Cable, Thurso and Kramer quiz Darling on the Banking White Paper

• [Jul 08] Dr. Vincent Cable (Twickenham) (LD): I ACKNOWLEDGE that there are many things in the paper that can be welcomed-which, indeed, we have advocated in the past-but their implementation has a timeless quality, as if we are on a kind of progression from White Paper to Green Paper to blank paper.

Almost all of the important recommendations would happen after the next general election. I know that a couple of weeks ago the Chancellor was advocating that banks prepare living wills; one rather gets the feeling that this is a living will for the Chancellor.

Having advocated macro-prudential regulation of bank reserves for five years or so, I very much welcome the Government's embracing it. Surely it must be right, however, that in anything that requires an understanding of the overall economy the Bank of England must have a central role-not a unique role, but a central position. That is not clear from the statement.

I welcome, too, the strengthening of consumer protection. We have at last got to the idea of generic independent advice, but it has taken 10 years of campaigning by Citizens Advice and others to get there. I am not clear, however, about how the Government continue to preserve a fragmented system of consumer protection with responsibilities confusingly divided between the FSA and the Office of Fair Trading. Will that be clarified?

I welcome, too, the emphasis on competition. However, does the Chancellor buy the argument of the European Commissioner, Neelie Kroes, who said that, if we are to have real competition in British banking, banks must be broken up and subdivided, and in particular the Lloyds-HBOS merger might have to be unscrambled? Does the Chancellor agree?

The big issue, as the Chancellor rightly emphasised, is the major question about the banks that are too big to fail, too big to supervise and too big for the taxpayer to underwrite. He correctly said that small banks as well as big banks can go wrong-that is absolutely right-but is there not a fundamental problem that when very large interconnected banks try to be the biggest investment bank in the world, the exposure to the British taxpayer is then wholly unacceptable?

Therefore, these banks have to be subdivided for that reason.

The Chancellor is looking over the distant horizon at necessary reforms, but may I suggest to him that key problems exist today? The publicly owned banks are not responding to the borrowing needs of sound British companies, and the bonus culture is being reinstated in publicly owned banks that are owned by the taxpayer. There is a complete lack of direction, and I suspect that a central reason for that is that the Government are so desperate to get the publicly owned banks back into the private sector quickly that too little attention is being given to defining the public interest.

I suspect that the White Paper will be received in the City with a great sigh of relief. It is yet another indication that we are getting back to business as usual.

Mr. Darling: On the last point, I think that most hon. Members agree that we need to toughen up the regulatory system significantly. We need to make changes, but we must not lose sight of the fact that this is an industry that employs over 1 million people in this country, more than half of them outside the south-east of England. It is important that we do not give the impression that we would rather be shot of it, because it is quite important. In the past nine years, it has contributed more than £250 billion in tax revenues-quite a useful sum. When it recovers, I hope that it will continue to make a contribution in the future.

The hon. Gentleman asked about selling. If he looks at the White Paper he will see that we make it clear that we will sell when we think that the time is appropriate. We do not have an artificial time scale and we are not under any pressure to sell, but it will not have escaped his notice that just at the moment the shares in the two banks that we own are worth slightly less than we paid for them. He therefore need have no fear of being confronted with a quick sale: we will do what is right to achieve the best value for the taxpayer.

On lending, I agree with the hon. Gentleman that it is important to try to get credit flowing in the economy again. That is a key part of what we are doing. Mortgage lending and the availability of lending for mortgages have increased but more needs to be done in certain sectors of business lending, such as to small and medium-sized enterprises, and especially to the medium-sized ones. For example, I welcome today's announcement by Prudential of a fund worth £1.5 billion specifically geared to medium-sized companies. That is an example of a non-bank bringing together pension funds, local authorities and its own funds to make money directly available to medium-sized firms, and it is a useful step in the right direction.

The hon. Gentleman made some broader points, and one of them had to do with the "too big to fail" argument. I understand where he is coming from, but I said in my statement that we must take into account the cost to the taxpayer as well as the wider effects of failure, and that we must regulate accordingly. However, there is a flaw in his argument-I heard him being asked about this on the "Today" programme at 10 past 7-and it is that he seems to back off from the consequences of telling a large bank that it is too big. In response to that, the bank might say, "We're too big, so we'll go somewhere else." Alternatively, dividing such a bank into lots of different companies, as was the case with Lehman Brothers, does not solve the problem. When Lehman Brothers went down, the whole shooting match went down, not just one aspect of it.

The hon. Gentleman made a wider point about macro-prudential supervision. In my statement, I said that given what central banks do, and what the Bank of England in particular does, I anticipated that such supervision would have a wider role, as we work through the present circumstances. The Bank of England is the obvious place for it, but I come back to the point that I made to the shadow Chancellor: wherever the lines of responsibility are drawn, we need a regulator who is able to look at the wider prudential supervision of the system, and the wider financial stability. We also need a regulator who will drill down to the nuts and bolts of every single company.

Whether people like it or not, there is no country in the world whose treasury does not have to be at the table. We know all to clearly that either the law has to be changed or there is a fiscal cost, so three people have to sit around the table regardless of how the regulatory cake is divided. That is something that the shadow Chancellor will not face up to.

• . . John Thurso (Caithness, Sutherland and Easter Ross) (LD): At the beginning of his statement the Chancellor mentioned the importance of competition. Does he accept that the shotgun marriage that he oversaw of Lloyds with HBOS was bad for competition, as well as proving to be a bad deal for both the shareholders and the taxpayer? Will he now do the honourable thing and oversee an amicable divorce?

Mr. Darling: The shareholders of both Lloyds and HBOS voted overwhelmingly, separately, for the merger to take place. The process took about three months. I do not know how the hon. Gentleman describes "shotgun", or whether he would regard a three-month engagement as being sufficient, but both parties were willing participants in the act and the shareholders of both voted to go along with it.

• . . Susan Kramer (Richmond Park) (LD): The Chancellor made no mention of the credit rating agencies, but they are the canaries of risk in the system and they got it spectacularly wrong in the previous crisis. Is he looking at providing any guidance or a framework for credit rating agencies and, in particular, at tackling the potential conflict that exists because the entities that are assessed pay the agencies' fees?

Mr. Darling: The hon. Lady is right. The Financial Stability Board, which the International Monetary Fund set up, is looking at the issue, because credit rating agencies are mostly American and they operate throughout the world. We have to have international agreement, and in Europe steps are being taken rather more quickly to try to ensure that agencies are properly regulated. She is right that they can be hugely influential, but I have always made the point that a credit rating agency's advice should be one factor influencing people's decisions. It should not comprise their total judgment, because it cannot.