Green paper on the banks

I am told there will soon be a Green paper on the banks. The government wishes to tackle the question of financing the recovery.

I welcome that, and welcome the fact that reading the papers it appears Parliament will be the first to know what is in it.

Readers of this site will know that I would like it to contain steps to put more competition into High Street UK banking. I would also like the banking regulators to say they have done enough for the time being, to allow the banks leeway to lend more to good businesses and against good projects.

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21 Comments

  1. Stuart Fairney
    Posted July 26, 2010 at 6:55 am | Permalink

    All good ideas, but do look again at the corporate tax regime. I was pitching a project to a couple of middle eastern investors on Thursday and the actual deal was fine for 'em in terms of risk profile, exposure etc. But after checking the tax issues, they decided that they could get a better return from lesser projects on offer in the Gulf.

    This alone won't destroy the economy of course, but their funding would have triggerred my really cautious bank to make the other half available and thus a small, actual, real, productive stimulus is halted because of excess taxes.

    Again if you want recovery, less regulation, less tax, get out of the way and we can take care of it handsomely.

  2. Henry
    Posted July 26, 2010 at 9:45 am | Permalink

    There is a letter to the Head of Business in today's Telegraph Business section by Godfrey Bloom, MEP, Coordinator, Economic and Monetary Affairs Committee. In it, he explains the European System of Financial Supervisors (ESFS). This apparently is comprised of five major new EU Institutions, which will have, in law, primacy over the law of all member states, with regard to financial services. This is yet another bit of our sovereignty handed over to the EU, "in large part enthusiastically supported by Coalition MEPs".

    Will our Green Papers therefore have any relevance?

  3. Mark
    Posted July 26, 2010 at 11:01 am | Permalink

    My wishes for the Green paper:

    1) Recognition that UK banks' health will only be restored once the property bubble has unwound, and therefore prioritisation of measures to promote that while avoiding a systemic crisis;
    2) Recognition that enforced bank lending to highly subsidised green energy projects could cause the next banking crisis because of the risk that subsidies will be withdrawn when no longer affordable, and that strict economic criteria will apply to energy;
    3) Recognition that banking has largely privatised overseas borrowing through wholesale funding of the customer funding gap, and that this is very damaging to the economy because interest on these loans is paid abroad;
    4) Recognition that proper allocation of lending can only happen when it is priced at market rates, not subsidised (i.e. allow interest rates to return to a market level);
    5) No bonuses to be payable at banks that rely on any form of BoE support such as SLS and CGS.

  4. Boudicca
    Posted July 26, 2010 at 11:58 am | Permalink

    Nothing to say, John, on the reports that the Coalition Government will be signing up to the latest power-grap from the Politburo in Brussels – the so-called European Investigation Order.

    This Directive destroys the civil liberties of British citizens – yet by all accounts, Cameron will be accepting it. I am so glad I voted UKIP; my decision appears vindicated already.
    http://www.telegraph.co.uk/news/uknews/law-and-or

    Reply: I remain strongly against the transfer of more powers to the EU. Pity the electorate chose another pro EU Parliament, with a little help from UKIP.

    • Cliff.
      Posted July 26, 2010 at 6:28 pm | Permalink

      It is sad that a government said there would be no further power transfers to the EUSSR appear to be backing this EIO. We have seen how some EUSSR countries have abused the EAWs and I can't see this new power being used by some in ways it was not meant to be.
      I also noted that Mr Redwood also said that backbenchers should not form the Broke Back Dining Club, this was from a man that said backbenchers were ignored by the previous government….It follows that such a Dining Club would allow backbenchers to discuss matters they feel the government are getting wrong.
      Regarding JR's reply; You should ask why the public didn't back our party given the state of the country and a hated Labour government. For many of us traditional Conservatives, all our fears over Mr Cameron are being proven right and many Conservative supporters will never trust our party again, just as people will never trust the LibDems agin…….It may not be a Broke Back Coalition but, we and the LibDems are certainly a queer marriage.

