The House of Commons Treasury Committee (the Committee) has published its seventh report of session 2008–09 entitled Banking crisis: Dealing with the failure of the UK banks (the Report). The Report looks at the following:
- The Financial Services Compensation Scheme (FSCS). The Report praises the FSCS for its response to the failure of several UK banks, in particular the variety of innovative solutions deployed by the FSCS to suit the particular challenges presented by each institution.
- Northern Rock’s lending policy. The Committee welcomes the Government’s decision to allow Northern Rock to expand lending. The Committee asks the Government to set out how this change of policy will also change the timescale over which the taxpayer loans to Northern Rock will be fully repaid and, in turn, the timescale over which a new ownership structure, whether by trade sale, privatisation or remutualisation, could be achieved.
- The merger between Lloyds and HBOS. The Committee notes that the merger may have prevented the collapse of HBOS with the consequent loss of thousands of jobs and also avoided the outright nationalisation of the company. Nevertheless, from the evidence the Committee has received, if the merger has had injurious consequences for Lloyds it considers that the responsibility for this lies primarily with the Lloyds’ Board.
- Bank recapitalisation. The Committee supports the decision to implement a recapitalisation programme. However, the unavoidable speed of implementation did mean that the implications for both banks and the Government were neither fully understood nor worked out.
- Government’s strategic objectives for the banking sector. The Committee welcomes the fact that the Government has attached conditions to those banks in receipt of public funds for the purpose of recapitalisation. The Government’s priority now must be to ensure that these conditions, in particular those relating to remuneration and lending levels, are adhered to. However, the Committee also states that the Government needs to clarify its strategic objectives and priorities with respect to the banking sector.
- Toxic assets and the asset protection scheme. The Committee welcomes the approach taken in the asset protection scheme, but is concerned about the need for greater clarity over the possible impact on the public purse, and urges the Government to complete the due diligence on assets in the scheme as quickly as possible, to make public the proportion of assets, by value, in each category covered by the scheme, and to disclose as soon as possible the mechanism for determining and the projected timeline for the crystallisation of any losses.
- Bank lending. Whilst noting some positive signs, the Committee is very concerned about the availability and terms of credit to the small business sector, and the slow movement on this issue by the banks.
- UK Financial Instruments (UKFI), the agency that controls the Government's holdings in distressed banks. The Committee urges HM Treasury to complete UKFI’s investment mandate so that the public, the markets and Parliament understand the full details of UKFI’s objectives with respect to its investee banks.
- The future of the banking sector. The Committee believes that a separation of retail banking from the investment banking function is a live issue which requires further debate. The Committee acknowledges that the toxic shock that major financial institutions have been exposed to by securitisation is likely to make them change their business practices. One such change will see banks returning to the practice of keeping a greater portion of loans they originate on their own balance sheets. The Committee also believes that a regulatory response may be required and recommends that the FSA coordinate efforts with its international counterparts to require that those undertaking securitisation retain a tranche of the commodities they trade. The Committee is also concerned about the lack of transparency inherent in over-the-counter trading. The Committee believes that it is desirable that the FSA take steps to encourage trading through clearing houses and where appropriate on exchanges.
The British Bankers Association has published a press release stating that the Committee’s report does too little to reflect the work banks are undertaking with the Government to restore the UK economy.
View Banking crisis: Dealing with the failure of the UK banks, (PDF 1.90MB), 1 May 2009
View BBA says Treasury Committee must move beyond blaming, 1 May 2009