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Banking Industry

Volume 487: debated on Thursday 12 February 2009

7. What assessment he has made of the effectiveness of internal risk rating as a basis on which to operate international banking supervision. (256288)

Internal risk models for United Kingdom banks are required to be approved for use by the Financial Services Authority. Internal risk rating is complemented in the Basel II framework—and, in EU law, the capital requirements directive—by a requirement for supervisors to undertake supervisory reviews of the banks’ risks and make appropriate adjustments as required. The framework also incorporates a third pillar: disclosure of key supervisory requirements of a bank to ensure market discipline.

Northern Rock’s banking practices were compliant with the Basel accords, so I think that this can be described as, in effect, a highway code written by boy racers. The system effectively hands all the risk assessment over to the banks themselves, and is fatally flawed as a result of being allied to a system of balkanised regulation. It does not need tweaking; it needs fundamentally changing. Will we try to get some proper, global banking regulation out of the G20 talks?

I think that the G10 regulators and people in the central banks who worked on Basel II will be surprised to hear themselves described as boy racers. They may be pleased to be regarded as so youthful. But I think the only boy racer when it comes to regulation is the shadow Chancellor, the hon. Member for Tatton (Mr. Osborne), given his earlier policy proposals in this context.

My hon. Friend has raised an important point about banks and their internal risk modelling, which must be approved by the Financial Services Authority. The Chancellor has been at the forefront of international discussions about future arrangements. We believe that improvements are needed to the Basel II process, and it will certainly be a major topic of conversation at the G20 Finance Ministers’ summit.

On two occasions, both the Prime Minister and the Chancellor have failed to express confidence in Glen Moreno, acting chairman of UK Financial Investments Ltd, the body entrusted with risk-managing our bank holdings. Can the Minister tell us when he will appoint a permanent chairman, and will he confirm that Mr. Moreno will not be a candidate?

I welcome the hon. Gentleman to the Dispatch Box for the first time, and I refer him to the comments made previously by the Chancellor.

The April 2007 Bank of England financial stability report documented a number of risk management weaknesses: weakened credit risk assessment; impaired risk monitoring; and over-reliance on risk assessments. It then glossed over those when it said that

“the growing use of credit risk transfer markets have increased the risk-bearing capacity of the system”.

That is incredible when one looks back at what has happened. Can the Minister instruct the Governor of the Bank of England to pay much more attention in future stability reports to explicit risks and far less attention to glossy commentary?

The hon. Gentleman served on the Banking Bill Committee, on which I led for the Government. Like me, he will be aware that statutory responsibilities are to be given to the Bank of England through the Banking Bill in just the areas that he is discussing.

Topical Questions

The Department’s responsibilities remain as I set out last December. With your permission, Mr. Speaker, I can tell the House that, following the meeting of the G20 countries in April, this year’s Budget statement will be on 22 April, when the House will have returned after its Easter recess.

Can the Chancellor say what estimate he has made of the number of firms and businesses likely either to cease trading or to go out of business as a consequence of the forthcoming 5 per cent. increase in business rates?

What I can tell the hon. Gentleman is that the measures we have put in place to support small businesses in relation to lending will help many businesses to deal with the costs they meet, in addition to helping them get through an extremely difficult situation—we will continue to do that. Other measures, for example, the empty property relief that I announced last November, will help people and businesses get through this difficult time. I will continue to keep under review, at the Budget and at other times, what else we can do to help small businesses.

T2. Talking of those measures that the Chancellor has mentioned, I understand that the time to pay initiative introduced by Her Majesty’s Revenue and Customs has been much appreciated by small businesses that have taken advantage of it. Does he have any figures that can objectively tell us what the take-up has been, and what the benefit has been to small businesses? (256308)

My hon. Friend is right to mention the very good response that there has been to this initiative. More than 60,000 businesses have benefited from the time to pay arrangements, including 191 in Derbyshire. In total, those businesses have agreed arrangements to spread tax payments worth more than £1 billion, so the scheme has been very effective. I know from what businesses have said to me and from what a number of Members of the House have reported to me and to other Treasury Ministers on behalf of businesses in their areas how successful and highly welcomed this scheme has been.

T4. Has the Chancellor exhausted his fiscal stimulus? If not, what is the limit of the stimulus that he intends to impose? (256310)

I thought that my right hon. Friend the Financial Secretary had just indicated one of the benefits that the fiscal stimulus has been giving to businesses in this country—£1 billion of help has been given to businesses. That is one example of the difference between a Labour Government who are giving that help and a Conservative party that is absolutely opposed to it.

