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That brings me to the second point that the hon. Gentleman raised, on help for banks. The Governor did not say that the Bank was unable to help Northern Rock because of current legislation. What he was talking about was whether that help could be given in a covert way as opposed to being completely open about it. I am bound to say to the House that this is a real problem. In this countryand perhaps right across the worldwe have been moving towards more
transparency and openness, which is generally a pretty good thing. The difficulty was that, because Northern Rocks trading position had deteriorated so rapidly, it was advised by its own legal advisersfor perfectly understandable reasonsthat it would have to issue a profits warning. It was also coming to the view that, because of its listing requirements, the fact that it was about to get facilities from the Bank of England would probably have to be disclosed. The Governor was also saying that the current legislation might require that disclosure. In addition, he made the point that, if it had been possible to arrange for another bank to come in, part of the takeover code might make that difficult over a weekend. I am looking at all these things, and if we need to change the legislation, we certainly will.
When we were discussing these matters prior to the Banks support being made available, I was pretty sure that it would get leaked, and I was absolutely right. The House will know that the story was broadcast by the BBC the night before the formal announcement was made, which is what led to the difficulties over the next few days. We need to look at that, because it is in the interests of the financial system not only in this country but across the world that, if central banks need to intervene, they should be able to do so in a way that is sensible.
The hon. Gentleman raised a number of other points. The Chairman of the Treasury Committee has written to me asking about the letters that I have received from the Governor and the FSA, and I will respond to my right hon. Friend before I appear before the Select Committee later this month. Yes, we have extended the guarantee, because I believe that it is right to help Northern Rock to have a period in which it can explore the options available to it, with a view to resolving these difficulties.
On arrangements between the Bank, the FSA and the Treasury, ultimately I am responsible to this House for whatever they do; that is part of being Chancellor. I hesitate to agree, however, if the hon. Gentleman is suggesting that we should move towards a situation in which the Bank or the FSA were merged, which would not be the right thing to do, as the institution would become unmanageable. If the question is whether I think that improvements should be made and that we should look further into the arrangements between the Treasury, the Bank and the FSA, of course that is the case. We do need to learn the lessons.
Finally, I am consulting on the protection of consumers. Having had some experience with courts in relation to consultation, I put out some general principles because the law appears to be that, if Ministers consult and then go on to close off or close down some of the options, we have to start all over againand I do not want to get myself into that position.
In conclusion, there are clearly lessons to be learned from what happened with Northern Rock, but as I have said on many occasions over the past few weeks, we benefit from having a strong economy and a generally strong banking sector, which I believe will enable us to get through these difficulties and maintain our reputation as the worlds leading financial centre.
John McFall (West Dunbartonshire) (Lab/Co-op):
I thank the Chancellor for his statement. He knows that the Treasury Committee is looking into the issue and
doing so in a wider context. The point that he raised about covert operations brings into question the concept of the lender of last resort, which is an issue that the Treasury Committee will be looking into. The real issue is how we help to protect depositors. Is the £35,000 figure correct? I would suggest that the key is consumer confidence. If consumers do not have confidence, the figure will be incorrect and it is important that we have the widest consultation on that. Another lesson is that depositors need easy and immediate access to their savings. Given that more than a quarter of global assets are now internationally owned, we need to address these problems in an international context. Will the Chancellor tell us exactly what he intends to do in that particular area?
My right hon. Friend is absolutely right that this matter needs to be addressed internationally as well as here at home. I said in my statement that I thought that a number of steps were necessary internationally. We have to ensure that regulators look not just into the solvency of institutions but into any liquidity problems that they might have. That also means ensuring that current rules as they apply internationally as well as domestically allow regulators and institutions to focus on that.
My right hon. Friend is quite right too about the deposit protection scheme. A number of steps are necessary to reassure people. If a bank fails, it should be possible immediately to remove the depositors money from it and run it separately, and ensure that it can be paid out as quickly as is reasonably possible. I have made it clear that the £35,000 is a first step; that is all that the FSA can do at the moment. I think that we need to go beyond that. That is precisely why I am consulting, because, of course, the scheme is financed by banks and other financial institutions. International action, as well as action to protect depositors, is absolutely essential.
Dr. Vincent Cable (Twickenham) (LD): I thank the Chancellor for making his statement. He could have hidden behind his Tuesday written statement and the pre-Budget report, but he has come before the House now, which is good. I am afraid that that is the only positive thing that I want to say, because this statement reeks of complacency. Frankly, the Government have become complicit in large-scale irresponsible lending by the same managementand it continues even todayin what amounts to little short of a banking scam.
