Tough times like these test our character and values as a nation. So even in a recession, we have to act now, both to protect people from the downturn and to prepare and equip ourselves for every future challenge.
Our future lies in low-carbon, high-technology manufacturing and services. Hence our investment in science, green jobs, skills and the digital backbone on which the rest of the economy depends. That is why we reject the idea of cutting spending now. But at root, the competitive edge that we need in the future requires an effective flow of credit through a reformed and more responsible banking system.
I understand and share people’s anger towards the behavior of some banks. But anger on its own does not offer us a solution. Instead, Britain needs to lead the world in reforming and restructuring our banking system.
The basic functions of a bank are very simple — to provide a place where people can keep their savings safe and to provide funds for those who want to borrow to invest. But it is to meet these objectives in a new world that we must make changes both in the banks themselves and their regulation.
Banks must act in the long-term interests of their shareholders and therefore of the economy as a whole, not in the short-term interests of bankers. That has to be the foundation on which a new system must be based. This starts with a rejection of the old short-term bonus culture. So, starting last week with the Royal Bank of Scotland, we are changing the bonus system in the industry — with long-term incentives and claw-backs if future performance is poor.
Another intrinsic part of the foundations must be better governance of banks. Their boards must have the expertise and power to challenge management and they must be able to understand the risks the company is taking.
So David Walker’s review will look at whether board members have the necessary expertise and the right incentives to monitor executives. We also need both better national and global regulation. For example, where banks are speculating, long-term capital requirements will have to be higher. All markets and all jurisdictions that want to benefit from the global economy should play by the global rules. Institutions with global reach should be regulated in a global way, not by a patchwork of national regulators.
But as we design this new regulatory system, we have to be clear as a nation about what we expect from our banks and clear, too, about how people, who depend every day of their lives upon banks, expect these vital institutions to be run. For, distant as the relationship between banker and client has become, the restoration of trust, the most precious asset of all, to the heart of that relationship must now underpin all that we do.
This should not be at the cost of Britain hosting big international banks. There is no room for parochialism or protectionism in our model of the future. Global financial flows and liquid capital markets have brought massive benefits to our economy since the dawn of global trade centuries ago. We are not evacuating, but rather entrenching, our place right at the heart of global commerce, finance and trade.
A central problem we now have to deal with is that in the last year Britain has lost significant lending capacity from both foreign banks and lenders who relied on finance from the global capital markets now frozen over. Alongside thriving international and investment banking sectors, we need to ensure that the UK banking system that emerges over the coming months is refocused on providing strong competitive banking for domestically focused businesses, including start-ups and entrepreneurs, as well as mortgages for those who want to buy a home. In short, we need stronger business banks, mortgage banks and savings banks.