Speech by Economic Secretary to the Treasury Kitty Ussher MP to the British Bankers Association Conf
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Issued 10 June 2008
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Introduction
1. Thank you, Angela, for that introduction, and for the invitation to speak
to you this afternoon – it’s a pleasure to be here.
2. Can I just start by saying that you’ve chosen a great venue for today’s
Conference here at Gibson Hall.
3. The building was completed in 1865, and from the following year, it was
the National Provincial Bank of England’s first banking office in London.
4. As many of you will know, after a number of other mergers and acquisitions
the National Provincial went on to merge with the Westminster Bank, forming
Natwest – and then of course became part of the RBS Group in 2000.
5. So this building is a reminder of the long history of banking here in
Britain, and here in London; a history of which we are rightly proud.
Importance of UK banking sector
6. Let me tell you why.
7. Because without banks holding and moving money, through bank accounts and
payment systems, our economy simply couldn’t function. So the importance of your
sector to our economy goes way beyond the 1.1 million people employed in
financial services, or the huge 10% of GDP they generate; it is uniquely crucial
to the functioning of UK plc as a whole.
8. An important part of this is the role that banks play in the investment
chain.
9. They’re often the first link in connecting savers and borrowers, and every
pound that savers invest helps to create opportunities for others – whether it’s
a first-time buyer looking to get on the housing ladder, or a business looking
to borrow so that it can grow.
10. But banks also have a much wider role in our society.
11. Many of the BBA’s members are already working with us to ensure that
banking services are available to everyone – especially the most vulnerable in
society. And we have to keep working together on that.
12. And I hope that many of the banks you represent will also offer Saving
Gateway accounts when they’re introduced in 2010 – which will be another
important way of bringing people into the financial system.
13. Banks have also been playing a major role in increasing the number of
free ATMs, particularly in low-income areas; and we’re also working together on
our proposals to allow unclaimed assets to be used for the benefit of the wider
community.
14. So, for all of these reasons, economic and social, banks have a huge role
to play in our economy, and in our society – and we need your sector to
flourish.
15. And as financial services make an increasingly important contribution to
our economy; as people increasingly rely on electronic payment systems; and as
we increasingly focus on the challenge of tackling financial exclusion, your
role is only becoming more important.
Disruption to financial markets
16. But of course, at the same time banks have been facing a number of
challenges – and I know that this has been a difficult year for many of you.
17. I don’t want to spend a great deal of time going over what has happened
since last summer – we’ve all been living through those events.
18. But I will just say that throughout the last nine or ten months, we have
worked hard to protect financial stability, and to support the financial
services sector – because we know how important it is to our economy, not just
here in London but across Britain.
19. And I would like to take this opportunity to talk about how we’re
responding to the disruption that we’re continuing to see in financial markets;
and how we intend to work with you to implement some of the lessons that we’ve
collectively learned.
Freeing up credit markets
20. Firstly, we are doing what we can to free up the credit markets –
particularly by supporting the Special Liquidity Scheme that the Bank of England
introduced in April.
21. That scheme allows banks and building societies to exchange high quality
asset-backed securities for Treasury Bills, which they can then use in the
market as a source of additional liquidity.
22. It’s designed to relieve liquidity worries in the market, at the same
time as ensuring that the credit risks remain with the banks and building
societies – and it has helped stabilise the financial markets.
23. Alongside that Scheme, we’re also taking action to strengthen the
mortgage finance markets.
24. In 2006, around a third of mortgages were funded through secondary
funding markets. The fact that this avenue has frozen up, with investors
unwilling to take on new mortgage backed securities, is a major challenge for
lenders.
25. And so we’ve asked Sir James Crosby to look at what can be done to
improve the way that the mortgage finance markets work, and to advise on a range
of market-led initiatives that could help to lower long-term mortgage costs, and
increase the availability of affordable mortgages.
26. He’s now begun work with lenders, investors and the Tripartite
Authorities, and he’ll be reporting initially this summer.
Banking reform: consultation
27. At the same time as dealing with the ongoing disruption in financial
markets though, we also have to think about what improvements we can and should
make to the broader supervisory and legal framework for dealing with banks in
difficulties, following the events of last summer.
28. We set out some proposals in a consultation document that we published in
January – and I want to say how grateful we are for all of the responses that we
received from people here in this room, and from the organisations you
represent.
29. We know that there are some major issues to consider here, and we know
how much importance you place on getting this right.
30. And we agree – the last thing we want to do is to rush into these
changes.
31. So we are taking the time to consider the responses that we had to our
consultation. And we’ll be holding another round of consultation over the
summer, including publishing some draft clauses, as we continue to finalise our
proposals.
32. I hope that you’ll be involved in that further consultation as actively
as you have been until now.
Banking reform: objectives
33. There seems little disagreement on the aims and objectives of reform, and
I will run through those in a moment.
34. The challenge comes in designing the system that best meets those aims.
This is the task of the next few weeks and months.
35. And I am absolutely clear in my own mind that if we work together, with
an open mind, we can not only improve our own banking system, but also lead the
world in developing an innovative and robust mechanism for resolving in an
orderly way the situation when a financial institution gets into difficulties.
