country to deal with the situation. Will the hon. Gentleman comment on that, because it seems that lack of access is an inhibition to addressing some of the problems that he is talking about?
I agree with the hon. Gentleman entirely. I have always been a great believer in competition. From the left, social democrat or so-called progressive side of British politics, we have been too easy on oligopolies
or monopolies across a range of sectors. The energy sector is one and possibly the media sector is another. There is a danger in the finance sector now that these great institutions have been created and merged and some are run directly by the state. What follows on from them when they go back to the private sector? We have to think about competition concerns.
Mr. Gordon Prentice (Pendle) (Lab): Are not these multi-million pound bonuses and payoffs absolutely scandalous? The five directors of MG Rover paid themselves £40 million as the car plant was going bust. Does my hon. Friend agree that we need a high pay commission, or something like that, to police the City and ensure that excessive bonuses that cannot be justified are not paid?
Mr. Grogan: My hon. Friend reads The Guardian too. I am glad-The Guardian needs all its readers these days. I would not set a maximum pay level or bonus level. I would look at the taxation of bank profits and bonuses and approach it that way. However, I share my hon. Friend's moral fervour. When people such as the chairman of the British Bankers Association make comments such as those I quoted earlier, it has to mean something. Unless the banks address their bonus culture, there will be a role for Government to do more.
I will move rapidly on. An interesting proposal from the Conservative Front Bench is the idea of having a consumer regulator for the retail banking sector. That almost touches on the point made by the hon. Member for West Suffolk (Mr. Spring) about competition and entry into the market. Retail banking could be much more innovative.
The eighth point is purely to ask whether it is time to look again, like Macmillan and Wilson, at having an inquiry into venture capital for our industry and services, and at whether our market is efficient. One of my regrets is that, as I understand it, the private equity movement originated in providing venture capital for new ventures. It has now largely become a vehicle for the takeover of assets and so on, of which Lord Myners has been critical. He has indicated, as have many economists, that he is not sure that such activity brings much economic value in the end. That matter would be worth looking at.
The ninth point is that when the public sector makes big investment decisions, we must be careful to ensure that we do not look too much at the interests of the City as opposed to those of the rest of the country. After the next election, any Government will have tough investment decisions to make about public expenditure. I would hope, for example, that the high-speed rail link, which is of interest to the whole of the country, might be higher up the agenda than Heathrow expansion or even, dare I say it, Crossrail, which has been heavily lobbied for by the City. If it is a choice between one or the other, as it may be, I hope that high-speed rail will be at the top.
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