Banking Competition

Steve Baker Excerpts

Thursday 12th July 2012 Westminster Hall

[Mr William Bain (Glasgow North East) (Lab)]

It is a pleasure to serve under your chairmanship once again, Mr Chope.

I congratulate the hon. Member for South Northamptonshire (Andrea Leadsom) on securing this important debate, which is of great interest and importance to all our constituents.

Our banking system is badly broken: Members of this House know it, the public know it and the industry knows it. Almost four years on from the collapse of Lehman Brothers and the part-nationalisation of two major banks in the UK, our banking system is failing to support the wider economy with the lending that is required to promote growth; there is still regulatory uncertainty over the mis-selling of derivatives; there is insufficient competition; and pay and bonuses in the banking sector are rocketing out of control. Last month, a major UK clearing bank could not even ensure that employees received their salaries or that businesses could pay their bills on time. The public are therefore right to demand further radical change and to seek new entrants to the banking sector.

Despite being given support—both directly and in guarantees from the taxpayer—on the awesome scale of £1.4 trillion during this crisis, and despite our central bank having printed £325 billion of new money since 2009 through quantitative easing, with up to another £50 billion on the way following the decision of the Monetary Policy Committee last Thursday, the banking system is failing to bolster growth or to provide a satisfactory supply of credit.

[Steve Baker (Wycombe) (Con)]

On that point, I notice that the banks are simultaneously failing to provide savers with a decent return. I am sure that the hon. Gentleman will agree that that is an astonishing failure of a system that is supposed to act as an intermediary between savers and those who wish to borrow money for productive uses. It is astonishing.

[Mr Bain]

Indeed. The hon. Gentleman makes a very powerful case.

Bank lending to businesses fell by 11% between 2008 and 2010 and it has continued to slump since, with bank lending to small and medium-sized businesses having fallen for five consecutive quarters. It is small wonder that in such circumstances economic demand in the UK is at rock bottom. In the G20 this year, economic demand is lower only in the eurozone, the Czech Republic and Hungary. As the Nobel laureate economist Joseph Stiglitz wrote about the financial system in an article in Vanity Fair in January:

“We have poured money into the banks, without restrictions, without conditions, and without a vision of the kind of banking system we want and need. We have, in a phrase, confused ends with means. A banking system is supposed to serve society, not the other way around.”

Sadly, the same is true of the financial sector in the UK too.

Studies by the International Monetary Fund and the European Central Bank powerfully demonstrate that financial systems in which there is more banking competition with institutions less dependent on wholesale funding are less prone to systemic shocks of the sort the UK and others experienced in 2008. The banking sector has expanded hugely in the past five decades. In 2010, the assets of the 10 largest UK banks had soared to 459% of GDP. Barclays assets exploded from 10% to 110% of GDP in the same period. That size, the implicit public guarantee and the resultant lower borrowing costs allow the big banks to maintain a large competitive advantage over any small competitors trying to enter the market. It comes as no surprise that business organisations such as the British Chambers of Commerce, the Federation of Small Businesses and EEF are calling for more competition in the banking system.

The European Commission found in its inquiry into the financial system in 2007 that the retail banking sector accounts for more than 50% of total banking activity, measured by the gross income indicator, but that banks face greater pressure on profits where consumers are more mobile. In this country, the Office of Fair Trading issued a report on the banks in 2008, finding that many consumers do not know the fees associated with their accounts, and that three quarters of them are not aware of the credit interest rate, because of both a lack of transparency in fees and their self-evident complexity. It also established that few consumers monitor the account market to switch to accounts offering better conditions. Only 6% of account customers had switched in the previous year and 61% of customers had held their main account for more than 10 years. It also found cross-subsidies from those consumers who incur insufficient fund charges, who are more likely to be in the socially or economically vulnerable categories, to those who do not—those on higher incomes or who have reasonable levels of savings with the banks—which create significant market distortions, as well as resulting in social unfairness.

