This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by the Financial Secretary to the Treasury.
[Check against delivery]
Chief Executive, My Lord Mayor, Your Excellencies, Sheriffs, Ladies and Gentlemen.
Thank you for inviting me to speak at this dinner this evening.
History shows us the role that banks have played in supporting our economy over the centuries. The influence of banks as a catalyst for economic growth in this country can be traced back as far as the Lombard merchant bankers who in the 13th century brought with them from Italy new practices of lending and underwriting that sustained the growth in trade through the middle ages. With the capital they built up they began lending to each other and built sophisticated money markets.
By the 19th century it was merchant banks that were instrumental in financing not only the Industrial Revolution but also the expansion of British trade across the globe, which gave rise to London as the centre of world trade and made Britain the world’s leading economic superpower by the beginning of the 19th century. The history of Britain owes a vast amount to Britain’s banks.
But our history alone does not give us the entitlement to remain at the centre of world trade or to remain a great place to do business.
At a dinner party in 1834 the great Nathan Mayer Rothschild, reflecting on his exploits as a merchant banker remarked,
It requires a great deal of boldness, and a great deal of caution, to make a great fortune; and when you have got it, it requires ten times as much wit to keep it.
We need to use our wits to maintain London as a global financial centre.
Our very recent history shows that just as banks can act as the bedrock of economic growth, when banks begin to crumble, the stability not only of the financial system but of the whole economy are put at risk.
In the eyes of many, events of recent years have overshadowed the work that banks have done to sustain growth over many years.
In this short time the reputation of bankers has hit an all time low in the eyes of the public.
It is not my intention to add to that chorus of condemnation today. Although I certainly recognise that mistakes have been made, I also recognise that Britain needs a strong and healthy banking sector to foster the economic growth that we all rely on for our future wellbeing.
And as we emerge from the crisis, I believe there is a real opportunity for banks to reclaim their reputation, by helping to rebuild our economy on sound principles and to reconnect with the wider community.
We have the opportunity to begin a new chapter in the history of British banking. One that is characterised by improving bank transparency, greater resilience and stability, and characterised by new business models that provide sustainability through the whole economic cycle.
Tonight I would like to set out how the Government and the banking sector can work together to rebuild the foundations of economic prosperity.
First, I will set out what the Government is doing help turn the page to a new chapter for British banking:
- through regulatory reforms
- by tackling issues in the structure of banks
- and by being a strong voice at international level.
And second I will set out the future role that banks themselves need to play in order to demonstrate their commitment to this new start:
- by serving the economy rather than being seen as self-serving
- rebuilding trust and confidence
- and acting as the motor of future growth.
Reforms to the system
Turning first to our regulatory reforms.
As the Chancellor announced here last month, we will put the Bank of England in charge of macro-prudential regulation by establishing within it a new Financial Policy Committee. We will abolish the Financial Services Authority and put in its place a new prudential regulator reporting directly to the Bank of England, and a Consumer Protection and Markets Authority.
In recognition of the inevitable temporary disruption and uncertainty that such changes bring to the regulated community, the necessary primary legislation will be in place within two years. We will be publishing an initial consultation on the detail of the reforms later this month and I look forward to engaging with many of you during the consultation process.
I am sure you will also engage equally constructively with the independent commission on the banking industry that we have set up under the chairmanship of Sir John Vickers. The commission will look at the structure of banking in the UK, the state of competition in the industry and how customers and taxpayers can be sure of the best deal.
Supporting a new economic role for banks
With these reforms in place, and as the wider international regulatory reform agenda begins to be implemented, we can mark an end to the last chapter, turn the page and start to look to new ways of working in the future, grounded in financial stability, which will help provide the platform for economic stability and growth.
The regulatory reforms will help to prevent future system failure, but we need to do more both domestically and internationally to underpin the future stability of the banking sector.
Promoting stability in the UK
In the UK steps have been taken to strengthen the regulation of banks. The quality and quantity of capital held by institutions has been increased, complemented by a stronger FSA regime for liquidity in the UK. Supervision has been intensified, with more resources focussed on larger and more complex firms. In addition, new UK powers are now in place to deal with failing banks.
However, it is important that we make progress this year on the issue of resolution regimes for large interconnected institutions. Systemic firms must be able to demonstrate that they have credible plans for recovery in a crisis. Our aim for recovery and resolution plans is therefore to ensure that risk is properly priced and to avoid the need to call on taxpayers’ funds in the future.
We are grateful for the work of Paul Tucker of the Bank of England who is leading at the international level through the Financial Stability Board and the G20.
A further measure towards stability in the UK is the introduction of a banking levy which we have announced following the recent IMF report to the G20. France and Germany have announced their intention to introduce similar levies and we expect the US to follow suit.
As the Chancellor announced in the Budget, we will be consulting widely on technical aspects of the design and implementation of the bank levy. Those discussions have already begun, including with and through the BBA, and I can tell you this evening that a consultation document on the bank levy will be issued tomorrow.