It has already been said that financial turbulence has existed in the financial community internationally throughout history, but this is the first time since the collapse of Overend, Gurney and Co. in 1866 that we have had a run on the system. The Chancellor talked about the business model, so does he agree with the FSA that that model was, in its words, extreme? This was a bank that was doubling its mortgage lending in six months and taking 20 per cent. of the market, on the back not of depositors but of large-scale rapid securitisation into markets, which became discriminating and pulled the plug on it.
The Chancellor said in his Tuesday statement that the bank had very little exposure to the sub-prime
market directly, but is he aware that, indirectly, it was forced to issue a statement on 14 September acknowledging that £600 million of its assets30 per cent. of its shareholders fundswere of questionable provenance? I know that there has been a postal strike, but why was that information not communicated to the Treasury, which seemed to be unaware of it?
Worse, is the Chancellor aware that the same lending practices are continuing today? A member of my Treasury team, Lord Oakeshott, rang the bank yesterday and made inquiries about its mortgage opportunities. As we would expect, he is someone of good credit standing, but the terms that he was offered were quite extraordinary. He was offered 127 per cent. of the value of the house, including the roll-up of the arrangement feefive to six times his incomeand 30 per cent. of the loan was to be unsecured. I do not know whether that is what the Chancellor meant when he talked about a return to old-fashioned lending practices. In the current economic circumstances and given the warnings about house prices from the Royal Institution of Chartered Surveyors, most reasonably cautious bankers would say that that borders on the insane. It is happening because the Government are underwriting the bank. That is precisely what the Governor of the Bank of England warned of when he talked about moral hazard.
Will the Chancellor tell us how much taxpayers money is exposed to this bank? I believe that there is £11 billion in lending and £23 billion in guarantees, so we are talking about a sum of money in one bank that is roughly equivalent to annual spending on the armed forces. When the Chancellor agreed to the effective nationalisation of the liabilities of this bank, why was the managementincluding the chief executive, who has been paid £10 million in five years for taking his bank on to the rocks, and the directors, including the ubiquitous Wanlessnot sacked? I would include the FSA, which has admitted that in 18 months it did nothing to check the bank.
We all understand that once the run had started, the Chancellor had no alternative but to guarantee deposits, as opposed to the institution and the shareholders, and I am sure that that was right, but why is he now extending that guarantee to new depositors? Does that not encourage irresponsible lending and is it not unfair on other banks that are acting responsibly? Is it not even more unfair on pensions institutions, which, as the hon. Member for Wolverhampton, South-West (Rob Marris) reminded us yesterday, do not have such a guarantee?
My concluding point is that this is not just a passing embarrassment. It is potentially a tragedy for the 5,000 or more people in Newcastle whose livelihoods depend on the bank, but it is also a scandal in which substantial numbers of people in the financial community are heavily involved. When the Chancellor has taken the necessary prudential action, will he have a full independent
Mr. Darling: First, the hon. Gentleman suggested that I should have sacked all the directors of the Northern Rock bank, but I do not have the power to go around sacking the directors of any company. The company is owned by its shareholders and the directors are responsible for the running of it. The decisions taken by Northern Rock in respect of its business model and its lendingwhether generally or to the noble Lord Oakeshott in particularare a matter for the bank and not for any Minister. The hon. Gentleman seems to be confused about that. The bank belongs to its shareholders and is run by the directors. If the directors are to be changed, it is a matter for the shareholders.
The FSA is responsible for the regulation of Northern Rock. The chairman of the FSA, Sir Callum McCarthy, said before the Select Committee earlier this week that it clearly has lessons to learn about the supervision of not just this bank but others. The hon. Gentleman seemed to suggest that Northern Rocks problems were because of the sub-prime market, but according to the FSA the bank has a good quality loan book. That has been fairly well established over the last few years.
I was not clear whether the hon. Gentleman was for or against the guarantee that was given: he seemed to shift his position two or three times. It was necessary to provide the guarantee for the stability of the financial system as a whole. The present arrangements are also necessary to give the bank time to make whatever adjustment is appropriate and whatever arrangements are appropriate for the future.
Mr. Doug Henderson (Newcastle upon Tyne, North) (Lab): My right hon. Friend will know that Northern Rock employs 4,000 people at its headquarters in my constituency. Contrary to the attitude and tone adopted by the official Opposition, and the lack of support given to Northern Rock and the people who work there by the Liberal Democrats, depositors around the country very much welcomed the action taken by the Government and the Bank of England in September, and again this week, to protect deposits. People who work at Northern Rock in my constituency have made the point to me that the business is viable, and if it is kept together as an entity it will continue to be viable and the jobs of 4,000 people in my constituency and 1,500 people in the constituency of my hon. Friend the Member for Sunderland, South (Mr. Mullin) will be protected. That is the priority. Will my right hon. Friend use his good offices to do what he can, even in an unpredictable situation, to retain that entity?
