Here is what I had to say about the Queen’s Speech:
My Lords, today UK businesses have about £700 billion in cash on their balance sheets-money that is looking for places to invest but companies are lacking the confidence to do so. In addressing the growth strategy-which currently seems to be absent-the biggest task facing the Government is to instil confidence in people and companies. We have to recognise that there is a demand problem facing the country. That is why the austerity approach taken by the Government in the past few years has been wrong.
However, we need to ensure that confidence is based on reality. As a member of the Parliamentary Commission on Banking Standards, I am very much aware of the reality that in banking and finance the architecture has crumbled. We need not just to reform but to rebuild that from the floor up. We cannot afford to apply a sticking plaster to a system. Just how much the system has disintegrated was admitted by Adair Turner, the former chairman of the Financial Services Authority, in a remarkable interview a few weeks ago in the Sunday Telegraph. He said:
“I think we-as the authorities, central banks, regulators, those involved today-are the inheritors of a 50-year-long, large intellectual and policy mistake. We allowed the banking system to run with much too high levels of leverage, inadequate levels of capital, and we ignored the development of leverage in the financial system and in the real economy. And not only did we ignore it but we had a pretty overt intellectual philosophy that we could ignore it, because we knew the financial system was just a market like any other and whatever it did was bound to be for the good because that’s what markets are … I was surprised at the supervisory approach. I’d been on the board of a bank, I’d been involved in banks, I’d dealt with banks back in the 1980s and 1990s, and I, throughout that, had accepted the existing capital regime as a given, right? I had never gone back to basics and said, ‘Why do we allow banks to run with 30, 40, 50 times leverage?’. And neither had anybody else, funnily”.
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That includes Larry Summers, former Treasury Secretary of the United States, adviser to President Clinton and president of Harvard University-he is presently the Charles Eliot professor of economics at Harvard-who has said that everything that he has taught in economics has been called into question by the crisis. When the respected John Kay and Professor Charles Goodhart came to the Treasury Select Committee a few years ago, I asked them whether they understood risk, to which Charles Goodhart succinctly answered no. John Kay said, “I’ve been teaching risk for the past 25 years at Oxford University and what I did was throw my notes away, because nobody understands risk at the present time”.
Therefore, the situation in which we find ourselves is fragile. I suggest that if we do not go back to basics we will not solve the long-term problems that affect the financial services industry. The Prime Minister last week admitted in response to a question from the chief executive of Santander that the Government were confused and had mixed messages for the sector. As for briefings from the Treasury and the Chancellor, I have been taken aback to read in newspapers over the past few weeks that the Treasury is paving the way to sell the Government’s bailed-out bank stakes at a loss. The Times commentators, Sam Coates and Patrick Hosking, both of whom I know and are very respected, wrote recently that the Treasury wants to,
“lower public expectations over the amount that will be recovered from the sale”.
It hopes that the Parliamentary Commission on Banking Standards will conclude that the Labour Government paid too much for Royal Bank of Scotland and Lloyds in 2008.
From my point of view, there is not a chance of that happening, and it is simply not true. Alistair Darling made it clear in an article in the Financial Times last week that, on the eve the general election in 2010, the economy was growing and the Royal Bank of Scotland’s share price was 504p, which meant that the taxpayer was up £500 million on the deal. Three years later, with no growth, the taxpayer is down almost £20 billion. It is vital that we do not turn a paper loss into a real one with a hasty sell-off. The Business Secretary, Vince Cable, agrees with us on that very point. He said:
“I don’t see the need for any haste”,
as he called for the break-up of the Royal Bank of Scotland to boost competition. That is perhaps as a result of his membership of the Future of Banking Commission-on which he sat along with me and David Davis MP, who chaired it excellently-when we called for increased competition, maximum transparency and a new culture and ethos in the system where customers’ interests come first.
Three years into the life of this coalition, meaningful competition is a more distant prospect than it was in 2010. The events at Lloyds with Project Verde and the RBS sell-off to Santander, which has hit the dust, illustrate that the Government have neither leadership nor control of this situation despite being the dominant shareholder in these entities. We cannot leave the structure of the banking system to the vagaries of the market. Perhaps the time has come for us to abandon the pretence that UKFI is in control of events, in a
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situation where Lloyds has already spent more than £1 billion on Project Verde and Santander has withdrawn from the agreement with Royal Bank of Scotland after years of negotiation. We have seen everything turn to dust.