On the structure of the banking system, the Independent Commission on Banking chaired by Sir John Vickers had a limited remit and was unable to consider the level of support that the banking system provides to growth in the economy, the existence of potentially criminal practices, the nature of the products being traded by banks, or the culture of greed exposed by excessive bonuses and pay. That is why we need to consider further whether the Vickers proposals for ring fences and higher capital buffers will be enough to protect against future scandals, or whether a complete separation of retail and investment banking services, or the break-up of those institutions, with the creation of new banks, is the only answer. As my hon. Friend the Member for Erith and Thamesmead (Teresa Pearce) and the hon. Member for South Northamptonshire said, there have been recent additions to the challenger bank market in the form of Metro Bank, and Virgin Money’s acquisition of Northern Rock. The Lloyds Banking Group’s divestment of branches will bolster the role of the Co-operative bank as a stronger mutual institution, too, which I welcome.

The Bank of England revealed in a report in 2010 that the implicit taxpayer subsidy to the banks could be as much as £100 billion, and a further Bank of England study from this year emphasises that that is largely a transfer of resources from Government and taxpayers to creditors, staff and shareholders. The effect of that could be to allow the amount of risk adopted by protected banks to rise. A more comprehensive examination of the banking system would make it possible to determine the underlying issue of whether it currently offers sufficient value for that investment by the taxpayer. There is much evidence from the IMF and the London School of Economics that it has not done so, and that higher pay and profits have been the principal results, at the cost of a slower flow of credit.

Interest rate swap arrangements that were mis-sold could affect up to 28,000 small businesses in Britain. The LIBOR scandal will undoubtedly draw in other financial institutions, and create the potential for court cases involving billions of pounds in compensation awards. Morgan Stanley produced figures today revealing that the global cost to the banking sector of every basis point of LIBOR suppression could be $6 billion, or $400 million for every bank affected. Other countries have been better able to survive the financial crisis because their banking systems have more competition, more effective direction from Government, and more socially beneficial lending practices. In Germany, the state-owned investment bank KfW last year provided €11.4 billion in new loans to small and medium-sized enterprises, focused on exports and job creation. Because of their statutory duty to put the good of the local economy over the maximisation of profit, the local savings banks, or Sparkassen, continued to lend even in the depths of the 2008-09 slump in output. While the major commercial banks in Germany cut lending to businesses by 10%, the Sparkassen increased lending by 17% between 2006-2011. Three in every four SMEs in Germany have links with the Sparkassen. A system whose ownership and remit were more diverse would help SMEs in the United Kingdom, too.

In a very good discussion of the banking system on “Newsnight” last night, it was startling that Jim O’Neill, the investment banker from Goldman Sachs, powerfully made the case for a state investment bank in this country, to support economically important industries. A more comprehensive examination of the banking system, including its structure and competition, could also consider the case for making the bank balance sheet levy more progressive, as Duncan Weldon, the chief economist of the TUC, has recently proposed, and whether it should be larger for bigger banking institutions, while greater competition would be promoted through a lower levy for smaller banks.

Lack of competition is also leading to a culture of excessive pay and bonuses within the banking system. The work of the High Pay Commission last year exposed the fact that within Barclays, while the average pay of employees rose by 866% in the three decades from 1980, the pay of top directors in that bank rose by a staggering 4,899%. Top directors’ pay at Barclays and Lloyds Banking Group rose from 14 times that of ordinary tellers working in the bank’s branches to some 75 times that of an average Barclays or Lloyds employee’s pay by 2011. That is the extent of the culture of greed that has grown in our banking system.

In other countries, over the decades, the need for a wider examination has been clear. The Pecora commission, founded in the United States in 1932, under an independent chief counsel, led to the uncovering of the reasons behind the Wall street crash of 1929, and to radical legislation to separate retail from investment banking under the Glass-Steagall Act. It created new criminal penalties and re-regulated the stock exchange. The work of that commission safeguarded the US financial system for the next fifty years. Afterwards, in his memoirs, entitled “Wall Street Under Oath”, Ferdinand Pecora wrote of the ills of the banking system across the world in the 1930s:

“Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism. Legal chicanery and pitch darkness were the banker’s stoutest allies.”

