In a speech last week Sajid Javid, Conservative MP for Bromsgrove, took on the popular notion that banks were entirely responsible for the financial crash. In his speech, delivered without notes, and republished in full below, he also sets out what should happen next to banking structure and regulation.
"I thank the right hon. Member for Oldham West and Royton (Mr Meacher) for securing this debate, which is a valuable one to be having in the House. I draw the attention of hon. Members to my entry in the Register of Members’ Financial Interest, which is a legacy of my spending 18 years in the banking industry. Before Labour Members get a bit too excited by that revelation, as many have unfortunately done in the past, I should say that for the past three or four years I felt that the profession of banker was possibly the worst to have in the eyes of the public, but that was before I became a Member of this illustrious House.
The motion states that we want to
“prevent a recurrence of the financial crash”.
Obviously we are all united on that, but it is important that we examine the causes of the crash, which we could debate for a long time and go round in circles. I am sure that many rational people will disagree on the responsibilities of banks and bankers. I may have misunderstood the motion, but it seems to suggest that banks are entirely responsible for the financial crash. That is wrong and it does not do justice to Members of this House or to our constituents in preventing something like this from happening again.
- The financial crash happened because too much money was chasing too few assets—financial assets or real assets such as real estate. There are three principal reasons for that, the first of which was that world financial reserves, particularly in the east, were growing at a substantial rate. Indeed, they continue to do so, as more people in the west consume goods from the east. To give just one illustration, China’s financial reserves in 1990 were $165 billion but today they are $2.65 trillion. Those reserves needed to find a home.
- The second reason is that commodity prices have grown substantially, partly as a result of the growth of the east and other emerging markets, and that has led to a substantial increase in sovereign wealth funds, both in the middle east and in other markets. Those funds also needed to find a home, and they created a colossal wall of money when combined with the financial reserves.
- The third reason is something that bankers have called the “Greenspan put”. Alan Greenspan became chairman of the Federal Reserve in 1987, just before the Wall street crash, and one of the first things he did when he found a problem in the financial markets and a potential crisis brewing was to lower interest rates as quickly and as substantially as he could. That happened again when the US Federal Reserve led the way after the dotcom bubble burst in 1991, again when Russia had problems and there were problems in Asia, and it has just happened again. Bankers have got used to that approach and it results in what the markets call a “put”, whereby they feel they can sell assets if things go wrong. That has encouraged bad behaviour and a moral hazard: the idea among many bankers of “heads we win, tails the taxpayers lose”.
In addressing these issues, we must not forget those key facts about what caused the crisis. However, bankers did play a significant role and there are things about banks that we need to examine. Although there are issues to address in respect of financial derivatives, I would not make that the key priority.
- The first thing to examine is the idea of retail banks and commercial investment banks acting as one entity, because that seriously needs to be looked at. I started working in the banking industry in New York in 1992. Under the Glass-Steagall Act, which was in place at the time, the bank I worked for had to have a completely arm’s length relationship with its retail banking division. That made a big difference to the risks the bank took or even contemplated taking. That situation changed in the late 1980s in Britain, when the big bang took place and the implied Glass-Steagall arrangement disappeared, and it formally changed in the United States in 1999 when that Act was removed. It is vital to examine that.
- Secondly, we should consider the banks’ capital requirements. It is right that under Basel III capital requirements should be lifted. The core tier 1 capital requirement will be lifted from about 2% for banks to about 7%. Some points are still missed, however. The focus is far too narrowly on the default risk of assets and we have strange incidences even with default risk—for example, under the new proposals industrialised sovereigns are still considered to be risk free. As we speak, Ireland’s 10-year Government bonds are trading at more than 11%, Spain’s 10-year bonds are trading at more than 6% and Germany’s are trading at more than 2.5%, but they are all treated as zero-risk weighted and no risk capital will be set aside. No account is taken of liquidity, either. One of the largest problems for banks over the past three or four years was lack of liquidity, but the capital requirements do not take full account of that.
- And third, one of the biggest mistakes that made Britain’s situation far worse than that of other countries was the change in regulation when Tony Blair’s Government first took office. The jobs of people at the Bank of England, who knew what they were doing, were taken over by people at the Financial Services Authority, who did not know what they were doing. I remember an FSA audit where the chief auditor of my credit derivatives book, which had a market value of more than €100 billion, was a 27-year-old with a degree in biology. It is no wonder that problems started to happen. We do not necessarily need more regulation, just smarter regulation.
There are many issues to consider that we could debate for a long time. Banking regulation is one such issue, but we do no service to our constituents if we merely focus narrowly on it when we consider the lessons of the financial crisis."