One white knuckle ride is enough

Some banks proved too big to fail, but John McFall is determined to learn lessons that will minimise the risk of failure in the future.

The Treasury committee will state to take evidence on the Too Important to Fail Debate this month onwards.

The past two years, with the sudden run on Northern Rock, the subsequent emergence of the wider, international banking crisis, followed by the government’s emergency rescue package, have naturally been extremely busy ones for our committee. However, much of the work we have done has necessarily focussed on the here and now as events unfolded, often dramatically, before us.

One of the most important contributions we made was in ensuring that the principle actors responsible for what happened appeared before us, and hence before the public, to account for themselves.

Our sessions and reports on the banking crisis did not stint in allocating blame where blame was due. It was clear that bankers, boards, regulators, and indeed politicians, had all failed. Select committees have an important role in holding those in positions of responsibility and power to account, which our inquiry clearly illustrated. The so-called ‘Masters of the Universe’ were masters no longer and had, quite rightly, to apologise.

However, throughout the banking crisis inquiry, I always felt that scapegoating individual bankers could distract us from some of the bigger issues. This is because what also emerged was the fact that, as well as irresponsible individuals, there were deeper, structural reasons which contributed to the crisis.

Our reports highlighted some of those issues, with the promise that we would do further work on them. The time has now come for that further work, and that is what Too Important to Fail is all about.

I believe it is vital to explore the issue of banks which are perceived to be too big or too important, to fail. The events of the previous two years have shown they exist – and in so doing, increased the risk of moral hazard. Banks could well take large risks again, knowing that in the good times they would reap the benefit, but in the bad times it would be the taxpayer who would be left to pick up the pieces.

Governments around the world had no choice but to authorise a massive injection of public funds last year in order to prevent a total collapse of the financial system. However, taxpayers are rightly angry that public money had to be used this way.

We can’t change the past or create an entirely risk-free system but what we can do is try to learn the lessons of the crisis and create a system which minimises the risk of bank failure and spill over effects to the rest of the financial system and real economy in the future.

We are privileged start our inquiry by this month taking evidence from some of the country’s most high profile and respected economists: John Kay, Roger Bootle and Charles Goodhart. Bank of England governor Mervyn King, who has already been an outspoken advocate of the dangers of having a system where banks are too important to fail, will also be testifying, as will FSA chairman Lord Turner, who has also been a leading voice in the debate.

Whilst the governor appears to be attracted by the idea of splitting retail from investment banking, Lord Turner has posited a different view, arguing in favour of higher capital requirements for those banks undertaking so-called ‘casino’ activities. We look forward to probing the reasons for their divergent views. We must also not forget that this debate is taking place at an international level, and so we will also be gathering the opinions of policy makers and the banking community beyond the UK.

It is understandable that in the run-up to the general election, attention may be diverted from the events of the past two years. However, the stakes are simply too high for politicians on both sides of the House to retreat to electioneering, whilst neglecting the big questions about the future of our financial system.

As chairman, I fully intend to lead the whole Treasury committee full-steam ahead on this inquiry. Getting the design of the financial system right will be key to ensuring that in the future our economy is resilient to the type of shocks which will sadly inevitably hit it from time to time. It is, after all, only on the basis of a stable and well-functioning banking system that we can ensure a growing economy, which means prosperity and security for all – not just bankers.

Ultimately what motivates me is ensuring that the banking system serves the wider economy’s needs, and that is why I attach such importance to this inquiry.