The irresponsible actions of banks around the world caused the global financial crisis – and we are still dealing with the consequences. Families and businesses are paying a heavy price for those irresponsible actions and the failure of regulation around the world – including here in Britain for which the last Labour government must take its share of the responsibility.
And on Monday they will be looking to Sir John Vickers’ Independent Commission on Banking to show that we can learn the right lessons from the crisis.
In April, ahead of Vickers’ interim report, I set three tests which the government must meet in implementing changes: protecting customers and taxpayers in the future, securing international agreement to protect jobs in Britain and delivering a banking system that supports the long-term interests of the wider economy. Those tests remain as important today as they were in the spring.
But in recent weeks we’ve seen bickering between senior cabinet ministers and heavy lobbying by the banking industry. I am clear that neither must stand in the way of banking reforms which are in the national interest. Banking reform must not be kicked into the long grass.
So, while the government will rightly keep a close eye on instability in wholesale banking markets, the choked off recovery since George Osborne’s spending review and VAT rise should not be an excuse for ducking the necessary reforms.
I have yet to see any compelling evidence that the reforms advocated will hinder growth – indeed there are those who argue that a ring fence of the kind advocated in the interim report could actually help increase lending to businesses here in Britain.
There is no denying that complex reforms will take some time. They should be implemented as soon as is sensible and practicable and on the timetable which the experts on the commission advocate. The forthcoming Financial Services Bill can and should be used to get on and legislate for many of the reforms.
However, the Vickers report is not the whole story on banking reform. And the wider issue of how our banks and financial sector supports long-term investment and deal with the wider culture of short-termism which still plagues our capital markets have been excluded from the terms of reference of the Vickers review. Its narrow focus on taxpayer and consumer protection means it won’t answer questions about the long-term needs of the economy and how banks should not just work for themselves but for the long-term interests of our economy.
And right now businesses are really struggling to get the banks to lend so they can help play their part in kick starting the recovery. These immediate issues cannot be resolved by the Vickers review.
So while the work of Sir John’s Independent Commission will, I am sure, be a valuable and important contribution to bringing necessary reforms about, it is not the only thing that matters. It is the government’s job to make sure the banks are supporting small and medium sized business lending, jobs and growth in the short-term.
The government has staked all of its credibility on a set of targets under their so called ‘Project Merlin’ deal with the banks. But the targets under this weak and toothless agreement have been shown to be almost meaningless. Even the Governor of the Bank of England has gone out his way to emphasise that net lending figures – which give a much more accurate picture of how much is actually lent to business – have been falling.
So in the short term, and before the Vickers recommendations can be implemented, the government needs to urgently address the issue of lending to business now, in order to get the growth we need to get our deficit down – as part of a more balanced deficit plan that puts jobs and growth first which a growing number of economists and international organisations are now urging.
And in the medium term, we need a diverse and competitive banking system which supports the long-term needs of our economy. As Vickers’ interim report acknowledged the sector is too concentrated and that is leading to higher prices for customers. The existing banks need to be challenged – and we await his conclusions on competition and bank branches with close interest.
As I will say at the Co-operative Party Conference later today a strong mutual sector also has a big contribution to make. Co-operatives and mutuals have shown their importance to our banking industry. When confidence in other institutions has collapsed, co-operatives have grown, strengthened and showed the way forward for responsible financial sector business in our country. Despite this George Osborne has made clear he does not intend to give serious consideration to proposals which he has received, not least from the Co-op, for the mutualisation of Northern Rock.
This is a short sighted and sadly ideological decision. The mutual sector has shown itself through the financial crisis to be a stable and sustainable model, and one which serves consumers well. So he should look again at ways to enhance the role of mutuals in our financial services sector, building on the work of the last Labour government championed by Labour and Co-op MPs.
The government will be judged in the coming days and weeks on their implementation of Vickers’ recommendations and issues around the protection of taxpayers and consumers. But the banks will also be judged on whether they support jobs, small businesses lending and the needs of our wider economy in the short and long term. Here the ball is squarely in George Osborne’s court.
Ed Balls is the shadow chancellor and the Labour and Co-operative MP for Morley and Outwood.