It is our constituents, particularly the poor and working families with children, and most of all the growing army of unemployed and underemployed, who are paying the price for the recession—the longest since the 1870s—that has resulted from this financial crisis. They did not cause the recession, but they have been asked to shoulder the heaviest burden, while the super-wealthy at the top of the financial services sector have continued to enrich themselves, and our banking sector is being protected from the radical structural reforms we now need. The very least that we as parliamentarians can do is to give them the fullest account of why our banking system is so badly broken, why it lacks effective competition, and why it is failing to promote any kind of recovery or sense of responsibility from people at the top. Only then can we begin the task of creating a banking system that serves the people of this country, and not the other way around.

[Steve Baker (Wycombe) (Con)]

It is a pleasure to serve under your chairmanship, Mr Chope. I congratulate my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) on securing this debate with particular serendipity. She called for more heart in banking, and tonight there will be a documentary on TV that I expect will be wonderful. “Bank of Dave” is about David Fishwick, an entrepreneur who sought to start a bank. It is a remarkable tale, and I hope the Minister will take a look at the programme because it speaks very much to the problem of barriers to entry.

Mr Fishwick is a successful entrepreneur who sells minibuses. He owns a Ferrari, a helicopter and a nice pad. He is a self-made man. He discovered that his customers could no longer get finance to buy his minibuses, and so his own business was endangered by the lack of credit. He therefore began to lend them the money himself. It seemed straightforward enough, and he thought, “I could do this, and serve my local community.” He set out to establish a bank, and his documentary, which is a series, talks about the difficulties he had. He is legally forbidden to call his institution a bank, so he does not take demand deposits but instead takes people’s life savings, personally guarantees them with his own wealth, and then lends them to productive businesses based on trust and relationships. That speaks very much to all the calls we have had from Members on both sides today for a new kind of banking. It is super local, personally guaranteed and based on trust and relationships, so I very much hope the Minister will watch Channel 4 at 9 pm to see Dave Fishwick and “Bank of Dave”.

I want to talk about the personal guarantee in particular. Members have talked about the loss of faith, and Mr Fishwick is restoring faith by knowing the people from whom he is borrowing and those he is lending to, and personally guaranteeing the finance. I introduced a private Member’s Bill in the last parliamentary Session to give directors of financial institutions strict unlimited liability for their banks’ losses, and to require them to post personal bonds to be used as capital and to place the bonus pool into capital for five years. That might seem a harsh measure, but it is based on the idea that without moral hazard, people will behave well.

[Andrea Leadsom]

That takes me back to the old days—I sound very old. Before the big bang, most small banks and financial institutions were run on a partnership basis and people ate what they killed. If they had a good year they took a huge bonus, but if they had a bad year they gave back the car, the house and the children’s school fees—I do not quite know how they would have done that. That changed when the institutions all became plcs and it was one-way traffic only, so I have a lot of sympathy with what my hon. Friend is saying.

[Steve Baker]

My hon. Friend demonstrates that the accusation of inexperience that is often levelled at this House is wholly false. Both she and my hon. Friend the Member for Macclesfield (David Rutley), who is sitting next to me, have extensive experience in the City and understand the changes and how things have moved on.

Historically, there were three ways of restoring trust in an industry—taking deposits—that has always been risky: mutuality; the historic trustee savings bank model, in which the directors were not able to take any personal reward; and unlimited liability. Some of the greatest bankers in history—the original J. P. Morgan and Nathan Rothschild—operated with unlimited liability, so everyone understood what they would lose if they got a deal wrong, and there was trust.

