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29/10

30 March 2010

Speech by the Financial Secretary to the Treasury, Paul Myners, at the Social Market Foundation breakfast on ‘Government support for small business & the wider economy’

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Introduction

Many thanks for coming here today.

As a member of the House of Lords, Canary Wharf is the closest thing that I have to a constituency, and it is always very good to be here.

We are at a critical juncture. As you all know, the UK economy is emerging from the deepest global recession for over 60 years. This is a recession which has hit all countries and which had the potential to be far, far worse.

Unemployment has risen, but it remains lower than in France, Canada, America and the euro area.

Repossessions have risen, but were significantly lower than the Council of Mortgage Lenders’ forecasts
Government borrowing is lower than forecast last year.

But recovery is still fragile and we must not take it for granted.

The Government has already made significant choices to limit the length and the impact of the recession, and last week’s Budget set out further measures to ensure that we don’t lose momentum.

In the medium-term, we need to ensure that the choices that we make today support industries and jobs tomorrow, and meet the challenges of the future: the move to the low-carbon economy, the need for a skilled, flexible work-force and rebalancing the public finances. 

Role of financial services

At the heart of a thriving economy is a competitive, profitable banking sector.

We must not forget the valuable social and economic function that banks perform.

The most basic functions of banks are simple: providing safe places for people to deposit savings, allowing businesses and home-buyers to borrow to invest in their future and transmitting funds with security and confidence.

In the last two years, we have seen the damage that the financial sector can cause.

We have seen reckless behaviours in a small part of the City; and how banks, regulators and governments across the world fundamentally misunderstood the nature and scale of risk.

We now know the true price of those risks – as taxpayers around the world have picked up the tab.

We also know that the impact of the financial crisis has hit businesses hard.

Our first challenge was to stabilise the banking system – not for its own sake – but without interventions, the credit squeeze would have been worse and the long-term consequences for jobs and growth would have been very serious.

We needed to ensure that our banks could open for business and continue to lend. This meant taking Northern Rock into public ownership, taking equity stakes in Lloyds and Royal Bank of Scotland, providing credit guarantees and liquidity.

But the next challenge – and one that will take time and international cooperation – will be to rebuild a stable, resilient financial services sector, free from taxpayer subsidy.

This requires a mixture of regulation, reforms to governance and a real step-change in the measurement and management of risk.

Let me be clear, a profitable financial services sector is good for everyone; it creates jobs and value. The sector needs to be successful if it is able to serve the present and future needs of businesses, savers, investors and pensioners.

Ensuring banking works for business

We signed lending commitments with Lloyds and Royal Bank of Scotland in February last year. Over the past twelve months, both banks have met their residential targets, but haven’t been able to hit their business targets.

In my view, this is not primarily a failing by the banks. Demand for credit has been weak and repayments – as in past recessions – have been high. 

Both banks have increased their market share and between them, they have lent £78bn to businesses including £38bn to small and medium sized businesses.

At the Budget, the Chancellor announced that in the coming year, they will provide a total of £94bn of new business loans - nearly half to SMEs.
In December, Lloyds and RBS signed ‘Customer Charters’ setting out the terms and conditions that SMEs can expect from their banks, including setting caps on fees and margins.

Since then, Barclays, HSBC and Santander UK have also published statements explaining their approach to lending.

These charters and statements represent a serious advance in the promotion of transparency.

But there are still companies who are being unfairly denied credit and feel that they are powerless to challenge the decision.

The Budget announced that the Financial Intermediary Service, which operates through Business Link, will be strengthened, providing a mediation service in every region.

And a new SME Credit Adjudicator will be established, who can examine lending decisions and who will – in due course – have legal powers to enforce its judgements.

But the best way to ensure that credit is available at the right price and on the right terms is to boost competition.

The sale of Northern Rock, combined with the divestments from Lloyds and RBS, provide a real opportunity for further competition for banking business on our high streets.

The FSA has also agreed to explore mechanisms to speed up and improve the application process for new bank licenses.

And I have personally been driving forward work to diversify sources of financing, by promoting new models of non-bank lending to ensure that businesses have the widest possible range of financing options.

We also need to ensure that the building blocks of the financial sector are working effectively and efficiently.

The failure of Lehman Brothers was a defining moment in the crisis.  It exposed the scale of the interconnectedness of financial markets, and the amount of damage and contagion that single failures can cause to entire markets.

In short, it highlighted the critical need to ensure that the ‘plumbing’ of banking is safe and sound.

