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Greg Clark Letter from a Treasury Minister

Greg Clark MP: The Banking Reform Bill – restoring fair play to our most important industry

Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.

George Osborne has called it the British Dilemma: how can Britain be one of the world’s leading financial centres without exposing ordinary working people in this country to the terrible costs of banks failing?

Let me illustrate both sides of the dilemma:

The financial services sector is one of our most important industries. Together with related services, it employs around two million people in this country – two thirds of whom work outside London. Even in the recession, financial services contributed about one pound in every eight of government revenue to pay for public services. The industry is, by far, our biggest exporter, generating last year a £47 billion surplus from overseas trade, providing us with vital foreign exchange earnings.

And yet that very importance carries huge risks for Britain. At its peak, the combined value of UK bank balance sheets amounted to 500% of British GDP. Compare that to 300% in France and Germany and just 100% in America. That left us in an extremely exposed position when the great debt bubble of the previous decade finally burst.

In 2007, we witnessed the first run on a British bank in more than a century, with depositors queuing in the streets to get their savings out of Northern Rock. Subsequently, HBOS and RBS – at the time the biggest bank in the world – had to be bailed out, with £65 billion of taxpayers’ money. It was the clearest possible proof of failure in the established system of financial regulation and in the culture of the banking sector.

There can be no doubt that reform is necessary – and it is this Government that has got on with the job. The first pillar has already been put in place through the passage of the Financial Services Act, which received Royal Assent in December. It puts right the mess that Gordon Brown made of financial regulation in the country – establishing clear lines of responsibility with the necessary powers to match.

The second pillar is the Banking Reform Bill, which received its Second Reading yesterday in the House of Commons. While the Financial Services Act is about regulatory structures, the Banking reform is about how the banks structure themselves.

Following the recommendations of the Independent Commission on Banking (chaired by Sir John Vickers), the Bill creates a ‘ring-fence’ for the ‘vital organs’ of the banking system. In other word those parts of a bank that enable millions of people and businesses to save and manage their money and without which the whole economy would grind to halt.

These are the ‘utility’ functions of the banking system—and, if they’re compromised, then governments have in the past had no choice but rescue them through bail-outs. To protect savers and taxpayers we must establish a clear distinction between these and other banking activities. As well as putting in place the ring-fencing ‘architecture’, the Bill ensures that the directors of banks will be held personally responsible for making sure the rules are obeyed.

We’ll also introduce an important additional safeguard recommended by the Parliamentary Commission on Banking Standards (chaired by Andrew Tyrie): if a bank tries to subvert the ring fencing rules, the regulator and the Government will be able order a complete separation of the bank. This new power ‘electrifies’ the ring-fence – deterring those who imagine that the way to get ahead is by subverting essential protections instead of providing the best service to customers.

Other protections for the taxpayer include new requirements on banks to make adequate provision so that they can cover their own losses without turning to the public purse. Furthermore, in the event of insolvency, deposits protected by the Financial Services Compensation Scheme will become preferential debts – again, so that taxpayers are not left paying the bill.

Finally, as well as reforming the way that individual banks are structured, we need to look at the shape of the sector as a whole. I strongly believe that the concentrated nature of the UK banking industry is unacceptable – because it stifles the most powerful consumer protection of them all, which is competition. We therefore need to tear down the barriers to new market entry. A prime example is the UK payments system in which potential new banks have to win the permission of incumbents in order to be able to use the system. The Government is about to consult on proposals to ensure that access to this system is available on fair, reasonable and non-discriminatory terms, and subject to the outcome of the consultation, to implement the appropriate reforms.

All in all, the Banking Reform Bill, together with the Financial Services Act, are reforms that will reset our banking system and. They are good for savers and taxpayers – and good for the financial services industry too. Britain built its position as one of the pre-eminent trading nations on a reputation for straight dealing and fair play. In an uncertain world, there is nothing old-fashioned about restoring these values in Britain today.


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