The implications of my private Member’s Bill would be, first, that banks would have a much better culture and people’s interests would all be aligned to the banks’ success. Secondly, if we gave directors sufficient warning that they would shortly be accepting unlimited liability for their banks’ losses and that the losses would come out of their personal possessions—their pensions and homes, and forgone school fees—we would soon find that they would break up the banks for themselves, because they would not wish to try to manage unmanageable behemoths. That would stimulate a natural diversity across the banking system, as directors created institutions that they could manage and understand. Similarly, as someone is hardly likely to keep retail and investment together if it is not in their interests, I would expect them to separate them.

Thirdly, if directors and staff stand to lose, there is a good case for lowering barriers to entry. If we can expect good behaviour from bank staff, and responsible lending, it is legitimate to lower barriers to entry, and a virtuous circle could be created. It might well be that going for strict, unlimited personal liability for directors would be a step too far as a first measure, but I invite the Government to consider it as an alternative way forward, which could lead to a more self-regulating banking system that served society more positively.

I think I am well known for believing that the state is the problem and that there should be less intervention, but if we must have intervention the suggestion of account portability made by my hon. Friend the Member for South Northamptonshire is a good one, because it promotes competition. We just need the banks to move accounts into.

I urge the Government to be cautious about the idea of a state investment bank. Whenever any Government—not necessarily this one—get into lending, it is to ensure that loans are made that would not otherwise be made because they would be bad loans. There is no kindness in encouraging a small business man to put his home at stake by taking on a loan he will never repay, because small business men, in all practical terms, often take unlimited liability. It would be better if they were employees. I urge the Government not to intervene too excessively in credit markets, although I realise that there are some elements they will proceed with.

Finally, I have some questions for the Minister. To what extent have the Government considered how their policies, such as the national loan guarantee scheme, promote big banks? We have all seen examples of officials being institutionally better at dealing with large companies, including banks, be it risk aversion or the simplicity of dealing with a small number of contacts to achieve a big result. Does current policy promote a small number of large institutions? That is the antithesis of the direction we want to go in.

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[George Freeman (Mid Norfolk) (Con)]

I thank Mr Speaker for allowing this important debate to take place, and for my chance to contribute to it. I congratulate my hon. Friends on securing the debate and on their contributions, particularly my hon. Friends the Members for South Northamptonshire (Andrea Leadsom), for Wyre Forest (Mark Garnier) and for Wells (Tessa Munt), but other hon. Members who have spoken, too.

I am not, never have been and never will be a banker, unlike hon. Friends who have specialist expertise in the world of high finance and banking. It is important that hon. Members bring to the House expertise in sectors that we need to regulate and guide. My interest, and my contribution today, is offered not with great expertise in the specific measures needed to put the banking sector right, but to articulate concerns about the implications of the banking crisis for what is sometimes referred to as the real economy.

I speak as somebody with a deep interest in growth, small business, enterprise and innovation. In a 15-year career before coming to the House, I was involved in starting small companies in the field of science and innovation, principally the biosciences. Typically, they were companies with an idea, a small team, a business plan and no money, raising funding for ambitious businesses to develop innovative products and services, often through a number of financing rounds, before acquiring another company or being acquired, or achieving an exit through the public markets.

I therefore speak with a particular interest in the life sciences, of which colleagues will be aware. The sector has much to offer the nation, as we seek to build a rebalanced recovery and a sustainable economic model. It has vast potential to help us to grow our trade links with the emerging world—the BRIC economies. A reference to Jim O’Neill and Goldman Sachs has already been made, and we met recently to discuss his latest analysis that, on top of the BRIC countries, the next 11 coming behind have phenomenal rates of growth in already large economies. Our life sciences have the potential to allow us to seed—literally, in some cases—the markets of tomorrow and to grow the alliances of tomorrow, which will, among other things, have the benefit of de-leveraging our financial dependence on the sclerotic eurozone.

