Work of the Committee 2008-09 - Treasury Contents

3  Looking forward

68. In Session 2009-10 we will continue to monitor the Government's response to the banking crisis. The Government has announced that Northern Rock, and parts of Royal Bank of Scotland and Lloyds Banking Group are to be sold over the next four years. The Chief Executive of UKFI told the Committee that he would "certainly expect to see a positive return on our portfolio over time".[60] We will maintain our scrutiny of UKFI's progress towards this goal and the behaviour of those banks in which so much public money is invested.

69. The banking crisis created a number of significant challenges for the Government. Scrutinising how the Government responds to such issues as restoring public finances to good health, reforming the financial system, dealing with rising unemployment, high levels of consumer debt, and the availability of credit, will dominate much of our future work.

70. During our visit to Brussels both Commissioner Kroes and Commissioner McCreevy stressed the need for politicians to take a long term view when considering policy responses to the financial crisis. In Session 2009-10, with the inevitable distractions of a looming General Election, it is important that we retain our focus and that our reports are considered, well argued, and based on sound evidence. We hope that our reports of Session 2008-09 have met this challenge.

71. The banking crisis faces policymakers with a dilemma. It is clear that there have been major and catastrophic failures both in the behaviour of participants in the financial sector, and in the regulatory framework, both by sectoral regulators and central banks. Working out ways in which to reform that regulatory framework at both national and global level will not be easy. There are difficult balances to make between allowing free market innovation, and providing a framework which prevents gambling. As the FSA has pointed out, in a recent paper, many regulatory choices have policy effects: the nature of the trade-offs between stability and possible growth need to be carefully considered. Moreover, this has to happen in the international arena, as well as in individual countries. At the same time, as the acute phase of the crisis passes, there will be a pressure to return to business as usual. Indeed, the first signs of that are already clear. In evidence to us, Sir David Walker considered concerns about bankers' bonuses as a "socio-economic phenomenon"; it was only when our Chairman intervened that he conceded that there might be some trade-off between money allocated to the bonuses, and money used to rebuild capital.[61] The return to business as usual can also be seen in the way in which thoughtful policy discussions can be presented as ideological battles between, for example, the FSA and the Bank of England.

72. The fear that return to 'business as usual' would soon blunt the desire for reform perhaps underlay the European Union's proposal to restructure its entire regulatory framework as quickly as possible. But that way too, there lies danger. Some policy changes will be urgent. Some will require careful consideration and debate. Some policy changes will need to be reconsidered in the light of events. We hope that over the next year our work will encourage debate on the key issues, such as how to prevent institutions being too big or too important to fail, or how to allocate resources between capital rebuilding and remuneration. It is too early to expect there to be a clear answer to these questions. As the Governor of the Bank of England told us:

We need radical reform of the international monetary system. In large part this goes to politics at least as much as to economics, so this is probably more in your domain than in mine. I shall continue to argue for reform of the international monetary system, as I have for many years in speeches. It is very important. If we ignore it and fail to tackle it I fear that some of the concerns we thought we were about to experience at the beginning of this year … will come back to haunt us.[62]

We need to ensure both that hasty ineffective measures are resisted, and that political will for reform does not fade before the necessary reforms are in place. Maintaining that balance will be a key task for the next session, and beyond.

60   Oral evidence taken before the Treasury Committee on 4 November 2009, HC (2008-09) 1090-i,Q 19 Back

61   Oral evidence taken before the Treasury Committee on 3 November 2009, HC (2008-09) 1089-i, Qq 3-4 Back

62   Oral evidence taken before the Treasury Committee on 24 November 2009, HC (2008-09), 34-i, Q 82 Back

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