T3. My right hon. Friend has brought forward much funding to enable public projects to progress in constituencies such as mine. Will he ensure that MPs are consulted when these public projects are brought forward so that we can ensure that they are in the best interests of our constituents, particularly where university funding is concerned? (256309)

My hon. Friend is certainly right to say that bringing forward increased public sector capital investment can help to support jobs in every constituency across the country—we think that it will help to support thousands of additional jobs. I am happy to talk to her further about what additional information she would like either from the Treasury or from individual Departments, which are, of course, supporting the major capital investment, not just across the higher and further education sectors, but across transport and other areas of infrastructure—it is all, sadly, opposed by the Conservatives.

T5. Among the poor judgments made by the Chancellor was that of asking Sir James Crosby to produce a report that recently concluded that the taxpayer should buy up the bad debts of the banks. Now that we know the level of complicity that Sir James had in producing those bad debts at his old bank, does the Chancellor still intend to press ahead with the conclusions of that report without question? (256311)

The hon. Lady is mistaken about what James Crosby actually proposed. He was not dealing with the question of the bad assets in the banks—that was being dealt with separately. He was asked to consider how to get mortgage lending going again—again, at the time, that was something that the Conservative party was in favour of. He suggested that the Government should underwrite some of that new lending. That has a great deal of merit, and it is something that I set out in the pre-Budget report. I am afraid that the hon. Lady was just plain wrong in what she said.

This week, one banker has described a salary of £1 million as “modest” and RBS has proposed obscene bonuses of £1 billion. Will the Chancellor now stand up for the taxpayers who own great chunks of the banks and demand a freeze on bankers’ bonuses?

The hon. Lady will be aware that when we recapitalised the banks in October, we imposed restrictions on the payment of cash bonuses to board members. I believe that bonuses should reward success, not failure, and many people who work for banks are not well paid in comparison with some of the people at the top. If the former work hard, they should be rewarded for doing so. I agree with the hon. Lady that people who are associated with the losses should not receive anything, and we must end the culture that has encouraged people to take reckless risks that the boards of the banks patently did not understand. It has had disastrous consequences for them, for this country and for the rest of the world.

This downturn affects the whole world, and does not that underline the importance of working with our partners in the European Union and other countries to stimulate demand? What action is being taken by EU members and other countries to address these pressing needs?

My hon. Friend is right. The co-ordinated European recovery plan, which was agreed by Finance Ministers and leaders in the EU, includes a fiscal stimulus of a similar size to the one that we pioneered in this country. Germany may have had a few words to say, but it has introduced the largest fiscal stimulus since the second world war, at €82 billion. The French have a €26 billion fiscal stimulus and the Spanish a €25 billion one. Even the Canadians, who used to be on the side of the do nothing party, have announced a $32 billion fiscal stimulus. Everyone is doing it but the Tories.

T6. Would the Treasury team confirm that, according to the pre-Budget report, our net contributions to the EU budget this year will be £2 billion, which will rise in two years time to £6.5 billion? Do they think that, in a recession, it is sensible for us to more than treble our contributions to the EU budget, especially when the European Court of Auditors has refused to sign off the accounts for 13 years because of the waste and mismanagement? Can Ministers think of a better way to spend that sum in this country in a recession? (256313)

The right hon. Gentleman makes some interesting points, but it is also important to remember that we are pioneers in ensuring that the EU budget is spent appropriately. We always raise that point in all the meetings that we have. I also note that €30 billion of the EU fiscal stimulus—which the Tories oppose, but which will help to revive all of our economies—will come directly from the EU budget.

Given the dreadful price paid by this country in blood and treasure after the previous surge of troops in Afghanistan in 2006, may we have an assurance that, before another surge is contemplated, we will have before us a full financial appraisal?

My hon. Friend will know that the Government remain committed to supporting our troops, who are carrying out an extremely difficult and dangerous task in Afghanistan. We believe, of course, that our contribution should be made alongside contributions from other countries too. This must be an international effort, and the burden cannot lie on the shoulders of a few. Our commitment to ensuring that we see the matter through with other countries remains as strong as it ever was.

T7. In her reply to the hon. Member for South Swindon (Anne Snelgrove), the Chief Secretary said that expenditure on public works would be going up during this vicious recession. In the current financial year, the Treasury will raise roughly £44 billion from the motorist. How much of that is being reinvested in the road network? (256314)

As the hon. Gentleman will know, we are increasing investment in transport and other infrastructure across the board. We are bringing forward capital spending on our transport infrastructure, and that is the right thing to do to support the economy at this time. The Opposition’s proposals would amount to a cut of £800 million in transport investment at a time when the economy needs it, in just two months’ time. I think that such a cut would be hugely bad for the economy.