I speak also as somebody with a long and passionate interest in the East Anglian innovation economy, a region that the Government increasingly recognise as a key driver for sustainable growth. It is a net contributor to the Treasury and has at its heart Cambridge, a globally recognised centre of science innovation, entrepreneurship and companies in need of finance. In my own county of Norfolk, the Norwich Research Park, a globally recognised centre of innovation, is becoming increasingly linked to Cambridge through the Government’s excellent investment in infrastructure.

I speak also as the father of two children. I am concerned about the world in which they will grow up and the economy in which they will have to make a living. Our generation in Parliament is important if we are to get this right. I want to touch on the context in which it is helpful to view this issue. This is not just a crisis of debt, although it is surely that. It is not just a crisis of regulation. It is not even just a crisis of political leadership. We are living through a deep crisis of political economy, which is shaking the very foundations of the world as we have come to know it in the past 20 or 30 years. One of the profoundly unsettling things about crises of political economy is that they undermine the very legitimacy of the institutions through which we seek to tackle them. That creates something of a perfect storm—a financial and political hurricane that fuels itself. As we see trust in the media, trust in the political class, trust in the bankers and trust in the regulators undermined—not least by the way in which those groups, in the past 20 or 30 years, have become too cosy—we start to fuel a growing public distrust of the idea that there is any institution capable of fundamentally tackling this problem. I am more optimistic than that. If we are honest about the causes of the problem, and rigorous and robust in our analysis, we can be optimistic about the future.

[Steve Baker]

My hon. Friend is making an absolutely magnificent speech. He has reminded me that, in his Bagehot lecture, the Governor of the Bank of England said:

“Of all the many ways of organising banking, the worst is the one we have today.”

I am sure that my hon. Friend can be assured of Sir Mervyn King’s support.

[George Freeman]

I thank my hon. Friend for that helpful and extremely generous intervention.

As the Chancellor put it so eloquently in his Budget speech, the recovery will require a new economic model. That is at the heart of this debate. The banks have a crucial role to play in that economic model, but for them to play that role we need to restructure the way they work, and retune what we expect of them and the people who run them. I shall concentrate on that point.

At the heart of the new economic model, we need a much more profound commitment to an enterprise economy and to a rebalancing of the relationship between risk and reward. I do not think any of us on either side of the House—indeed, I think it was the former Member for Hartlepool who said he was passionately relaxed about wealth creation—have a problem with wealth creation through people who take risks, or for reward to flow from risks. At the heart of the problem is the fact that people have been receiving huge rewards without taking the risks. If the public saw people paying back some of what they have earned for success on failure, there would be much more public support for the industry. It is about the break-up of some of the old structures, the big and literally bankrupt structures, that are saddling this economy with debt and a lack of leadership. It is about unleashing a creative revolution of hungry, entrepreneurial little platoons who can rebuild an economy of which we can be proud and on which we can rely.

I come now to three points: the nature and causes of the problem; my particular rural constituency interest; and what we need to do, with particular emphasis on the importance of competition and new entrants, and encouraging new sources of finance for the small companies that we will need to grow our sustainable recovery.

As other hon. Members have more eloquently testified, we are seeing multiple failures: the mis-selling of payment protection insurance; a manipulation of LIBOR, which, of course, is a benchmark used to set payments on a vast amount of money, up to $800 trillion-worth of financial instruments affecting the price of everything from simple mortgages to interest rate derivatives, as The Economist set out clearly recently; and the mis-selling of complex interest rate products. They are symptomatic of a much deeper shift in recent years in our banking culture out in the regions.