The Government need to demonstrate leadership by producing a blueprint of their own for a changed financial service. Perhaps, as the noble Baroness, Lady Kramer, who is an excellent member of the Parliamentary Commission on Banking Standards, mentioned earlier, that could be in conjunction with the regional partnership initiative of the noble Lord, Lord Heseltine. We have heard calls today for decentralisation from Westminster, for a rebalancing of the economy and for other parts of the country to share in prosperity.
However, if we do it in a hurry, it will be messed up. I suggest that the date of the next general election should not be the deciding factor in reforming the architecture of the banking system. This is a one-off opportunity. Mention has been made of the situation in Germany, where the privately owned Mittlestand companies are thriving because of their close regional relationship with the 3,000-plus independent banks, whose managers understand their businesses. Handelsbanken in the UK had a favourable press because of the same style of engagement at local level.
If we are serious about rebalancing the economy, developing SMEs and revitalising manufacture, this is the time. There has never been a better opportunity to use the leverage that we have. The politically myopic reactions to the situation from the spinners at the Treasury do no service whatever. Although the Parliamentary Commission on Banking Standards is doing excellent work, it is not the forum to produce a blueprint for the Royal Bank of Scotland and Lloyds. It can point the way forward, but the blueprint is for the Government. That is not our main focus. Our focus when we were established was clearly to look at culture and standards in the banking and financial services industry. RBS should not be a big element of our report, but we should recognise that there is an opportunity to do something there for the manufacturing and regional banking sector.
Also, we do not at present know what is on the banks’ balance sheets. Less than two weeks ago, the Financial Policy Committee said that British banks have a £25 billion shortfall in capital overall. The other day, the Local Authority Pension Fund Forum, representing 55 public pension funds, stated that the Royal Bank of Scotland has £10 billion of undisclosed loan losses on its balance sheet because it is using accounting standards that allow loss to be booked only after it is incurred, however likely a default may be, thereby underplaying the likely losses. We have been here before with accounting standards, when the banks, in their heyday, booked options and their own bonuses and expenses based on expected profits. A year of two later, however, the profits did not materialise. It is a sensitive and shaky situation.
Only the other week, I had discussions with HMRC after the noble Lord, Lord Lawson, and I, in a sub-committee of the Parliamentary Commission on Banking Standards, examined Barclays and the structured capital management vehicle, which the noble Lord accurately
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referred to as tax avoidance on an industrial scale. It is a black box. Following my discussions with HMRC, the head of the business unit wrote to me to say that HMRC has 92 issues with the big banks at the moment and £3.2 billion is under consideration in relation to tax avoidance schemes. Those matters have still to be determined. They will not be determined tomorrow or next month; it could take between seven and 10 years. The sum of £3.2 billion could have considerable impact on the prudential stability and health of banks. The banks have set aside £16 billion already for PPI mis-selling-perhaps that is a euphemism for fraud-and that figure is not final. The situation is fragile and illustrates the folly of making definitive judgment calls before a general election. We are presently clawing our way in the dark. Incentives are at the heart of the matter in banking.
At the end of the day, we need that leadership from the Government. A quick disposal of shares on political grounds will negate the golden opportunity for the Government to effect real change. I submit that the customers’ interest, both personal and economic, requires a responsible, mature approach to the disposal. When I was chairman, the Treasury Select Committee was clear that we wanted the taxpayers’ interest to be paramount. The Public Accounts Committee has followed that up and said in its report of 2012:
“The taxpayer has invested £66 billion in RBS and Lloyds shares and it seems that their ‘temporary public ownership’ will last for some time if getting value for our investment remains the most important objective for Government … We are concerned that a short-term decision to sell might undermine long-term realisation of value for the taxpayer. The Treasury, with UK Financial Investments Ltd, should set out a strategy for its share sales, and how it will prioritise the government’s various objectives so that the taxpayer’s interests are protected in any eventual sale”.
Hope and confidence are at the centre of that. If we expect to take taxpayers along with us, we need to have that mature and fundamental look at the system.