At its Liverpool conference last weekend, in the light of the nationalisation of Northern Rock, passed a motion proposing reforms to combine genuine competitiveness in the banking sector with protection for depositors. It is also timely in view of the shakeout in world stock markets this week, triggered by the credit crunch in the United States.
Summing up in support of the motion, Liberal Democrat Shadow Chancellor Vince Cable said the Government needed to decide whether to treat banks like a utility - tightly regulated but protected - or like a private company - which meant banks would need to operate in a genuinely competitive environment where there was the opportunity for new entrants to enter the market and for existing ones to go out of business.
To provide protection for savers in a competitive banking sector, the party is proposing to introduce a new Deposit Protection Scheme paid for by banks - as has proved successful in the United States - to provide 100% cover for personal deposits of up to £50,000. Depositors would have immediate access in the event of a bank failure. Effectively it would operate as a collective insurance scheme paid for by banks.
The full text of the emergency motion is -
Conference notes the nationalisation of Northern Rock on 18 February 2008.
a) Recognises that confidence in the British banking system has been severely dented by:
i) Imprudent levels of bank lending in relation to both consumer credit and mortgage finance.
ii) The use of unsustainable business practices by some banks, which have achieved rapid growth in consumer lending based on commercial borrowing rather than deposits.
iii) The imposition of unreasonably high penalty charges for customers.
b) Notes the failure of bank regulation and supervision which led to the first run on a UK retail bank for over a century, and the Government’s use of taxpayer funds to bail out Northern Rock which are yet to be repaid.
c) Believes that the long period of time taken by the Government to nationalise Northern Rock after it became clear that no suitable private bidder was willing to buy Northern Rock and repay taxpayer loans in a timely fashion has caused considerable damage to the UK’s banking reputation.
Conference therefore calls on the Government to:
1. Ensure that all taxpayer loans to Northern Rock are repaid as quickly as is reasonably possible.
2. Introduce a new regulatory regime to address the inadequacies of the current tripartite arrangements on the Treasury, Bank of England and FSA and strengthen the supervision of UK banks with particular regard to liquidity adequacy, systemic risk and robust stress-testing of business models.
3. Confirm the Bank of England’s independence of market supervision, but revise present arrangements concerning their ‘lender of last resort’ responsibilities; in particular ensuring that any bank which receives credit from the Bank of England in its capacity as the lender of last resort does so on condition that if necessary the Bank of England can take management control.
4. Introduce a new Deposit Protection Scheme paid for by banks - as has proved successful in the United States - to provide 100% cover for personal deposits of up to £50,000 and if necessary allow immediate access for depositors in the event of a bank failure and to make the scheme widely known.
5. To ensure that there is greater banking stability, using capital requirements as a tool to reflect the state of the economic cycle and therefore deter prevent large fluctuations in lending particularly in the housing market.