Banks in Norfolk and East Anglia have moved from the traditional model of looking after savings and lending money to small companies. They have shifted their emphasis, closing local branches and investing in new types of staff who are more salesmen than bankers in the traditional mould, and they seem to be much more interested in making money from complex charging structures, and instruments and derivatives. Instruments and derivatives may be appropriate—indeed, vital—for the City of London. There is a perfectly legitimate trade in such instruments; indeed, they sit at the heart of any functioning market economy. They are not, however, appropriate instruments on the high streets of such towns as Watton in my constituency, which has been the victim of the inappropriate selling of inappropriate products. I will say a little more on that in a moment. Swaps, options, warrants, futures and forwards should not be the concern, and are not the concern, of most couples taking out their first mortgage, or most entrepreneurs starting a small business. The mentality which says that complex bank products and charging structures are a more attractive source of revenue than the traditional role of banking has been deeply corrosive of the real economy.

I plead guilty to being slightly misty-eyed—I am, after all, a Conservative. I remember as a boy going with my stepfather, who was starting a business, to our local bank. The bank manager knew his name. Rather to my amazement, he knew mine. He offered us a cup of tea. He had a notepad and a file, he knew the business and he knew what had happened at the last meeting. He wanted to talk about the cash flow, the harvest, the outlook for business and how he could help. What a long way that is from small businesses’ experiences of banks in today’s economy.

As for my particular constituency interest, the mis-selling of complex instruments has devastated a number of individuals and businesses, the most celebrated of which—if that is the word—is Adcocks of Watton, featured recently on the BBC. Adcocks is a historic business on the high street of Watton, one of the four towns in my constituency, that is now saddled with £175,000 in bank charges. They threaten to cripple that small business, which is at the heart of the high street as a major employer. Also, a constituent of mine, Mr Leonard, was the subject of international property fraud by an equity trust. Investigations have been conducted over the past several years, and still have not concluded.

Those are just a couple of examples, and the more the debate unfolds—I do not know whether other Members have had the same experience—the more people come forward. I believe that we are witnessing the beginnings of something rather bigger than has hitherto been apparent. There is an iceberg of hidden claims and effects in my constituency, and if that is true in Norfolk I suspect that it is true elsewhere. The impacts in a rural area are far more profound than in an urban area. It takes only one business to fail on the high street of a town like Watton for the whole town to feel the reverberation. In that context, it is important that whatever the small print in the contracts says and whatever the findings may be under contract law, the Government should be sensitive, as I know they are, to the need for accountability, responsibility and appropriate compensation in order to send a signal that such things must and will stop, and to prevent the fall-out from undermining the Government’s efforts to drive an economic recovery and growth in the regional economy.

I have one or two thoughts on what needs to be done. Several colleagues have discussed culture and the importance of a new culture, and whether we should agree with Bob. I remember hearing Mr Diamond say, as The Economist reported:

“We all know that these events are not representative of our culture.”

I do not believe that to be true. It is precisely because much of that activity was deeply representative of a culture that we need to tackle that culture.

Not all in the City take that view. I was struck by the comments of John Nelson, chairman of Lloyd’s of London, who stated in a recent Financial Times article that

“the future for banks…is dependent upon finding the right model, and critically the right culture…None of the revelations over the last week means that the City is inherently corrupt”,

but:

“It is imperative that we tie performance to longer-term incentives and sustainable profits.”

We need responsible banks with a culture of fostering local business growth and a strong understanding of their role in helping to generate economic growth and innovation on the ground, and good banks that encourage a competitive marketplace in which the local bank can flourish and real banking for the real economy.

A number of good measures have been put in place. I commend the Government for the fundamental restructuring in the banking reform Bill, and the Treasury White Paper issued in June on banking reform sets out numerous important initiatives and measures. I suspect that more may have to be done over the coming years. The Merlin agreement covered a number of important initiatives, and it is important that we ensure that it is enforceable and has appropriate teeth to guarantee that it is followed through.

Principally, my concern and my call are for much greater focus on competition and new entrants into the banking sector, as other Members have discussed. Colleagues may be familiar with some of these facts, but I think they bear repeating. The size of the top 10 banks in proportion to UK GDP in 1960 was 40%; in 2010, it was 459%. Something has gone profoundly wrong with how we have allowed the banking industry in this country to develop. It needs serious reform. In the US, the top 10 banks were equivalent to 10% of GDP in 1960 and 62% in 2010, so it is not a global phenomenon; it is a distinctively British one. Only one new high-street bank has launched in more than 100 years. The big five have an estimated market share of 85% for personal current accounts and 67% for mortgages.