A strong voice in the international dialogue
But domestic responses to the crisis alone are not enough to ensure stability, because the global financial services industry stands and falls together. So we as a Government want to have a strong voice in the dialogue around international reforms.
In the run-up to the crisis the pre-eminence of London as a global financial centre gave us a strong and powerful voice in European debates on financial regulation. The experience of the last few years means that we have to work harder to persuade our European partners of our views.
The Lisbon Treaty has strengthened the powers of the European Parliament. Tonight and tomorrow at ECOFIN the Chancellor will be working with his opposite numbers and the rapporteurs to reach agreement on supervision.
The crisis means that we have to work harder to defend our interests but this is a shared responsibility. Banks must engage constructively with the European process and new European Supervisory Authorities. Our focus must be on the solutions as well as problems. We need the support of banks to make the case for strong global markets and to challenge protectionist tendencies that would seek to constrain financial flows by geography or currency.
We believe that the authorities should reinforce the single market, ensure consistency in supervision and application of rules across the jurisdiction, but not regulate institutions directly.
As well as engaging with Europe, we are engaging at the G20 level to secure stability, in particular we are keen to work towards certainty about an end point to the debate on capital and liquidity.
The G20 rightly agreed in Toronto that the core of the financial reform agenda rests on strengthening capital and liquidity requirements and constraining leverage. They agreed that capital levels should be enough to avoid calls on taxpayers’ funds if this last crisis repeated itself.
Implementation of these reforms will need to be phased in carefully, particularly in light of ongoing market fragility and the need to provide growth through sustainable lending. As we work at the international level to strengthen and stabilise the financial system, we are committed to preserving maximum discretion for the UK to act in its own interests where necessary and to provide our banking system with the support it needs in the event a future crisis.
Banks that serve the economy
But there is a limit to what we, as the Government, can do to enable the British banking industry to play its role in the life of our economy. It is in the hands of banks themselves to determine the new role they will play. Playing it well will mean serving the economy well.
Allow me to draw on the recent events in South Africa by way of analogy.
As is often the case in the World Cup, we have seen teams with few well known players out-perform the well known stars of teams like Italy, France and even England. But when a team performs badly the answer is not to drop the star player, but to strengthen the squad. No star player can win a game playing single-handedly but they can lead a stronger team to victory.
In the same way banks, which for so long have been a star player in the British economy, are viewed by many today like an overpaid professional footballer who has let the side down. But I want to see banks proving those critics wrong by being a team player that serves business and helps the whole economy to win.
And by serving the economy with all the wider benefits that brings, banks will begin to regain the trust and confidence of the public.
Banks that are trusted and respected
The fate of banks in terms of public trust and respect rests also in your hands.
A key way of regaining public trust will be by reforming the system of remuneration. We have the opportunity to send a clear message to the public that the banking system now operates in a way that is fair and stable and no longer rewards employees based on short-term performance whilst leaving investors and taxpayers exposed to the long-term risks. It is better for the industry to lead these changes.
But there is a role for the Government too. We will explore the costs and benefits of a Financial Activities Tax on profits and remuneration, and we will ask the FSA to examine further options in the forthcoming review of its remuneration code.
And we will be encouraging all G20 members to implement the FSB principles on remuneration rigorously.
The public sector and the private sector have been showing significant pay restraint since the recession.
I don’t need to tell you that the next bonus round will be conducted against a background of continued pressure in the private sector. And by visibly reforming the way they operate, banks can show that they exist to serve the whole economy, not just their own interests.
Growth built on confidence
The ultimate way in which banks will serve the economy is by acting as the motor of recovery.
Economic recovery can only be built on confidence and the banking sector can only support the recovery if underlying confidence in the banking system has been restored.
To this end, stress tests will increase the confidence of banks to lend to each other and we welcome this progress. The UK regime is based on the highest quality capital, Core Tier 1. Greater levels of transparency both to supervisors and markets must fast become the norm.
As a move towards increased transparency, we therefore welcome the recent announcement by the Committee of European Banking Supervisors that they have expanded the scope of their stress tests of European banks, and will be publishing the results on a bank-by-bank basis.
Reformed regulation, a more resilient banking system, and rebuilding of trust in banks as team players will help to build confidence further. We want both the banking system and wider financial markets to continue to meet the needs of the economy over the long term. To this end we will be publishing a business finance green paper that will examine options for non-bank financing at the end of this month.
I have argued this evening that we have an opportunity to start a new chapter in the history of British banking. In taking this opportunity and playing a new role, the industry has the full backing of the Government.
The history of British banking contains many great chapters of growth, expansion and empowering world trade. To take just one, the Victorian era saw an explosion in the scale and specialisation of financial markets whether in investment banking, insurance or commercial trade, which led to times of unprecedented growth and prosperity right across the economy. And many of the City’s great buildings, like the Royal Exchange opposite, stand as monument to that time.
And so I am confident that by grasping the opportunity of reform, the banking sector can start a new chapter, one based on the principles of transparency, resilience and stability. A chapter that sees Britain’s banks once again fuel business-led growth to the benefit of our economy as a whole.