Banking Reform

Debate between Matt Hancock and Michael Meacher

Monday 29th November 2010 Commons Chamber

[Matthew Hancock (West Suffolk) (Con)]

I want to speak briefly at the end of what has been a very interesting and informative debate, which I commend the Backbench Business Committee on securing.

I welcome some of the measures that the Government have already taken, so in the light of this debate, I hope that the motion, which states that the Government have taken no action, will not be pressed to a vote. Many Members have accepted that the measures on tax, including a permanent tax on banks, the Vickers review into banking structures, the international push for transparency and the action taken to bring banks together to work on bonuses show that a strong work programme is in place already.

[Mr Meacher]

I do not want to take up time, because I have a couple of minutes at the end of the debate, but the hon. Gentleman picks up on a point I was going to raise. I did not say that no action has been taken. My motion states that

“no action has so far been taken which would prevent a recurrence of the financial crash”.

That is a very different proposition.

[Matthew Hancock]

I thank the right hon. Gentleman for that intervention, because it brings me precisely to the final thing that the Government have already proposed, and which I think is central to preventing a recurrence of the financial crash: the decision to move the powers for prudential regulation to the Bank of England and to strengthen those powers.

Having quickly welcomed the action already taken, I want to concentrate on prudential regulation. The removal of powers of prudential regulation in 1997 was central to many of the things that Members on both sides of the House have talked about. The hon. Member for Islwyn (Chris Evans), who is not in his place, spoke passionately about how his managers were telling him to lend more no matter what the customer needed. That was part of the rapid expansion of banks’ balance sheets, because there was no prudential regulation at the top of the size of those balance sheets. We also heard, from Government Members, about the rapid, uncontrolled run-up in balance sheets.

The idea of prudential regulation and having an institution exercising judgment, instead of just lots more rules-based regulation, has come of age. After all, the system before 1997, although imperfect, had prevented a run on any bank in the UK for 140 years, so it deserves some credit, and it deserves studying. So why would more discretion and judgment based in strong institutions work better than more rules? There are three key reasons. The first, as we have heard in many contributions, is that although rules can be set down in statute, statute can take a long time to change, whereas bankers can change and adapt very quickly. We have heard a lot this evening about regulatory arbitrage—another example of how financial institutions will change quickly to make the most out of whatever rules have been put in place on the ground. But the system cannot then adapt quickly.

Secondly and crucially, the system cannot adapt to innovations. We have seen massive financial innovation, especially with the development of computers over the past 30 years. However, to blame that innovation itself for the mess we are in ignores the fact that it was the lack of regulations—as my hon. Friend the Member for Warrington South (David Mowat) pointed out so eloquently, regulation is crucial to a functioning market economy—around these new developments and the attempt to regulate through explicit and specific rules, rather than the exercise of judgment, that was the problem.