Statistics from the Federation of Small Businesses show that 15,000 financial institutions compete in the US market: about 7,700 banks and 7,000-odd credit unions. The German Sparkasse network comprises 431 locally controlled banks, and Switzerland has 24 cantonal banks, which explicitly recognise social and economic responsibility. We should not be hidebound as we deal with the fallout from the crisis. There are other models for reforming our banking system in terms of retail banking on the ground that supports the local economy. I encourage us to look as far and widely as we can.

We need two things: a much more competitive retail banking sector with many more new entrants and a regulatory structure that encourages rather than hinders new entrants. After the glad, confident dawn of new entrants to the banking sector in recent years, I was depressed to see that a number of them had floundered against reportedly impossible regulatory barriers. It is shutting the stable door after the horse has bolted. What we need now are new banks. Cambridge Bank is one, and there are numerous other excellent local initiatives. We should do whatever we can to encourage local entrepreneurs to set up new banks.

Finally, alternative sources of finance are important for our innovation sector. In my 15 years of starting more than 20 companies, the banks never came in and invested in risky ventures in the first five years. They needed to see positive cash flow and revenues, and they always wanted all their risks covered. The innovation sector relies on a much broader group of people who should be promoted, celebrated and encouraged. Angel investors put their personal wealth into extremely high-risk ventures. Their return is often more personal wealth, but I argue that if the reward is balanced to the risk, it is all to the good and should be encouraged. Venture capital trusts have put substantial funds to work in less risky but still emerging ventures. Corporate venture funds are coming into the UK, and there is good news in the sector. In the past six months, we in the life sciences sector have raised more than £1 billion. International money is coming to the UK, not through banks but through new investment vehicles.

More locally, I highlight the importance of credit unions, mutuals and innovative microfinance schemes such as the excellent Kiva, which I commend to you, Mr Davies, when you are next browsing the internet. It is a powerful global microfinance network providing debt finance to small ventures in the emerging world. A lot of money in this country sits in our banks earning very little, and it could be put to use supporting small ventures. Particularly in the localities with which people are affiliated, such as counties, towns or urban neighbourhoods, we may be able to consider unlocking money from personal bank accounts to provide £500 or £1,000 microfinance loans to support small companies. We need an innovative, entrepreneurial and early-stage company financing sector, and we need to reform our banks to allow one.

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[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

I declare my interests, which are in the Register of Members’ Financial Interests. I am a Labour and Co-operative Member of Parliament and have connections with various parts of the co-operative movement and a number of credit unions.

I thank the hon. Member for South Northamptonshire (Andrea Leadsom) who ensured that the debate took place, and other hon. Members who supported the application for a debate. This has been a welcome opportunity to look in more detail at competition in banking and to hear some thoughtful speeches. The fact that nine hon. Members have contributed, in addition to the hon. Lady’s opening speech, and that hon. Members have made many interventions shows the level of interest.

I should like to respond to points made in the debate and set out our policy position. It goes without saying that there was consensus on this matter; I am glad about that. We need real change in the British banking system if we are going to rebuild our economy. That message was set out clearly as a way forward by the Labour leader, my right hon. Friend the Member for Doncaster North (Edward Miliband), and the shadow Chancellor earlier in the week, when they visited the Co-operative bank. That message is important and worth restating today, notwithstanding differences of emphasis across the political parties. I think hon. Members agree that we need to build a banking system that recognises that it is not just an industry that serves itself. That came through in a number of hon. Members’ speeches. Banking must have a fundamental and higher responsibility to serve the economy, but Members gave examples of banks not necessarily having served either constituents or local businesses.

