City of London

Indeed, that is true. The tax benefit from the City is not all one way; we can summarise the position like that. There is a big employment impact from the City and it is not just in the City of London. The financial services sector is an important employer throughout the United Kingdom, although many of the very high-value wholesale jobs are concentrated in the City of London. I generalise, but there are more retail banking jobs in the rest of the country. Some academics have argued that our economy has become imbalanced: Baumol, for example, argues that there is only a certain number of natural entrepreneurs in an economy, and if the economic rent is greater than the value in a particular sector of the economy, it sucks in so much of the entrepreneurial talent that there are fewer entrepreneurs in other sectors of the economy. That may have happened in the City in recent years. Finally, the authors of the Manchester report question whether some banking activities are what they characterise as a "great transaction machine". They do not say that there has been too much lending, but that there has been the wrong sort of lending—not a bubble economy, but certain bubble sectors, with about 40 per cent. of bank lending on property and more than a quarter on financial intermediaries. What they characterise as productive business investment has stayed much the same throughout the period, at about 10 per cent. of GDP. They calculate that the amount of bank lending that goes to productive business investment has declined from 30 to 10 per cent. They would say that the very highly paid employees in many of the integrated banks have had a common interest with some of the shareholders in the banks in having as many transactions, often obscure transactions, in derivatives as possible. The banks have certainly produced a lot of our profits. At one stage, about a third of all profits of the FTSE 100 were produced by banks. Again, however, that has not been stable and there has been a cost for many of my constituents who have faced the downturn. When in doubt, a politician should produce a 10-point plan, so I shall rattle through 10 suggestions that have been made for reform of the City, concentrating on some more than others. The first, which is very much the Government-sponsored idea, is to increase capital requirements in the banking sector. That is good as far as it goes, but we have to reflect on the fact that, just before many of the banks were brought in to see the Government, they were saying that they were meeting all the capital requirements at the time. As we saw in the various television programmes over the summer, bemused bankers were brought in to meet the Chancellor of the Exchequer, assuring him that they did meet the capital requirements. Of course it is easy to get round capital requirements, as various observers have pointed out. One danger is that banks may take on even more risk to sustain high returns on equity. Another is that banks will find a way round higher capital requirements via off-balance-sheet vehicles and exploitation of derivatives strategies and so on. That is a risk. Moving on to my second suggestion, a variety of people have commented that banks are now too big to fail. Given that they are essentially backed by a state guarantee and that things such as the Glass-Steagall Act in the United States have long since been abandoned, a number of people have advocated a return to simpler banking—narrow banking, as some academics refer to it. John Kay, a distinguished economist who taught me economics many years ago, is a strong advocate of narrow banking—of separating casino banking, if I can characterise it like that, and utility banking. He says, for example, that we should have a system in which a Lehman Brothers should be allowed to fail. A bank should not be so interconnected with the rest of the banking system and counterparties and so on that the consequences of its failing are so disastrous for the rest of the economy.