Banking

In recent years, we have seen a massive financial meltdown due to over-lending, over-borrowing and poor regulation. The Government believes that the current system of financial regulation is fundamentally flawed and needs to be replaced with a framework that promotes responsible and sustainable banking, where regulators have greater powers to curb unsustainable lending practices and we take action to promote more competition in the banking sector. In addition, we recognise that much more needs to be done to protect taxpayers from financial malpractice and to help the public manage their own debts.

  • We will reform the banking system to avoid a repeat of the financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs.
  • We will introduce a banking levy and seek a detailed agreement on implementation.
  • We will bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.
  • We want the banking system to serve business, not the other way round. We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.
  • We will develop effective proposals to ensure the flow of credit to viable SMEs. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.
  • We will take steps to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this will take time to get right, the commission will be given an initial time frame of one year to report.
  • We will reform the regulatory system to avoid a repeat of the financial crisis. We will bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.
  • We rule out joining or preparing to join the European Single Currency for the duration of this agreement.
  • We will work with the Bank of England to investigate how the process of including housing costs in the CPI measure of inflation can be accelerated.
  • We will create Britain’s first free national financial advice service, which will be funded in full from a new social responsibility levy on the financial services sector.
  • We take white collar crime as seriously as other crime, so we will create a single agency to take on the work of tackling serious economic crime that is currently done by, among others, the Serious Fraud Office, Financial Services Authority and Office of Fair Trading.

Your comments (19)

  1. Spireva says:

    You must reform this sector of the economy, People have lost trust in the system and bonuses are a crime.

  2. James says:

    Separating retail and investment banking is a red herring and very very difficult. The truth is, there are successful banks and unsuccessful banks of both the integrated and separated kind.

    Any reform should be focused on improving risk management and leadership within the banks, not an overreaching, oversimplistic reform.

  3. David says:

    With the prospect of Oil in the Falklands, and the continued posturing in the Argentine government. Do you support the continuing need for the protection of our citizens and sovereignty there. Would the present government have the necessary military force available to respond, given the current deployment elsewhere?

  4. Paul Scott says:

    Be careful not to kill the golden goose. Digby Jones said on TV last night that the financial sector provides 24% of tax revenues. The credit crunch was an imported problem from the USA, and the banking failures in UK were bread & butter mortgage lenders like Bradford & Bingley, Northern Rock. It had nothing to do with so-called “casino capitalism” in the UK,. The banks that failed were just badly run (poor risk management) and had structured their Balance Sheets incorrectly – by relying on wholesale markets for ongoing funding, instead of relying on a retail depositor base. And of course the regulators & Labour Govt were asleep at the wheel. Remember Northern Rock was in trouble for a year before it went under. Govt action should have been taken a year earlier than it was.
    Above all, we just need smarter regulations, and smarter regulators, not necessarily more of either. Above all, get some good brains from the City in to the regulators, instead of a useless bunch of box-tickers who don’t even understand the markets & products they are supposed to be regulating! You need some city heavyweights on big salaries running the regulators. Then things might get done right.

  5. Gillian says:

    Bank shareholders should be paid their dividend before bonuses get shared out. Dividends should be regarded as part of their costs. If Government stops bonuses they will be cutting off their nose to spite their face as banks will probably not be so profitable because good staff will go elsewhere. The bank will therefore have less money to repay the taxpayers’ bailout. Lloyds should be treated as a special case owing to being coerced into taking on HBOS when it was said competition rules would be waived – but not by EU! Lloyds still having to sell off businesses.

  6. Mark says:

    I note that neither in this section nor section 9: Deficit Reduction does the programme discuss the recovery of public money that has been used to prop up the system, and that has caused such a massive deficit.

    This seems a significant oversight.

    I would have thought that, unless specifically addressed, you risk leaving a sense of us having written it off and that all the forthcoming pain is to be bourne without troubling the errant banks and bankers who caused it.

  7. William Baker says:

    Make banks pay back the money they steal from Customers who are in distress from the current economical situation in the last three years might be a good idea and ban the extreme charges they have for defaulters who are in genuine financial trouble. We have bailed them out with taxes from the public and therefore the public should be able to bank without fear of extreme unchecked charges from these banks.

  8. Jon Harvey says:

    It seems to me that was caused the meltdown was not an absence of regulation but an absence of ethical leadership and any palpable sense of responsibility for anyone or anything outside the banks and their shareholders. Whilst the measures you outline will help – they don’t go far or deep enough. How will you tackle the avarice that is at the heart of so many of the problems that we are now all paying for? How will you make banks more responsible – from the insides of their vaults, boardrooms and souls?

  9. Alex Duggan says:

    We should follow the German Government and outlaw short selling. In addition, the trading of options should be restricted to those who physically hold shares in which they have options.This would mean that broker bonues will be reduced since options and derivatives provide the bulk of executive bonuses.It will be unpopular in the City of London, but the derivatives market only benefits a select few, rather than the wider community.Should this policy be implemented, there will be no need to target the banks wih some sort of excessive profits tax because a major source of their obscene, casino profits will have been removed.

  10. Paul Mumford says:

    make banks responsable for there mistakes and allow compensation for over chargeing at the same rate as they charge us.

  11. [...] Attitudes towards big banks are changing around the world and across the political spectrum.  In the UK, the new center-right government is looking for ways to break them up: [...]

  12. Caleb Jarvis says:

    Save the chequebook!

  13. [...] around the world and across the political spectrum. In the UK, the new center-right government is looking for ways to break them up: “We will take steps to reduce systemic risk in the banking system and will establish an [...]

