Queen's Speech — Debate (3rd Day)

Part of the debate – in the House of Lords at 5:23 pm on 8th December 2008.

Alert me about debates like this

Photo of Viscount Trenchard Viscount Trenchard Conservative 5:23 pm, 8th December 2008

My Lords, I am grateful to the Secretary of State for introducing the debate.

The Government would have us believe that this financial crisis is global or supranational and that they have no responsibility at all for its creation or for the fact that the cupboard is bare at the onset of the crisis. On the other hand, the Government are prematurely trying to take the credit for solving the crisis by taking decisive action earlier than others and by creating the model for rescuing financial institutions which has now been followed by others around the world.

It is true that the financial crisis is global. However, London is the most important financial centre in the world and financial services account for a significantly greater proportion of GDP than is the case in all the other leading economies. Financial markets are now largely global. The Government, by their own profligacy during the boom years, set an example that was unfortunately followed by the banks. They inherited a healthy and improving economy in 1997 but have borrowed too much and spent it all during the good years.

The gracious Speech acknowledges that the strength of the financial sector is vital to the future vibrancy of the economy and says that the Banking Bill will ensure fairer and more secure protection for bank depositors and improve the resilience of the financial sector. It is true that the Government did move, perhaps belatedly, but decisively, to recapitalise the banks. Will the Minister explain why the Government needed to be quite so vindictive and punitive towards the banks in the detail of the measures that they have adopted, which are harsher and more demanding than the equivalent measures adopted by other countries in various ways?

The Government have said that they will not act directly as a hands-on shareholder. In that case, why did they insist on taking such a large proportion of their shareholding as ordinary shares? Indeed, why did they not provide most, or even the whole, of the recapitalisation package in the form of preference shares, thus avoiding dilution of ordinary shareholders?

By no means have the Japanese Government excelled in the management of their economy over the years. I declare an interest, in that I am employed by Mizuho International plc, the London-based investment banking unit of the Mizuho Financial Group. Mizuho has suffered some sub-prime-related losses in the current crisis, although these are relatively modest compared with the losses sustained by many leading American and European banks. The three leading Japanese banking groups are in relatively much better shape than many of their American and European competitors. One thing that the Japanese authorities did get right was the scheme used to recapitalise the Japanese banks after the collapse of the property bubble in the 1990s. It was done wholly by the issuance of preference shares; there was no talk of nationalisation. There were strings attached but, crucially, there was no restriction on the payment of dividends. The preference shares have now all been paid back.

This crisis is of course different in both scale and reach, but there are still two good reasons why the Government should revisit their decision to restrict dividends on our banks' ordinary shares while the preference shares are outstanding. First, the purpose of issuing the preference shares and the equity injection was to recapitalise the banking system. To ban ordinary dividends until the preference shares are repaid distorts incentives towards shrinking the capital base of the industry by prematurely retiring the preference shares simply to restart the payment of ordinary dividends. Secondly, if the Government permitted dividends on the ordinary equity, there would be a significantly greater chance of clawback taking place, reducing the cost and risk to the taxpayer of recapitalising the banks. It would also underpin the value and marketability of any stake of ordinary shares that the Government held.

To turn back to the question of preference shares, why have the Government saddled the banks with a cripplingly high coupon level of 12 per cent, just at the time when the base rate has been cut to 2 per cent? As Dominic Lawson asked in his excellent article in yesterday's Sunday Times, referring to the Prime Minister,

"if 12 per cent is the rate he believes it is necessary to charge the banks for long-term money, why should the banks be expected to charge only one-sixth of that to other British businesses?".

The Prime Minister boasts that other countries, such as the United States and Germany, have followed his lead in recapitalising their banks. But other countries have been much more reasonable and less punitive towards the banks. The US Treasury has imposed a coupon of 5 per cent on its new preference shares, while in Germany the coupon is between 5.5 per cent and 8.5 per cent.

I would like to say a quick word about regulation. I do not agree with the noble Lord, Lord Turner, that the FSA needs more people. The FSA seems to me to already have far too many people and to spend a great proportion of its time on internal meetings—it is very inward looking—and on having conferences with other regulators. It is essential to preserve the competitiveness of the City of London in the future and, to that end, we should not rush to introduce much more strict regulation. We need better regulation, not more of it.

Other noble Lords have mentioned the pensions problems. I look forward to hearing what the Minister has to say about the ever growing, unfunded public sector pension liability, which stands, I think, at some £1.3 trillion, at a time when our private sector pension schemes are suffering even more from the collapse of the markets and their deficits will be much bigger than they were a year ago.