Vince Cable: MPs are paying for their mistakes, now our bankers must do the same

Yesterday, I set out our plan for the banking sector and where I, as Chancellor of the Exchequer, would go from here.

Evidence from the Bank of England and the Institute of Directors shows that banks are not lending to good, solvent British small and medium-sized companies and that there has been a sharp rise in the cost of lending. Banks have lurched from recklessness to extreme conservatism and, as a result, business is being starved of capital.

What is needed is a fresh mandate for the nationalised and semi-nationalised banks which are failing to fulfil their legally binding lending obligations at present. This would be my day one, hour one objective as Chancellor. I would insist that the banks support the economic recovery by ensuring that viable businesses are not starved of capital. The lending agreements have to be more concrete, long- term and better policed. Put simply: RBS and Lloyds are key to supporting the British economy.

Then there is the issue of banks that are too big to fail. Mervyn King, the Governor of the Bank of England, has repeatedly warned that banks that are too big to fail are too big. The Liberal Democrats are committed to splitting up the banks. But we have an open mind on the mechanisms involved. For existing publicly owned institutions, RBS especially and Lloyds, they should be broken up before they are

returned to private ownership.

Breaking up the existing big banks removes large-scale systemic risk; banks become small enough to fail; and more competition is restored. One version of this argument is that investment banks should be split off from what is called "utility" banking: a modern version of Glass-Steagall.

President Obama is pressing ahead in the US. It is time to do the same here in the UK. The priority must and should be to make the UK safe. And if necessary, that means proceeding unilaterally. The essential point is that, within a realistic time frame, the British taxpayer has to be totally disengaged from the risks involved in global investment banking. Until the process of breaking up the banks is complete, the Liberal Democrats believe that banks should pay an insurance premium – in the form of a 10 per cent levy on profits for registered banks in the UK (excluding mutuals).

This week we will be hearing more on bonuses as RBS and Lloyds post their profits and formally announce details of their remuneration packages.

Just as politicians were very slow to grasp the public reaction to duck islands, moats and house "flipping", the financial community has been extraordinarily obtuse in failing to appreciate why the public is so angry about bankers' bonuses. Many seem to have forgotten that they were bailed out by the taxpayer and would be without a job were it not for the outlay of this public money.

The basic point is that there should be no cash bonuses. If there are bonuses – and we should work towards an environment where there is less of a bonus culture – they should be paid in shares redeemable after several years so as to avoid reckless risk taking.

The Liberal Democrats believe that the FSA should make publicly

available the outcome of assessments made of banks' remuneration policies.

Increasing capital requirements could be one tool to enforce this but a fine would send a more powerful message and would provide greater transparency. It should start with the big institutions, which incubate systemic risk, not the small fry.

It is impossible to see how large bonuses can be justified for senior executives in the public sector banks, when their banks are losing money, depend on the taxpayer and are failing to meet their legally binding lending agreements.

We should follow the Swedish example and attempt to eliminate them altogether. All highly paid staff in regulated institutions with a compensation package in excess of the Prime Minister's 200,000 should also publish details of their remuneration. They would also have to declare whether they are normally resident and domiciled in the UK for tax purposes.

The financial services industry is an important feature of the UK economy. The City is at the heart of it. But the financial crisis must make us look critically at its contribution. There are considerable benefits, but, as we have now discovered, major systemic risks which can spill over into the rest of the economy.

It is the job of policy-makers, and specifically regulation, to cut the risks relative to the benefits. And the Liberal Democrats are committed to doing so.

Dr Vince Cable, who was born in York, is the Treasury spokesman for the Liberal Democrats.