      Reply: There is no need for a Brokeback Dining Club. There are plenty of dining clubs and other ways for backbenchers to meet, discuss and influence the government. The new Parliament is better in this respect – the new Backbench business committee allows us to choose the business of the House one day a week, and the arithmetic of the Coalition requires Ministers to take backbench opinion more seriously. We cannot change the electorate's decision to elect a pro EU Parliament once again.

    • Brian Tomkinson
      Posted July 26, 2010 at 8:12 pm | Permalink

      John,
      Do you really mean things would have been any different with a Conservative government? I doubt it.

  5. christina sarginson
    Posted July 26, 2010 at 12:58 pm | Permalink

    I hope the banks lend more to small businesses and help us out of the hole left by cutting the public sector if the regs do that then hooray!!!

  6. Martin
    Posted July 26, 2010 at 1:01 pm | Permalink

    Out of curiosity if the banks don't have enough money to lend to small start up businesses why don't they offer higher rates to depositors? Have the laws of supply and demand been abolished?

    • Alan Jutson
      Posted July 26, 2010 at 4:58 pm | Permalink

      Martin

      Probably because they do not have to. They would probably prefer to work with vastly increased margins to increase their reserves.

      If one Bank raises rates for savers, then others may follow.

      When all of one type of trade get together to agree prices, its called a Cartel, its not legal, but difficult to prove.

      Does this apply to Banks ? You have to make up your own mind !

      Government could do something about it by insisting that Banks that they control (Taxpayer Shareholders) do pay higher rates to depositors, but Government will tell you that are at arms length, and do not get involved with Day-Day management.

      One is then forced to ask, why part own a Bank or two, or three, or four then !

  7. sm1
    Posted July 26, 2010 at 12:37 pm | Permalink

    How will you ensure the banks use the various direct and indirect 'Public Subsidies' to rebuild their balance sheets, write off bad loans and start responsible lending, instead of paying bonuses on possible illusory profits?

    These profits may well dissappear as soon as banks are made to finance themselves without subsidies ( low interest rates and liquidity schemes or via monopoly profits.)

    Honestly you may have to call their bluff? and start putting in 'covenants rules' to the schemes which legally bind them to certain performance criteria and prohibit certain actions (eg. financing aggressive tax avoidance or paying large bonus or renumeration which are not deferred to the end of the subsidies)

    Thats what business have to live with!

    I look forward to sensible solutions.

  8. Javelin
    Posted July 26, 2010 at 7:22 pm | Permalink

    Banks need to have more savings before they can do more lending. This means higher interest rates.

    It's amazing how myopic economists are !!! How do they think small businesses can raise cash if not from the banks. Large companies can issue bonds – but large companies do not lead a country out of recession.

    We need more cash being saved in banks so it can be lent, rather than just focusing on the stock exhchange or ploughing it into houses.

    INTEREST RATES are NOT just about INFLATION.

    The BofE MPC are strangling the life out of the UK.

  9. BigJohn
    Posted July 27, 2010 at 3:43 am | Permalink

    Can we have a green paper on the sustainability of government ?

    I would be interest in :-

    Is it possible to just let the government go bankrupt ?

    Or is it another example of being too big to fail ?

    I was asked to add the following :-

    When are the government actually going to do something about reducing the debt and when ?

    There seems to be a lot of talk, but not much action, other than some promises about something happening in the future, but nothing substantial is happening, and the debt is getting worse by the day.

  10. Norman
    Posted July 27, 2010 at 7:45 am | Permalink

    This could all end in tears.

    Firstly, what is financing the recovery at the moment? 1.1% growth for the quarter, not too shabby. Things can only get better, surely?

    Secondly, I heard some absolutely deranged opinions on the radio yesterday. Wild talk about government dictating to banks who they should be lending too. Have we learned nothing from the last 15 years? This is what caused the recent crisis! American regulators dictating to banks who should get mortgages or be accused of redlining.

