During the Lib Dem’s Spring Conference an emergency morion was passed calling for Tougher Action on Banks and Bonuses.
There were many aims of this motion which stemmed from the need for a healthy banking system to protect the individuals and the wider British economy. However, given the failure of regulation in the past, most notably leading to the financial crash of 2008 where many banks were seen to have privatised large profits to the detriment of sustainable investment and growth in the economy, Liberal Democrats support the need to tackle these disproportionate rewards for risky financial behaviour and the concentration of power to the few at the top of the large banks.
The motion praised the aims of the recent “Project Merlin” which sought to increase the credit available to British businesses, improve transparency over executive pay and reduce the overall bonus pool.
However there is a belief that Project Merlin didn’t go far enough and the motion looked to ensure the recommendations of the Vickers Commission are carried out promptly, specifically
- Splitting the taxpayer supported banks into smaller, safer entities with full disclosure of pay packages greater than the Prime Minister while they are state owned
- Large banks to divest their investment banking arms
- Pay transparency to be extended to highly paid traders and other employees, not just executive level pay
- Banks to hold greater capital reserves
- Green Investment Bank to be a bank and not a fund
- Measures to tackle financial exclusion for individuals and small business with a public bank administered through Post Offices providing fee-free ATMs within walking distance of deprived communities and reducing unfair bank, credit card and loan charges
- Greater support for local credit unions and mutuals
The overally aims of the motion are clear with conference generally being positive on the work which has been carried out so far by the government with Project Merlin, but called on them to go further.
In general I support these aims, I want to see a safer banking system which promotes growth in the economy. I want to see a move away from the risk seeking sectors of a banking industry, while these banks are either state owned or using retail money to prop up their investment arms potentially risking the average persons savings.
However, I stood up at conference (my first speech) to talk against this motion, or at least parts of it. My first and major concern is that the Independent Commission on Banking is not complete yet, the interim report isn’t due until mid April and the responses from the Issue Paper give a highlight of the issues that have been raised and the arguments for and against various parts of the motion, but in general do not (and should not at this stage) give an indication of which way the commission is leaning.
The main two parts of this that I spoke against are sections 1 and 2 to split up the state owned banks and to split the retail and investment banking arms of the large banks. My reason for talking about this isn’t that we should not necessarily do these, but the aims seem to be talked about without any theoretical or real life examples of how this will lead to a safer, healthier banking sector in the UK. Even the Vicker’s Commission report published so far has said
“It was argued by some that a split would not increase financial stability”
I want to see evidence led policy effecting our decisions and for something as important and potentially as economically devastating as changes to the banking system we need to be sure that we are not just effecting popularist changes. My main concern with this is when looking at the banks which did suffer as a result of the financial crisis in 2008.
First Northern Rock, this was not one of the largest banks, it was in fact one of the smaller banks in the UK. The problem with Northern Rock wasn’t its size, it was the manner in which it was wrapping up mortgages into “less-risky” assets and selling these on thereby allowing it to take more and more risk. At the same time the largest bank in the UK did not require any government assistance. Although there is obviously the issue that the implicit state guarantee of banks gave a safety net to the likes of Barclays and HSBC, which is maybe why these banks did not require a government bailout.
Second, splitting up the retail and investment arms, the two big banks which came crashing down around the financial crisis were Bear Stearns, then Lehman Brothers. Both of which were purely investment banks. Where as the UK banks with the largest investment banking arms did not require any government assistance.
What I am saying is not that I do not agree with what is proposed in this motion, but rather that I would like to see the full analysis of the potential effects before we commit to policy these recommendations when they do not appear to agree with the evidence before us. It is dangerous to move too quickly and potentially damage our economic growth, or even the fragile stability we have.
I will finish by saying there is no talk about the manner in which “risk” is perceived by the banks in this motion and maybe that is more important. The method of “hiding” risk employed by Northern Rock and others was one of the drivers of the financial crisis and maybe when developing policy on banks it is time that we fully understood the method in which we look at the risk of the banks. The problem is, this will be much harder to understand, and doesn’t make for such pretty policy as we’ll end the bonuses and split up the banks.