As the hon. Member for South Northamptonshire said, the revelations of the past two weeks have shown precisely what has gone wrong in some aspects of banking—it has had an impact on our economy—and what has gone wrong over decades, with cultural changes taking place slowly and not necessarily being picked up until crisis point. Problems have been highlighted that require further scrutiny.

As in the wider economy, we need a banking system that is based not just on short-termism. It is not about making the fast buck and not about people taking what they can and not worrying about the longer-term consequences. Instead, we should begin to look again at how we can rebuild the economy and our banking system through patient investment, looking to do the right thing in the longer term and sharing responsibility for how the process moves forward.

The short answer is to try to shift the culture so that it is not about predatory behaviour and banks trying to make the hard sell and the quick extra buck by selling a product and pushing it on people, whether they want it or not. It is about productive behaviour and considering how we encourage people to save and how to use those savings productively for local communities and small businesses. Hon. Members have focused on that.

Above all, I want an economy and a system that do not work just for the powerful, privileged few. My hon. Friend the Member for Islwyn (Chris Evans) mentioned how angry people are when they see what has happened in the banking system, particularly when they have worked all their lives and saved and done the right thing, and now find that they and their families and communities have been let down and left out, because many of them have used their savings and now have nowhere else to turn. It will be difficult for many people approaching their retirement years, or in retirement, who thought that they would be okay and that they had done the right thing, but now discover that they are in difficulty.

Again, as the Labour leader set out earlier in the week, the move from what has been described as casino banking to stewardship banking is important. That use of language is interesting, because the idea of stewardship is that we have responsibility for looking after the money and the people who have invested their money in the banks.

The point was made strongly that we need a banking system in which the bankers are not given incentives, overtly or in other ways, to focus only on a short-term return. We should move to a system that is about building up long-term, trusted relationships with customers, whether individuals or small businesses. The hon. Lady also made an important point: we need a banking system in which no bank feels that it is either too big to fail or too powerful to be challenged. Yes, banks need to face real competition and customers must have proper choices, but above all we need a banking system in which all the people in the UK have confidence once again.

I say with feeling as a Scot—we have at times been castigated for our thrifty nature, and sometimes even been described as mean rather than thrifty—that the values and principles I spoke about are the foundations on which the Scottish banking system was built. Many of us have taken it badly that those values and principles were cast aside. Not only did the banks find themselves in difficulties, but there were wider questions about the culture of Scottish banks, which we were once upon a time extremely proud of.

[Steve Baker]

I have always admired the Scottish banking system. My friend Professor Kevin Dowd is a huge advocate of Scottish free banking. At its height, its key distinguishing feature was the almost complete absence of the state. Banking was at its best when the state was at its least intrusive.

[Cathy Jamieson]

That is an interesting point, but I will speak about some collective approaches to banking. The nub of much of this debate is what caused the banking system, which at its height was doing well for the economy and working well for people, suddenly to tip over. It put people on the wrong side of the decision-making process, and forgot that it was supposed to be looking after other people’s money. That is the issue I would like to explore in more detail when we have the opportunity to scrutinise the matter.

In her opening speech, the hon. Member for South Northamptonshire referred to the culture in her day. As a young person, I saved threepence a week in old money and took it to school every week to put in a school bank account. I still remember the day I got to the wonderful point of having £1 and, in addition to having a school bank account in which to save threepenny bits, or whatever it was, became the proud owner of a Trustee Savings bank account book.

I did not live in an affluent area—far from it—and my family was not well off. My father was often unemployed, but the principle of saving a little every week for a rainy day established for me and many of my generation at a young age the importance and responsibility of saving. I remember my horror at secondary school when I had to buy a set of drawing instruments and had to go the bank and take money out. That was the first time I realised the trauma of having to take money out instead of putting it in, and then to work doubly hard to replace it.

At that time, banking was a respectable job, as hon. Members have said. It was a job that people vied for.