I am glad the Prime Minister has reaffirmed his support for free enterprise and markets, whilst calling for proper regulation. This echoes our calls in the Economic Policy Review for better regulation of banks and the credit they extend by the Bank of England, when we warned of the dangers stemming from the loose monetary controls exercised in the early years of this century. We need the Bank of England to get its old powers back that this government removed. Then it might be better able to judge conditions in money markets, and avoid the excesses of easy money and tight money we have witnessed in recent years.
We also need to call today for proper control of government. The government should not have stepped in so clumsily with new capital for a couple of Scottish banking groups. If the government and Regulator wanted a bank or two to increase the capital required because it thought one or two banks were in a weak position, it could have done so through private discussion with the affected banks without letting their share prices suffer through leaks. If the Regulator wants to raise the minimum required capital for all banks it should make a statement about it, and give banks a period of time to adjust.They could do much more to remedy their own positions, without having to rush to the state as their new paymasters.
Any bank short of capital should as a high priority take action to keep more of the cash it is generating from its operations. Dividends should be cancelled. Bonuses to staff should be cancelled if the bank is running out of cash and capital. People on high salaries – say over £200,000 a year – should be asked to take a pay cut in a bank in need of state aid. If they prefer to move on that helps cut the costs. There should be a staff freeze on new recruitment, and discussions with staff about smarter working to see the bank through the troubled period. There are many ways of conserving cash and generating more profit in a large business. In the UK it is wrong to expect the taxpayer to finance a big merger between two banks. If the banks concerned can only do the merger with public money, they should be told they cannot do it. It is no business of the taxpayer to finance huge deals to reduce the amount of competition in the banking market. The total dividends paid by the three banks seeking public funds amounted to a massive £7 billion in 2007.
If the government presses on with its plans to nationalise RBS I can only see problems ahead. The pay levels, lending policies, attitudes to customers and much else will become legitimate matters of public debate. The rest of the public sector will be jealous of the special treatment highly paid bank workers receive.Taxpayers will be bemused at what is happening to their tax money.We will all be angry if the nationalised bank then proceeds to large write offs and losses. These banks are too big for the taxpayers to own and sleep easily at nights.
Any bank in need of help should receive loans and assistance in the normal way from the Central bank. The taxpayer should be protected by taking sufficient security for such lending.