    There was also some more off the wall talk about dictating to banks how much they can pay out in dividends. If ideas along these lines are being seriously considered we're done for, may as well bring Labour into the coalition too, at least they make no bones about being statists. Absolute madness.

    I notice your post today is absolutely full of sense about leaving decisions in the hands of those who know best. Why not apply this to the financial sector? Or doesn't the coalition like freedom?

  11. Javelin
    Posted July 27, 2010 at 8:58 am | Permalink

    Having read some of the Green Paper last night it appears to me that the politicians (St Vince) are trying to focus on the behaviour of banks without understanding the mechanisms and constraints which fundementally limit their operation.

    Trying to encourage lending ACTUALLY means encouraging risk. Any bank will prefer to lend to low risk borrowers, and higher risk borrowers will be their second choice. So to encourage more lending is to encourage higher risks.

    What is key is to understand that the higher the risks then the higher the reserves need to be. So crudely put the more you lend the progressively higher your reserves must be. What the Green Paper should of done was to firmly understand the relationship between risks and reserves – not to try to prescribe profit and lending levels.

    • Mark
      Posted July 29, 2010 at 9:59 am | Permalink

      Banks don't care what risks they lend to so long as they can securitise the risk and resell it. Bank expertise concentrated on the securitisation/resale model, and they no longer retain the same expertise to evaluate borrowers. Since the suckers who used to buy risk from banks have gotten wise to this, they aren't game to be fooled again any more. Indeed, some of the suckers have themselves gone broke, effectively returning the risk to the banks, because they can't pay the insurance claims on the risk the banks are now making.

  12. Alan Jutson
    Posted July 27, 2010 at 9:04 am | Permalink

    Interesting that Vince Cable is proposing to try and FORCE Banks to lend to small businesses.

    Please advise how exactly he can do that with a Private commercial enterprise.

    Will he offer to underwrite all of the losses a Bank makes on any such transaction.

    Clearly some small and medium size Companies do need to raise finance in order to grow, but surely a Bank will only operate within certain risk margins.

    If Banks no longer loan, and no longer give depositors a real rate of interest, for any length of time, then they will slowly die with their own type of medicine.

    Perhaps Vince should look at the Taxpayer funded Banks first.

  13. DennisA
    Posted July 27, 2010 at 10:59 am | Permalink

    What about the proposed Green Bank, which will be given Carte Blanche to throw our money at renewable power, instead of building proper power stations.

  14. Colin
    Posted July 27, 2010 at 11:50 am | Permalink

    John,

    I'd be interested to know what you think about a proposal on this website that I found http://www.bankofenglandact.co.uk/.

    Briefly it discusses a way to change finance which would be in the better interests of the public. The role of current banks to increase the money supply is removed and given to to the Bank of England, leaving banks as distributors of money, looking after people's current accounts and servicing loans from customer's investments.
    This would remove the need for government borrowing from the banks ( and paying interest ) in the future, as instead money can be 'printed' and used for whatever government spending or tax cuts are required.

    I found it an interesting website. It isn't a golden bullet, but it does appear to reduce systemic risk, as it ensures that runs on banks cannot happen. The main I'm wondering how it would affect our economy. My gut feel is that it would probably be a quite unpleasant transition, but would put the country in a better financial footing in the long term. I suspect that banks and our financial sector really wouldn't like it though.

  15. davidb
    Posted July 27, 2010 at 1:14 pm | Permalink

    I have a sneaky feeling the government is colluding in this low interest regime while inflation is about 5% – and could be more, because the figures have been suspect for a while – in an effort to inflate away a lot of the debt. If the target is 2% interest rate should be heading upwards, not flatlining. Its not like they couldn't be lowered again if deflation was to be regarded as an evil and a risk.

  16. christina sarginson
    Posted July 28, 2010 at 8:23 am | Permalink

    What do the banks think of this?

  17. George
    Posted July 29, 2010 at 6:50 am | Permalink

    As some one running a small business, my perspective of the bank/s are negative. More competition has to be a good thing. THe new banks opening today will hopefully be the start of a needed change.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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