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Banking in Scotland

My hon. Friend raises two interesting points. On his second point, a number of banks have raised the point about whether the capital requirements restrict their lending. The agreement reached last month on Basel 3 requires banks to raise their core tier 1 capital to 7%. UK banks are already well placed to achieve that, so that is less of a constraint. They have been given until 2018 to achieve that level, which will enable them to phase in the increased capital requirement, so I do not think that that necessarily acts as a disincentive to lend. The other side of the argument relates to the risk attached to lending to SMEs, which is an issue that banks have raised with me. The Bank of England's financial stability report stated that there is scope for banks both to build capital and to continue lending to the real economy, so that is less of a concern than my hon. Friend suggests. However, he made the valid point that a number of foreign banks have exited the market, creating a gap that several UK banks have sought to fill, and we should not overlook that fact in any debate on banking. It is important that we have the necessary information available to be able to hold banks to account on lending across all parts of the UK. I know that the Scottish Government, in the absence of that information, commissioned a review of lending in February 2010. When we start to look at the regional data, we will be helped by the fact that the banks will want to engage in an outreach programme at a regional level, through chambers of commerce, to start to discuss what is happening in the sector on a regional basis. It is not only about what is going on in London and in the headquarters; it is also about engaging in the regions. That is an important part of the process. Much more data on mortgage lending are available through the Council of Mortgage Lenders, which publishes regional and national data. A positive story on that from Scotland is that mortgages to the value of £1.4 billion were advanced there in the second quarter, compared with £1.1 billion in the first quarter. That increase in Scotland is actually greater than the increase for the rest of the UK as a whole, so clearly we should recognise that there is strength in the Scottish housing market. In addition to the enhanced information requirements that banks are committed to, they have agreed to establish and invest in a new business growth fund, which will build up to £1.5 billion. That will help to address the equity gap and will be aimed at investments in the £2 million to £10 million bracket. All previous Governments have thought about and tried to fill that gap. The banks are going to try to fill it in that practical way, as 3i, or the Industrial and Commercial Finance Corporation, did in the past. We have been absolutely clear that banks need to improve the lending environment for small businesses, and we welcome the taskforce's report as an important first step. It is now important that banks deliver on that. Bonuses were referred to several times in the debate. We need to bring about a cultural change in the sector. The issues on bonuses that were mentioned in the report are at the heart of that. Recent stories of bank bonuses have caused concern, which is understandable given the current environment. The Government are taking action. We have already introduced a permanent bank levy, which will raise £2.5 billion—something the previous Government refused to do—and we will shortly consult on a remuneration disclosure regime that will require the disclosure of detailed pay information from large banking organisations operating in the UK. Performance-related pay is an important part of rewarding valuable contributions, but it must be reward for long-term success that takes into account an appropriate level of risk. It is important not to abolish bonuses, but to ensure that they encourage the right sort of behaviour. The FSA issued a consultation paper on a revised remuneration code of practice in July, laying out detailed principles that will require not only large banks, but a wider range of financial services firms, to establish remuneration policies that are consistent with effective risk management on a proportionate basis. The Government are also exploring with international partners the costs and benefits of a financial activities tax on profits and remuneration. When I talk to banks operating in the UK, they say that the UK regime is tougher than those in place elsewhere in the world. That is a matter of complaint for them, but I think that it is something from which we can take a degree of satisfaction. In conclusion, the UK economy turned a corner in 2010, but the recovery of both our economy and our financial services industry will necessarily be gradual. It is vital that we act now to support a sustained recovery, backed by a resilient financial services industry that serves the needs of consumers and the broader economy. In that recovery, Scotland will continue to be proud of its long history in providing financial services and of the new financial centres that are emerging. It strikes me as entirely appropriate that Scotland, which pioneered the modern-day ATM, should now host the headquarters of one of our new financial services players, Tesco Personal Finance. We are confident that the Government's proposals will restore to Scotland a secure, profitable and sustainable banking sector that will be capable of serving the customers, businesses and economy of Scotland.