[Check against delivery]
I am very pleased to be here today as events like these provide the perfect opportunity to escape the Westminster bubble, the London bubble even, and see first hand what the recovery feels like across the country.
Because it’s absolutely critical that we, the Government, keep a close ear to the ground, hear directly from businesses, so that we can understand the challenges that you face.
Banks and businesses have to work together to fuel a private sector recovery. That much is obvious. But it’s one thing to wish it, quite another to realise it.
And I know this from my own experience having grown up not a million miles away from here in Durham, and having worked as an accountant…working for banking and business clients.
But of course, today’s economic climate is very different to when I was growing up or practicing. And the financial sector is at the very centre of the story.
As the Chancellor said in his Mansion House speech a few weeks ago, banks across the system are shrinking their balance sheets not because we the Government or the regulators demand it, but because the markets themselves demand it.
Before the crisis the balance sheets of our banks shot up from around 300% of GDP in 1998 to a staggering 550% just a decade later. The de-leveraging that’s now taking place of course acts as a powerful drag on recovery.
At its core, the financial crisis was a crisis of trust - between market participants, but just as importantly, between banks and their customers.
And it wasn’t that far from here just how strikingly apparent the crisis was. I was speaking in Newcastle yesterday…and of course the queues of people outside branches of Northern Rock are a lasting image of the crisis.
But three years on from the nationalisation of Northern Rock, and an array of other financial sector interventions, this Government is taking the first steps to exit from these. And we have already announced that Northern Rock is being put up for sale.
But this not simply a return to business as usual. The last crisis cost the taxpayer billions of pounds. This is a situation we cannot afford to repeat.
We are taking the necessary measures to reform our regulatory system to ensure we effectively monitor and manage financial risk… and we are forming the financial system itself to ensure that taxpayers will not be on the hook for bank failures.
But we have to strike the right balance. The financial sector creates hundreds of thousands of jobs across the UK, and a successful industry remains in our national economic interest. But at the same time we know that success cannot come at the expense of wider economic stability.
We have to answer how we can create a successful but stable financial services sector.
The work of the Independent Commission on Banking is key to this. Earlier this year the Commission produced its Interim Report which made two very important recommendations that the Government supports in principle…
Bail-in instead of bail-out - so that private investors, not taxpayers bear the losses if things go wrong
And a ring fence around better capitalised high street banks to make them safer, and to protect their vital services to the economy if things go wrong.
We look forward to the Commission’s final recommendations, but we haven’t spared time to fundamentally reform our domestic regulatory system.
It’s clear that the tripartite system of regulation failed utterly in its task to monitor and address risk in the financial system. Critically, it failed to monitor the macro and systemic risk that grew in the sector over the previous decade.
Last month we issued our White Paper on regulatory reform which revamps the system of domestic regulation. We are creating a permanent Financial Policy Committee within the Bank of England to monitor overall risks in the financial system, identify bubbles as they develop, spot dangerous inter-connections and stop excessive levels of leverage before it is too late.
We are abolishing the Financial Services Authority in its current form, and transferring its significant prudential functions to a new Prudential Regulatory Authority that will sit in the Bank of England. Together these two bodies will bring judgement and foresight to regulation rather than mere box ticking.
And we are also bringing a new approach to protecting consumers, to ensure that they are at the heart of the financial system.
A new Financial Conduct Authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers.
Rebalancing the economy
These reforms go a long way to ensuring we create a financial system that supports sustainable growth across the economy, and doesn’t jeopardise stability.
But at the same time we are taking the necessary steps to rebalance our economy away from over reliance on the financial sector to support growth across all regions and all sectors.
Our Plan for Growth, published in March this year, set out our plans to secure a private sector-led, sustainable recovery through export and investment. It included plans to reduce the regulatory and tax burden on businesses and entrepreneurs, and invest in our skills and infrastructure base as a springboard for private sector growth.
But that doesn’t mean we can ignore financial services. Indeed it is only by working with the financial services industry that we can achieve these goals.
It is only by healing and restoring the relationship between banks, businesses and individual consumers that we can drive a sustainable recovery.
Of course, Leeds, and the wider Yorkshire and Humber are no different. Across the region we can see diverse strength of manufacturing, retail and business services in terms of their output and their employment. But there is also a strong financial services sector which has a vital role in promoting growth across the region and across all sectors.
There is already a lot of work underway across the country to build and improve the relationships between banks and businesses. Once such example being the British Bankers Association’s Better Business Finance Initiatives which are being held across the country.
There have been five regional events so far, including the one in Newcastle that I attended yesterday, and there are a further ten to be held, including one in Leeds on October 18th.
The Business Finance Initiative has made substantial progress on a number of targets including the launch of the micro-enterprise lending code, new lending principles for medium and larger businesses, and the launch this week the Business Mentoring scheme to help businesses find existing support in their area.
But as well as advice, businesses need credit.
Businesses want better access to the funds they need for day to day financing as well as investment and growth.
Of course this has proved a complex and controversial area, as it is extremely difficult to know where the balance lies between supply and demand.
But we haven’t been complacent on the issue.
We have been working tirelessly with the banks to try and get credit flowing again.
Because, whilst we know that banks and some businesses need to deleverage, we wanted banks to send a clear signal that they had the capacity to lend to support businesses.
That is why we reached our agreement with the UK’s biggest banks to commit to lend £190bn of new credit to all businesses in 2011. And that figure includes £76bn being made available specifically for SMEs. A substantial increase on the £66bn lent to SMEs in 2010.
The Government will use every tool at its disposal to make sure that the banks meet their published commitments.
To support more bank lending, we’ve also committed to continue the Enterprise Finance Guarantee Scheme for the next four years.
On the equity side, we’re also continuing with Enterprise Capital Funds, which invest up to £2m in small innovative companies. And we welcome the commitment from the BBA’s Taskforce to the new Business Growth Fund that is now ready to provide up to £2.5bn in equity investments in Britain’s businesses.
It’s only through cooperation and engagement between banks and business that we can ensure we are all pulling in the same direction.
Events like this today are essential to re-establishing confidence and trust between business and the financial sector.
It’s in our collective interest to create a strong and stable financial sector, one that serves the interests of its customers, one that delivers a sustainable economic recovery.
The Government has been driving this agenda and has made substantial progress to date. And I also welcome the steps that banks and businesses are taking themselves to realise this ambition.
And I am especially keen to hear from you about your experiences, and what more can be done to support our economic recovery.