On Monday, the Federation of Small Businesses said that the VAT cut had not worked. That is certainly what I am hearing from my local businesses. Denise Harrison, the owner of the small business Complete Image, pointed out that reprinting her price list would cost so much that lowering her prices would not be economic. When will the Chancellor admit that the cut was a gimmick? When will he come forward with proposals that would really help small businesses in my constituency and the rest of the country?

I do not agree with the hon. Gentleman. We cut VAT because that was the quickest way to put £12.5 billion into the economy. We are also reducing the amount of tax that basic rate taxpayers pay, and introducing measures to help families with children, and pensioners. It will all make a difference. The Institute for Fiscal Studies is independent of Government, but in its report a couple of weeks ago it said that the temporary cut in VAT that is now in place would be a more effective

“stimulus measure than its critics suggest.”

In addition, the forecasts in the inflation report that the Bank of England published yesterday made the point that the VAT reduction and the other stimulus that we have put in place, together with the effects of monetary policy and falling energy prices, will make a difference.

I know that many small businesses are finding it very difficult at the moment to make ends meet, and that many of their customers are cutting back on what they are doing. That is all the more reason, I would have thought, to support putting more money into the economy. We are putting something like £20 billion into the economy over the next year or so, and other countries right across the world are doing the same thing. It will make a difference. There is no quick fix or overnight solution, but the alternative—of doing nothing and letting the recession take its course—was tried in the 1980s and 1990s. It did not work then and it would not work now.

T8. Can the Chancellor please tell the House what the point is in having a Financial Services Authority at all if the Government were either unaware of its concerns about HBOS, or unwilling to make sure that action was taken? (256315)

I believe that it is essential to have an independent regulator such as the FSA. Indeed, the hon. Gentleman might do well to remember that it replaced some seven or eight self-regulatory organisations that, for example, manifestly failed to prevent the mis-selling of pensions in the late 1980s. That is why we set it up. The FSA has a responsibility to regulate the financial services industry. It routinely raises concerns about firms from time to time. It would not routinely report those concerns to the Treasury unless at that time it felt that there was a major systemic risk. Clearly, it did not feel that such a risk was evident when it carried out its investigations, because it did not report any suspicions to the Treasury at any point. However, I do not think that one can argue from that that there should not be independent regulation of the financial services industry. That position is just patent nonsense.

Has the Treasury made an assessment of the role and influence of external credit agencies in the analysis of financial regulation for our financial services industry?

Yes, we have, and I agree with the point that I think that the hon. Gentleman is getting at. Credit rating agencies are a useful aid to decision making, but they cannot be a substitute for decision making on the part of boardrooms. People need to decide whether a risk is good or not or, if there is a risk, how they are going to price it. To do that, they should, of course, refer to credit rating agencies but that should not be the last word. Other issues are involved, such as the conflict of interest that arises when credit rating agencies certify products in which they have a financial interest. However, these are all issues that we have raised at the Financial Stability Forum, because the problems need to be dealt with at an international level. They cannot be dealt with in any one country alone.

T9. What is the Minister’s latest assessment of the number of jobs currently being lost from businesses located in British ports, as a result of the appalling and wholly unjust decision to levy three years of business rates retrospectively on port tenants, many of whom are now being pushed to the brink of insolvency, as a result of their new and unexpected tax liabilities? (256316)

My right hon. Friend the Minister for Local Government has recently announced to the House, following our announcement in the pre-Budget report, an unprecedented period of eight years to pay back these liabilities, which are properly and rightly assessed, as happens routinely with all business services. There is an eight-year pay-back period; it is interest free; and it should offer a great deal of help.

Returning to Mr. Glen Moreno, does the Chancellor of the Exchequer not understand that it was a gross error of judgment to appoint that Liechtenstein-based banker, who specialises in tax avoidance, to look after taxpayers’ interests in our banks?

As I said earlier, Mr. Moreno is taking that job on an acting basis until we can appoint someone on a permanent basis, but the right hon. Gentleman’s protestations about tax dodging and people not paying taxes in this country when they should would have far more credibility—[Interruption.]

Order. Let the Chancellor answer. It may not be the answer that the right hon. Gentleman wants, but let him answer.

The Opposition do not want to hear the answer, because there are some uncomfortable truths—some of them sitting not very far away from this place.