King condemns banks' treatment of customers

The Governor of the Bank of England, Mervyn King, has described as "heart breaking" the way some banks are treating business clients who had been customers for many decades.

Mr King revealed his frustration with the way the banks were failing to support the real economy as he told MPs on the Treasury Select Committee: "I meet many people who run small and medium-sized enterprises and the thing that really makes them angry is that, having built up a business often over several generations and had the same banking relationship for 60, 80 years, then suddenly comes a letter churned out of a computer saying the terms of our relationship have changed and I have seen many of these."

"It is heart-breaking sometimes. It is a lot harder to build a business than it is to sit in London and trade away."

The Governor added that existing lending agreements between the Government and banks were "not effective" because they set targets for gross lending, whereas "what matters is net lending". While he did not think the banks were deliberately trying to be difficult, and some suffered from weak balance sheets, "I do think we should try to encourage new entrants because they won't have the same legacy of balance sheet difficulties, there is... plenty of scope for long-term reforms".

Mr King raised the question, for the Government, of "what is the role of the state-owned banks?" The Chancellor, George Osborne, and the Business Secretary, Vince Cable, launched a Green Paper earlier his week on lending. Mr Cable urged banks to limit bonus and dividend payments to "pre-crisis and 2009 levels respectively".

The Governor called again on the banks to help repair their balance sheets by retaining their earnings and not distributing them through higher dividends or excessive remuneration, rather than cutting back on their lending. He said bankers' claims that there was no demand for credit was "not an adequate response". He called again on the Government to encourage new competition so that hard-pressed firms might have somewhere else to turn. "If there are impediments in the current regulatory we should do our best to try to work through that," he said. As if on cue, one tiny new entrant, Metro Bank, opened for business in west London yesterday.

Dampening expectations that the recovery was yet well established, Mr King downplayed the significance of last week's announcement that economic expansion in the second quarter ran to 1.1 per cent.

"On the face of it, that's encouraging. But we must be careful not to read too much into one number," Mr King said. "The wider economic problems around the world underline the fact that we can't be confident that the recovery in demand, output and employment here in the UK will be sustained."

However, the Governor indicated that sluggish growth would be accompanied by inflation that will remain above the 2 per cent official target for another year and a half or so. "Given the changes to VAT announced in the Budget, it's likely that inflation will remain above target for much of next year." The deputy governor for Monetary Policy, Charles Bean, added: "Inflation has surprised us on the upside fairly consistently in the recent past. Some of that is because there have been unexpected events like oil prices that are substantially higher now than they were two years ago, but there are other aspects where basically our initial judgement about the inflation process turned out to be incorrect. In particular, it looks as if the effect of the depreciation of sterling has been rather larger and faster than we were expecting."

The Treasury Committee also took evidence on so-called "macro prudential regulation", which aims to restrict the sort of explosion of credit that contributed to the recent financial crash when it starts in 2012.

The new Financial Policy Committee, proposed in a recent consultative paper, would oversee the policy and be chaired by Mr King, but, in answer to questions from the Committee, Mr King said that the Chancellor is "in charge" in all decisions involving public funds. Mr King agreed that a more powerful Bank would have to be accountable to Parliament, the Government and public.

More power to MPs?

Andrew Tyrie, chairman of the Treasury Select Committee, told The Independent yesterday that he wanted Commons select committees to win the sorts of powers enjoyed by their US peers, which will lead to speculation that he would like the committee to have a veto over the appointment of the Governor of the Bank of England.

Mr Tyrie said: "We do have something to learn from the Congressional Committees who have taken over the primary role of scrutiny in the US and have the power to call for papers, to subpoena witnesses and enjoy far greater resources." Mr Tyrie also welcomed Mervyn King's call for more competition in banking.

Mr Tyrie defended the chairman of the Office for Budget Responsibility, Sir Alan Budd, as a figure of "complete integrity. It was no doubt his sense of public duty that persuaded him to come back and produce the forecasts for the first Budget of the coalition Government."