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8.45 pm

The second major failure was that of Bank of Credit and Commerce International and on that subject I can do no more than quote carefully the words of the former Chancellor, now Lord Lawson, who said in his memoirs:


He goes on to explain that, even where the problem in the system originates elsewhere, fraud is often the means by which it is concealed and therefore it grows to be a much bigger problem when it finally hits the news.

My colleagues and I are deeply concerned that, in the construction of part III and the later clauses to which the amendments relate, little is explained or put into effect in relation to how the new regime proposes to attack fraud. There is a great deal to be said for the new super-SIB, in its operations in the London market, being given the power to root out fraud wherever it suspects it may exist.

I would very much welcome the considered comments of the Economic Secretary and her assurance that, having studied the matter carefully, she is completely confident that sufficient powers would exist as a result of the enactment of the Bill to deal with any possibility of fraud in the banking system in London.

The Barings crisis is the third factor that comes across from the lessons of recent years. The collapse of Barings was partly the result of fraud--the result of a dealer in another centre opening up what he called his, "Six, six, double six account", which involved fraud. Above all, the Barings collapse came about through a lack of understanding, first, on the part of the directors of the bank, but also by those who supervised them. It was either a market risk that led Barings to pay out hundreds of millions of pounds from London to its operation in Singapore--a risk on a scale that it should have known was way beyond its legal powers or what the Banking Act enabled it to do--or the money sent to Singapore must have constituted a credit risk. Again, it was a risk on a scale that it was not empowered to take under the terms of its banking licence. The directors of Barings should have understood that, and so should the supervisors of Barings at the Bank of England.

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That brings us to one of the most important points. Whatever supervision system is constructed under the Bill, it must employ people who understand how the system works. Having such people costs money, but it is important for the Government to ensure that, under the new regime, the money is spent on having the right people, but so efficiently that the burden on banks in London is not excessive.

Many of the burdens would result from demanding information. What matters is not the cost of the people at the centre of the new investment board, but the costs imposed on the banks in terms of the amount, the precision, the regularity and the detail of the information that they are required to submit. It is far more important that the key figures are given accurately and regularly to the Bank of England than that the minutiae of the operations of each bank in London are demanded of them. In Committee, the Economic Secretary was very helpful. She made some important statements about how the Government intend to bear down on the costs of banks in London.

Although he was too modest to press the point, in amendment No. 24, my hon. Friend the Member for Sevenoaks (Mr. Fallon) took care to quote the Economic Secretary's exact words. Through the amendment, we are simply asking her to put her money where her mouth is, because it says exactly what she said at column 298 of the Hansard of our Committee proceedings. I would be curious to know why she should have any reluctance to accept that amendment.

Unfortunately, proportionality alone is not enough. Smaller banks in London have a vital role to play. They may often be the motors of innovation and new products. This is where the idea of proportionality comes unstuck. Mr. Howard Davies, who is to be the head of the super-SIB, explained to a Back-Bench meeting at the House before Christmas that one way in which it is proposed that the burdens of regulation will be limited is that banks are to be allowed to take some risks with a modest proportion--about 5 per cent., I believe--of their capital.

The difficulty is that small but sound institutions in London would need to use more than 5 per cent. of their capital to launch a new product and make it succeed. They would have to go over all the expensive regulatory hurdles that the new framework threatens to impose, at a time when no one knows whether the new products, services or markets are worth that investment of time and money; if, indeed, such a small institution could afford it.

I hope that the Government will show that they accept that, while no system of regulation can be perfect, in a sound regulatory system the good will drive out the bad. London is an excellent financial centre for a bank to establish itself in, but it is by no means the cheapest or the easiest. Indeed, it is an extremely competitive marketplace.

For a bank to survive in London it must have a profitable operation and a first-rate reputation. If either factor fails, the bank's borrowing costs will go up, its ability to do business will shrink, and the pressure of its overheads will oblige it to withdraw gracefully from the scene.

It is the job of other banks to know which are the safe and the less safe banks. That is the market intelligence that drives the strength, security and reputation of the

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London market as a whole. No regulatory system, however expensive, can do better than that market system and that market intelligence. The Government should have no hesitation in accepting some constraints--that is all that the amendments would impose--on the charges that may be imposed on banks, which by and large will rely on their own market intelligence to ensure that they do not lend to other banks in London at an unacceptable risk.

Mr. Tim Loughton (East Worthing and Shoreham): Does my hon. Friend agree that the risk to banks operating in London will be heightened by what is happening on the continent? It is generally recognised that London is one of the more costly places in which to operate, because of the regulatory costs placed on the many hundreds of foreign banks in the City. At a time when the financial system on the continent is being liberalised, it would be easier and, indeed, cheaper for many of those banks to up sticks and move to the continent, especially in the context of a single currency, if that ever comes about. By not being more liberal on charges on banks in London, the Government can only encourage that movement.

Mr. St. Aubyn: That is a concern which we must all share. It is immensely encouraging that so many international banks, especially German banks, are concentrating operations in London. They might have been expected, in the build-up to the creation of the euro and a Euro-central bank in Frankfurt, to want to move there. Far from it: they have been scaling down operations in Frankfurt and coming to London because, as the global world of financial services becomes ever more competitive, economies of scale must be achieved.

Provided we have control over the costs of supervision, the natural advantage that London has built up in this vital part of our economy will ensure that those banks remain here. It would not take a great deal to drive them out to another centre. Because of the lack of consultation before part III was unveiled to the world last May, banks in London are concerned that there may be more surprises in store once the Bill is enacted and some of the other instincts that we have seen betrayed under the skin of new Labour come to the surface.

Either the amendments should be accepted or we should get some cast-iron assurances, perhaps from the Chancellor himself--I am delighted to see him here tonight--about the costs that will be inflicted on banks in London.

There is another risk, which I thought that my hon. Friend the Member for East Worthing and Shoreham (Mr. Loughton) might be about to allude to: the risk in transition. It is well known that, when the supervision of savings and loan institutions in the United States moved merely hundreds of miles, I believe, the disruption caused to staff and to the information-gathering process was identified by many who later studied the problem as a key cause of the institutions' immensely expensive collapse. Unless we have strict control over the administration costs of the new supervisory body, there is a real additional risk that the transition costs will be extremely high for banks in London.

My hon. Friend the Member for East Worthing and Shoreham mentioned banks on the continent and I have mentioned those in the United States. It is striking, and a

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point worth making, that, although there were regulatory or banking failures in the London market under the old system from which we are moving away, they cost the British taxpayer scarcely a penny. In contrast, the collapse of Credit Lyonnais in France cost taxpayers there the equivalent of billions of pounds. Indeed, the scale of collapse of savings and loans institutions in the United States was measured in hundreds of billions of dollars.

It is an extraordinary achievement in a fast-changing world that, whatever deficiencies or mistakes may have been made in the Bank of England's supervision under the old regime, the cost to the British taxpayer was virtually nothing. It is incumbent on the Economic Secretary to the Treasury to assure us that she does not envisage any circumstances under which the taxpayer might be forced to make up for mistakes in any market upset under the new regime, in which she and her colleagues are taking a much more pivotal role.

When we discussed such regulatory matters in Committee, the Economic Secretary suddenly launched into a discussion about pensions. We are dealing primarily with wholesale markets. I look forward to debating with her the Conservative party's record in government on pensions at an appropriate time, but she should resist the temptation to do so on this occasion. We have a proud record of building up pensions provision in this country. I hope that she will--


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