  14. Simon Wilson says:

    In my view, the root cause of the financial crisis was a lack of morality.
    Bankers, who, fundamentally, are given the right by society to care for our, the citizens’ money, must bear an obligation to safeguard it and return as much of it as possible to the providers of that money, savers and depositors. In allowing banks to cross the line between this public, social, service and that of venture finance (most notably through the abandoning of the Glass-Steagall Act in the US) government made a grave error.
    Bankers saw an opportunity to use other people’s money for their own greed and personal gain arguing that this generated wealth and management of risk for the good of business and society. In so doing, however, they severely over-stepped the mark by hijacking a disproportionate stake of the gains and increased leverage to unsustainable levels suspecting that they would be protected by society (moral hazard). This is where the lack of morality lies. Bankers were given an open and free hand but misused that trust for their own personal gain. Further, a lack of moral sense is evident throughout society where what once used to be the earnings difference of, say 10 times, between the lowest paid and chief executive has now extended to 100 times and sometimes 300 or 400 times. No being can justify the morality of such a position unless it is taxed away to society!

    This structure must not be permitted to continue, in my view. Risk must, of course, continue to be rewarded but not at the expense of the fundamental safeguarding of savers’ and depositors’ money. A structure that separates these two fundamental utilities needs to be found such that risk, where taken, above and beyond money-market and strict lending business (using the multiplier effect in a regulated way) is separated from all other forms of venture capital and finance and its “risk management”. In so doing, through the avenue of such entities being structured and capitalised separately, there would be no argument about “bonuses” and excessive reward. Such “risk” entities would clearly be rewarded by their own risk venturers and participants or fail. The regulator of personal returns would be the risk venturers in those returns and not the general public.

  15. Forehill37 says:

    I would like to know how/if the banks will pay back the taxpayers money which was given them to help thme through the crisis.

  16. Suhan Srinivasan says:

    We all know that capitalism has many failings. However, it is very efficient on the whole and the best system we have at allocating resources. Interfering with the market often leads to unintended consequences; e.g. the Fed keeping interest rates too low for too long. Regulation is a necessary step in certain markets to help guide the markets when they fail to allocate resources “appropriately”.

    Ironically, no regulation of the banks, with no compensation scheme (FSCS) for savers, would force savers to seriously look at how safe the banks are and for banks to demonstrate that they are safe. This may resolve most of the current problems but would cause other problems and would be politically unlikely.

    A more prudent approach would be to segregate the retail banks and the investment banks. I see no problem with a business taking as much risk as they want. However, the average Joe would have no idea of the risk being taken by placing their money with a bank. If the two are separate, then this allows the investment side to carry on taking as much risk as they feel prudent. It also allows the savers to place their money with the banks with relative security. The FSCS does not have the money to bail out the major banks, so it is important to reduce the risk of that ever happening.

    The mortgage market does need significant reform. There needs to be maximum income multiples. These will obviously be unpopular, as most people will borrow as much as you will give them but they will help with long term affordability should interest rates rise significantly. Being forced to save up a significant deposit if you want to buy a house is no bad thing.

    The charges for unauthorised overdrafts does need to be looked at. There is nothing wrong with charging someone say £35 for exceeding their limit. They are not entitled to that money and should be penalised for taking what is not their’s. What is wrong is that a person will be charged multiple times for fundamentally the same mistake, such as when additional direct debits are claimed. This can easily take a charge to over £100, which is excessive. Competition does not really work in this area, as very few people will choose a bank based on their unauthorised overdraft policy.

    Lloyds and RBS should be left alone to operate as private institutions. Banks do not make money by being nice. The taxpayers have made an investment in these companies to prevent them from going under. This was more in the public’s interest than the bankers; the bank would have been taken over or ceased to exist but the chaos in the UK economy could have brought it to its knees. The banks will not be in public ownership forever and should not be changed according to the public (or in reality the press) whims, as they really have no idea how to run a bank. There is a good chance that we may make a good profit on our investment in the banks, if we leave them to do what they do best… squeeze as much money as possible out of the public!

  17. Paul says:

    Breaking up the banks, some of our only world leading companies, would be economic insanity.

  18. Eleanor says:

    I hope the government will not ignore the analysis of Professor William K. Black, regulator at the time of the Savings and Loan crisis in the USA. His analysis of control fraud, the factors which contribute to it, and the difficult issues for regulators could be most helpful in designing a consistent, effective regulatory model, with its funding and its heart in the right place. In all sincerity, it is too easy to attack the wrong problem and ignore the acts and incentives of the individuals who have control of financial institutions.

  19. John Whipple says:

    Please disband the bloated FSA, a quango out of control that has failed on so many issues and levels it is hard to believe.
    They have over 200 employees earning more than the PM without counting Expenses, Pensions contributions and annual “bonus” payments. Why a not for profit quango feels it can pay bonus payments despite year after year of abject failure is proof enough of the corruption we have seen every where in politics and public bodies. If you don’t do it soon you will never do it as corruption seeps in the longer you hold power.

    To Paul Scot
    The banks have been in the business of credit creation for many years your wish to go back to deposit based ratios can never be (nor really ever was for proprietary banks) as the UK has a very, very low savings ratio (another FSA failure due to over regulation and consequence is that social mobility is worse than 30 years ago) and is second only to the USA in consumer disposable spending.
    To Suhan Srinivasan I hear what you say and agree with most. The FSCS has no money it assess claim demand then sends out invoices to firms within its remit to enable payment. It was dreamed up by an outfit called “Oxera” look them up on google.
    The UK retails banks must be made to lend to small and very small companies now and for next 5 years to get this economy going and increase the velocity of money. As they are still not lending net lending targets are needed and fines imposed on individual board members if they are not lending. also rate sand fees must be regulated to ensure fairness and the government must back the loans it must take risks to invest in the UK it might cost £5 billion or so.

    Good luck with the economy and the banks.

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