The Treasury Committee today releases its second report on the Banking Crisis, entitled Banking Crisis: dealing with the failure of the UK banks. The report examines the failure of the UK banks and the steps the Government has taken since.
On the origins of the banking crisis the Committee concludes:
The origins of the banking crisis were many and varied, including low real interest rates, a search for yield, apparent excess liquidity and a misplaced faith in financial innovation. These ingredients combined to create an environment rich in overconfidence, over-optimism and the stifling of contrary opinions. Notwithstanding this febrile environment, some of the banks have been the principal authors of their own demise. The culture within parts of British banking has increasingly been one of risk taking, leading to the meltdown that we have witnessed. Bankers have made an astonishing mess of the financial system. However, this was a failure not only within individual banks but also of the supervisory system designed to protect the public from systemic risk.
John McFall, Chairman of the Committee said: "We have experienced a comprehensive failure of the banking system at all levels. The banks have failed to govern themselves effectively: senior managers failed to understand the investments being made in their name; risk management and due diligence were seemingly ignored; and the non-executive directors, often eminent and hugely experienced individuals, failed in the proper scrutiny of the banks' activities.
Governments, politicians, regulators and central bankers in the UK and across the world also share a responsibility for sustaining the illusion that banking growth and profitability would continue for the foreseeable future. Today's report looks both at the origins of the crisis and the steps the Government has taken to resolve it so far. Whilst we would hope that the nature of banking, and bankers, would change in response to what has happened, the responsibility also falls on the regulator to create a more durable framework for finance in the future. Rewards for failure must not be repeated. We will address this and other aspects of regulation in forthcoming reports."
On the steps taken by the Government to address the crisis, the Committee draws the following conclusions:
On recapitalisation:
Given prevailing market conditions it was clear that some UK banks would have collapsed without taxpayer support. The Committee therefore supports the decision to implement a recapitalisation programme and the Government's support in return for stakes in banks that were unable to raise additional capital through the private sector. The report notes, however, that the unavoidable speed of implementation meant that the implications for both banks and Government were neither fully understood nor worked out.
The Committee welcomes the fact that the Government has attached conditions to those banks in receipt of public funds for the purpose of recapitalisation. This is despite the fact that such conditionality may have discouraged other banks from applying for Government support. It is important that Government intervention does not undercut the competitive position of sound banks.
John McFall said: "The public must be assured that that the banks face a quid pro quo in return for Government money and have not received a cost-free bail-out, especially as it is the public who are now feeling the sharp end of the crisis. While conditionality provides some reassurance, the Government's priority now must be to ensure that the conditions they have set-in particular those relating to remuneration and lending levels-are adhered to. Our next report will consider remuneration policy in more detail."
Toxic Assets and the Asset Protection Scheme:
The report welcomes the approach taken in the Asset Protection Scheme, but expresses concern about the need for greater clarity over the possible impact on the public purse. It urges the Government to complete the due diligence on assets in the scheme as quickly as possible, to make public the proportion of assets, by value, in each category covered by the scheme, and to disclose as soon as possible the mechanism for determining, and the projected timeline for the crystallisation, of any losses. It also questions whether, given what emerged, more analysis should have been instituted by regulators earlier to clarify the nature and value of assets on which banks were relying.
John McFall said: "We support the due diligence on assets of banks participating in the Asset Protection Scheme currently being conducted by the Treasury but we also call for it to be as swift and transparent as possible given the potential implications for the taxpayer. It is also still unclear whether the scheme is a precursor or an alternative to a bad bank; we call for clarity as to the Government's intentions in this area."
UKFI:
The report urges the Government to publish a strategy for UKFI addressing how it will use its control of the investee companies, and what role it envisages for UKFI in promoting change within the banking sector more generally. Certain aspects of UKFI's institutional arrangements have also led the Committee to wonder just how "arm's length" the organisation actually is from the Treasury. Given the importance of the task entrusted to it and the vast sums of public money involved, the report calls for UKFI to be established, at the earliest opportunity, on a proper statutory basis. It also calls on the Treasury to provide details of an exit strategy for the taxpayer's investment in the banking sector.
John McFall said: "It is not in the national interest for UKFI to remain so enigmatic a body. Given the importance of the task entrusted to it and the vast sums of public money involved, we need reassuring, not only of its independence, but also that there are adequate mechanisms in place to make it properly accountable to Parliament and the public."
Bank Lending:
Whilst noting some positive signs, the Committee remains very concerned about the availability and terms of credit to the small business sector, and the slow movement on this issue by the banks. The report notes regretfully reports of sharp increases in bank charges and arrangement fees, which can often be more damaging to businesses than higher interest rates. The Committee deplores the behaviour of a number of those banks who have received so much public money and behaved in such an insensitive manner, particularly to established customers. The report calls on the banks and Government to account for progress in this area on a quarterly basis.
John McFall said: "The extreme difficulties being faced by small businesses with regard to repaying and accessing loans was brought home starkly to us on our regional visits. There is clearly an unresolved inconsistency between, on the one hand, bankers' assurances that they are increasing their lending and, on the other hand, widespread and clearly sincere complaints that credit is difficult to obtain and increasingly expensive. More comprehensive reports from the banks and Government on this matter would go some way to resolve this inconsistency."
Future of the Banking Sector :
The rebuilding of consumer trust is closely wound up in depositors having faith in the safety of their deposits, and the stability of payment systems and other utility aspects of banking. In the Committee's view, depositor reassurance can in the short term best be provided through improving and strengthening the regulatory regime for all types of bank. The report notes the Governor of the Bank of England's instinct that a separation of retail from investment banking functions is "very attractive" and highlights this as a live issue which requires further debate.
The Committee remains concerned about the lack of transparency inherent in over-the-counter trading. One of the many reasons why "toxic" assets had such a devastating impact was that institutions had only a shaky grasp on where they were, what they comprised and what their value was. Their judgment was further clouded by the strong correlation between complexity and profitability. Looking to the future it is desirable that such obscurity is avoided. The report therefore recommends that the FSA takes steps to encourage trading through clearing houses and where appropriate on exchanges.
Lastly, the Government has been obliged to intervene very heavily in the banking sector to ensure its survival and maintain economic stability. In doing so, competition concerns have not been a priority. However the benefit of free competition in this area remains important and the report calls on the Government to address this issue during the next two years.
John McFall said: "The repercussions of this banking crisis are being felt, and will continue to be felt, by ordinary people for many generations. This is why it is crucial that we learn from the mistakes of the past. Looking to the future, the rebuilding of consumer trust is key. We are undertaking a new inquiry into the consumer-related issues that have emerged, which will include looking at where regulation can be strengthened to reassure depositors. There will come a time when saving will need to be encouraged; people will need to know their hard-earned money is safe.
We will also be examining the role that the UK should be playing internationally to help strengthen the banking system in our other new inquiry into the international dimension of the banking crisis. The global nature of finance means that unilateral action to discourage over-the-counter trading by the UK would be ineffective. Nevertheless, the UK's central role in world finance makes it a key player in moving forward this agenda."
