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Banking

Volume 707: debated on Tuesday 10 February 2009

Question

Asked By

To ask Her Majesty’s Government what further action they are planning in respect of United Kingdom banks.

My Lords, on 19 January the Government announced a comprehensive package designed to reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy. The Government are now focused on implementing these measures.

My Lords, I think I thank my noble friend for that Answer, but is he aware that whatever he seeks to do on the central issue is being driven off the news headlines by the bonus issue? Does he accept that without the billions of pounds that the taxpayer has put into the banks, they would have gone bust and the employees would have been looking for jobs, not bonuses? Does he not agree that the only way to get back to the central issue is to stop all bonuses now and ask the committee that the Government propose to set up to look into the banks to produce an interim report quickly to consider the legal part of the contracts that any of them may have and any other relevant matters? Then the final decision could be taken by a government proposal approved by Parliament.

My Lords, the Chancellor of the Exchequer has invited Sir David Walker to look at a wide range of issues relating to the governance of banks, including the approach that boards took to evaluating risk and the establishment of compensation and incentive arrangements. He is also looking at the engagement between shareholders, who owned the banks, and the banks. The issue of bonuses is very much in the public eye at the moment. I endorse the view that bonuses should not be paid unless they are fully justified by the contribution of the individual. That contribution must reflect the individual’s contribution to the success of the bank, taking into account risk and the provision of bank capital, which has often been overlooked in the design of those schemes. It is quite clear that the schemes have had unintended consequences. The responsibility for making decisions on bonuses rests with the boards and with their shareholders. In respect of those banks in which we have a large shareholding through UKFI, UKFI is engaging with those boards of directors. In particular, we will seek to ensure that where it is asserted that there is a legal and contractual obligation to pay bonuses, that that really is a legal and contractual obligation that cannot be challenged.

My Lords, in the light of this whole sorry experience, is it not clear that the time has come to put in place a modern equivalent of the 1930s Glass-Steagall Act, which separated investment banking from commercial banking? Talking of the 1930s, does the Minister agree with his ministerial colleague, Mr Ed Balls, that the current boom and bust—to coin a phrase—is said to be even worse than the slump of the 1930s?

My Lords, I am not an economist, and therefore I am not going to comment on Mr Balls’s observations. As for the Glass-Steagall Act, the noble Lord, Lord Lawson, will be aware that, in our consideration of the Banking Bill, we have had much discussion on this subject: a discussion that has been led in particular by two colleagues, my noble friends Lord Eatwell and Lord Williams. The genie is out of the bottle, and it is very difficult in a global situation to separate retail from investment banking, but what we can do—the FSA is doing this—is to look at the allocation of capital against activities. It is quite clear that too little capital was required in support of trading activities, and probably too much capital was required against rather more conventional banking, as we understand it. We can achieve some of the consequences and benefits of separation through a much more rigorous capital, supervisory and regulatory regime than previously prevailed.

My Lords, does the Minister accept that many people find his earlier Answer extremely frustrating? Allegedly, the Prime Minister and the Chancellor want to end the bonus culture. Taxpayers currently have majority or very significant stakes in two banks. Why, at the very least, cannot ridiculously high bonuses be ended in those banks, rather than kicking the whole thing into the long grass of yet another wretched review?

My Lords, I absolutely assure noble Lords that this is not being kicked into the long grass. There is a need for a considered and contemplative review of governance, practice and engagement between shareholders, companies and boards of directors. That is what Sir David Walker will lead on. The more pressing issues about bonuses will require decisions to be taken in the fairly near future. Those issues are in no way being ducked. They will need to be confronted, and UKFI is now actively engaged in discussions with the Royal Bank of Scotland and the Lloyds Banking Group in connection with this. We will endorse the payment of bonuses only where there is a legal requirement to do so or where there is evidence of an extraordinary and exceptional contribution by individuals or teams. We will not reward failure.

My Lords, can the Minister explain that last statement? He has said that the Government will not endorse the payment of bonuses, but they have been standing by, since they first started to take control of the banks, and have done absolutely nothing. Can he say precisely what the Government are going to do about the bank bonuses?

My Lords, clearly the phrase “doing nothing” has finally caught on on the other side of the House. We are not the Government who do nothing. We made it clear in October, when we recapitalised the banks and in so doing ensured that the banking system continued to be available to support the economy, that reward issues were pertinent to that recapitalisation, and we secured the commitment from boards of directors that they would not take cash bonuses for 2008. We have now said in our more recent statement that participation in the schemes that have been detailed, including asset protection and the extended credit guarantee scheme, will be conditional on bonus payment issues. I repeat that we are not opposed to paying for contributions and adding value; we are opposed to rewarding failure.

My Lords, did my noble friend see the bankers appearing before the excellent Treasury Select Committee this morning? Is he not as worried as many of us are that they seem to have learnt absolutely nothing from the events of the past few months? Is there not something that the Government could do at least to give them a lesson in humility?

My Lords, I caught only snippets of the Treasury Select Committee hearings this morning between meetings. I understand that there were some expressions of sorrow, but the work that David Walker is going to do will be much more constructive in setting a new framework for accountable banks, taking into consideration their importance to the economy and their dependence on public support for the immediate future.