Firstly, we need to to reduce the risk of failure and to make it possible for any type of bank to ‘fail safely’ through ‘Recovery and Resolution Plans’, or Living Wills.

The Government has also recently consulted on measures to ensure that investment banks can fail, without spreading contagion to the rest of the system. 

We are reviewing the repsonses to this paper and will publish our findings later in the year.

Secondly, we are working with industry and partners in Europe to improve the quality and transparency of derivatives clearing. 

We are supporting moves in Europe to drive up standards in central clearing parties, and looking to incentivise increased use of these counterparties to clear trades. We are doing this by challenging clearing targets and insisting on increased capital requirements for bilateral collateralisation. 

This will increase transparency and certainty for clients, while not stifling innovation and the continuing need, in some cases, for bespoke solutions to properly hedge complex risks.

Thirdly, we need to ensure that the basic infrastructure for banking is fit for purpose.

London is still the premier location for investment banking services worldwide. 
This is a position built over many decades - based on the talent of our people and the financial services infrastructure present in London and the UK. 

But to remain at the forefront of global banking, we must ensure that London continues to offer an infrastructure that is world class, and unmatched by other financial centres.

And we must ensure that our regulatory framework remains consistent and even-handed at all times - regardless of the approach in other jurisdictions.

Decisions on location should always be made by firms on the basis of their own commercial objectives, and never in response to the whims of individual regulators.

There is no advantage to the UK - or indeed the EU - adopting a short-term approach to regulation that seeks to manipulate the choices of individual firms. 

We recognise the importance of the single market, a level playing field and fair and open competition.

In the end - it is the strengths of our infrastructure, the talent of our people and the even-handedness of our regulatory approach that will ensure that London retains its competitive advantage and remains the location of choice within the EU.

Budget – support for business

As I’ve said before, Governments can’t create wealth; businesses create growth and last week’s Budget was clear that we need to support businesses to ensure that the recovery is secured.

To that end, the Budget announced help for 500,000 SMEs - cutting business rates for one year from October. The Federation of Small Businesses say this is the third biggest cost after salaries and rents, and it will ensure that 345,000 businesses pay no business rates.

We are also doubling the Annual Investment Allowance to £100,000, increasing the Entrepreneurs Relief lifetime limit to £2 million, and continuing ‘Time to Pay’, which has proved invaluable in assisting cash flow management.

We have also rolled up the multiple public sector investment funds in to UK Finance for Growth, which brings together over £4bn of funds, including the Growth Capital Fund, to provide finance for growing SMEs.

And building on the recommendations of the Glover Review, the Budget announced that the proportion of central government contracts that go to SMEs will increase by 15 per cent. .

This could mean new business worth an extra £3bn from central government alone and up to £15bn across the wider public sector.

In the long-term, we need to ensure that the choices we make now create the right conditions for growth in the future.

To do this, we need to invest in our human capital. The Budget announced extra funding for 20,000 university places, concentrating on the Science, Technology, Engineering and Mathematics skills which will drive future innovation and growth.

And the introduction of “patent box” will support high-tech and high-value innovative industries.

We also need to continue investing in key infrastructure to support sustainable growth.

Since 1997, the Government has invested over £275 billion in public assets, including vital infrastructure for transport, business and education. In addition, we have provided a stable regulatory environment for more than £100bn of private infrastructure investment over this time.

Through a new ‘Green Investment Bank’, we will supply over £2bn of finance to low-carbon industries.
Ernst & Young estimates £165 billion is needed in the coming decade to replace and expand the UK’s ageing energy infrastructure, and meet our ambitious carbon reduction targets, with investments in renewable energy and other green technology.

The Green Investment Bank will help to reduce the risk profile of these investments, bringing forward vital investments in offshore wind, high speed rail and carbon capture and storage.

So we are making the right choices to invest now in the areas that will support growth.

But we also need to ensure that we are living within our means. The Chancellor’s Budget sets out a clear plan to halve the deficit over four years, once the recovery is secured.

This is the most ambitious deficit reduction plan in the G7 and one that will ensure  that Britain reduces its deficit quickly, but fairly.

Conclusion

This year’s Budget is all about making the right choices to support the recovery and the right choices for our economy in the long-term.

And at the heart of our economy, we need a vibrant, responsible, profitable and competitive financial services sector; one which can support new and growing businesses, and protect savers, investors and pensioners.

I believe that rebuilding a well-regulated sector will be beneficial for all; and will help ensure that London remains a world-class centre of expertise and excellence.

Thank you for listening.

Ends

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