36. Let me come on now to our objectives for reform.
37. The first of those is to improve the stability and resilience of the
financial system – which includes better risk management by banks; better stress
testing; and better management of liquidity.
38. We also need to look at the credit rating agencies – including concerns
that have been raised about conflicts of interest, about the information content
of ratings, and about investors’ over-reliance on them.
39. The second objective is to reduce the likelihood of individual banks
facing difficulties. We’re looking at strengthening the regulatory framework,
and at the way that liquidity assistance is provided and disclosed.
40. Our proposals here don’t mean taking responsibility for managing risk
away from individual firms, and from the people in charge of them; and I want to
be clear that we’re not going to create an environment in which no bank can
fail.
41. And so given that, our third objective is to reduce the impact if a bank
does get into severe difficulty – and to make sure that we can deal with that in
a way that minimises the impact on financial stability.
42. Our proposal is to introduce a Special Resolution Regime, which would
give the Tripartite Authorities a number of tools to resolve a failing bank in
an orderly way: for example an accelerated method of transferring business to a
healthy bank; and a way of allowing the Authorities to control all or part of a
bank through a ‘bridge bank’.
43. There does seem to be recognition in the consultation responses and
discussions that we’ve had that in those rare cases where a bank does get into
major difficulties, we do need a regime which the Authorities can initiate to
facilitate timely and effective resolution.
44. But we also agree with the views we’ve heard that it is important to have
appropriate safeguards in place, and to consider the powers and tools within the
regime carefully – which is of course what we’re doing, and what we’ll continue
to do over the summer.
45. Moving on, our fourth objective is to provide compensation arrangements
that are effective, and that give customers confidence.
46. As many of you will know, it is for the FSA to consult on the limits of
the Financial Services Compensation Scheme – which they intend to do later this
year.
47. But we also need to think about ways in which payments can be made much
more quickly to depositors, and about how to ensure customers are aware of the
protection that they’ve got.
48. This is a good example of where we are keen to continue to work with you,
because a lot of the challenges of making quick payments are very practical –
and the failed bank’s infrastructure could play a major part in allowing it to
happen successfully.
49. Finally, our fifth objective concerns the need to improve co-ordination
between authorities – both here and internationally.
50. We do think that the Tripartite arrangement is right for the UK – but
that it needs some changes.
51. So, we’re suggesting a statutory basis for the Bank’s role in financial
stability, and developing the Memorandum of Understanding to learn some of the
lessons of the last nine months, and perhaps make some of the responsibilities
clearer.
52. And we also need to make sure that co-operation across borders is
effective. We want to work closely with our international partners, particularly
to introduce an early warning system on global financial risks, and a better
system of cross-border crisis management.
53. These are, together, pretty major proposals – and of course we want to
get them right. As I’ve said, we are taking our time to make sure we can do
that, and to consult again before we introduce our legislation in the autumn.
Defending the UK’s regulation
54. And I hope that you’ll agree that we have been careful to avoid any kind
of knee-jerk reaction in this area, and to make sure that we don’t put London’s
proportionate, principles-based system financial services regulation at risk –
because we know what an advantage it is for the City.
55. Since last summer, there have been calls to be more prescriptive – but we
will continue to defend our system, because we believe it is right.
56. So we will resist calls for more prescriptive regulation – and while I’m
on the subject of regulation, we will also resist the calls that have been made
for direct regulation of executive pay.
57. Of course, remuneration packages should be strongly linked to effective
performance, and incentives should be aligned with the long-term interests of
the business and of shareholders – and we don’t support ‘rewards for failure’.
58. And over the last ten years, we have taken steps to improve transparency,
and to encourage shareholders to improve accountability.
59. But I’m clear that executive pay is a matter for Boards and shareholders
– not for Governments.
Conclusion
60. So, we’re resisting calls for new regulation where we don’t think it’s
necessary, or don’t think it’s appropriate.
61. And on the reforms that we do plan to make to banking regulation, we’re
taking the time to work as closely with you as possible, to make sure that we
get this right.
62. By doing that, I believe that we can ensure the continued strength of
both the UK’s banking sector; and of the City of London as the world’s leading
financial centre.
63. At the start, I spoke about the National Provincial Bank of England, and
it’s decision to set up here at Gibson Hall, moving to London for the first
time.
64. That is just one example of the many businesses that have been drawn here
over the years, and that London continues to attract – not just from the rest of
England, like the National Provincial, but from around the world.
65. London’s success brings huge benefits for the whole of the UK; and
Britain’s banks are at the heart of it – as well as of our economy and our
society.
66. We are, as I hope I’ve made clear, determined to maintain the strength of
the sector, and of the wider financial services industry here in London and in
the rest of the UK.
67. And I’d like to congratulate the BBA, and you Angela, for the heartfelt
and vigorous way you represent your members.
68. This is an essential dialogue for good policy-making, and I’m grateful
for the opportunity to work with you, both as we reform banking regulation, and
in a whole range of different areas.
69. So, thank you on behalf of the Government for all you’re doing – and
thank you for listening.
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Article Published/Sorted/Amended on Scopulus 2008-07-03 09:08:35 in Economic Articles