Mr. Darling: My hon. Friend makes a good point. The Northern Rock bank is of great importance to his constituents and to the north-east of England. It enjoys a good reputation and employs more than 6,000 people nationally. I very much hope that a solution can be found in the next few weeks and months that will enable the bank to continue. Ultimately, that will be a matter for the bank, but I very much recognise the point that my hon. Friend makes and the importance of the Northern Rock bank to Newcastle in particular.
Mr. Peter Atkinson (Hexham) (Con):
The Chancellor will accept, however, that there is widespread concern and anger in the north-east at the way in which the
affair was handled. In particular, what provoked the Bank of England to announce that Northern Rock was looking for help? The European Central Bank managed to rescueI thinktwo German banks and a French bank without a similar panic. I am at least grateful that the Chancellor appreciates the importance of the bank to the north-east economy and to many of my constituents, who, like those of the hon. Member for Newcastle upon Tyne, North (Mr. Henderson), want to see the bank rise again. As the Chancellor said, the order book is strong. We will note the complete lack of support from the Liberal Democrat spokesman for the bank and the people who work in it in the north-east.
Mr. Darling: As I said in reply to the shadow Chancellor, the difficulty with the announcement that the Northern Rock bank would get specific help from the Bank of England was that, as I always suspected, somebody told the BBC about it. In the light of that, the information could not have been kept private. That is a problem not just in this country but across the world. We want to be as open and transparent as possible, but there will be circumstances in which support may be necessary for one or a group of institutions, and if someone chooses to go and tell the BBC or another outlet about it, the whole thing becomes public. That is the reason why the decision was ultimately taken to make an announcement. Unfortunately, just a few hours before that announcement was made, a highly damaging story appeared on the BBC that caused huge problems for the Northern Rock bank. That is a problem, and we will have to consider how to resolve such problems in future. I agree with the hon. Gentleman, who represents a constituency just outside Newcastle and will know the importance of the bank to the north-east. The more that we can do collectively to help the situation, and not make sometimes irresponsible statements, the better.
Mr. David Clelland (Tyne Bridge) (Lab): As a long-standing customer of Northern RockI suppose that I should declare an interest in the usual way in that regardI assure my right hon. Friend that savers are very grateful to the Government for the support afforded at a difficult time. Our concern, however, has now turned to the future. What can the Government do to help to ensure the continuation of Northern Rock as an independent north-east based company? Will he take on board the comments of my hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson) and assure the House that the Government will help to protect the security of employment of thousands of Northern Rock staff in the north-east, and to protect the Northern Rock Foundation, which supports arts and culture, young people, children in need and other disadvantaged groups across our region?
On that last point, as my hon. Friend knows, the Northern Rock Foundation has given grants of more than £28 million, and that is one of the reasons why the Northern Rock bank has much popular support in the north-east, along with the fact that it is a major source of good-quality employment. The most significant thing that the Government can do
is to continue to provide the support that we have offered to Northern Rock, and to give it time to consider its strategic options. We stand ready to do whatever is appropriate as and when the bank decides what the best option is.
Mr. Michael Fallon (Sevenoaks) (Con): Which of the two regulators has primary responsibility for ensuring that banks are sufficiently liquid as well as solvent? Why did Ministers choose to implement the EU market abuse directive in such a way as to take out the exemption of situations of grave and imminent danger, thus making a rescue more difficult?
Mr. Darling: On that latter point, as I said a few moments ago, the EU directive was not the stumbling block. We looked at many considerations. As I said in reply to the shadow Chancellor, given that the bank was going to have to issue a profits warning, that it had to have regard to the listing requirements and the impact of getting facilities from the Bank of England, and that the news would almost certainly get leaked, which turned out to be the case, we believed that it was better to make an announcement than not to do so. If we need to look at the current law, we will do that. In relation to the hon. Gentlemans first point, the primary responsibility for supervision of individual institutions lies with the Financial Services Authority.
Mr. Chris Mullin (Sunderland, South) (Lab): May I underline the points made by my hon. Friends the Members for Newcastle upon Tyne, North (Mr. Henderson) and for Tyne Bridge (Mr. Clelland)? Despite all that has happened, Northern Rock is a respected institution, and remains so, in the north-east. It also employs a large number of my constituents. No one wants to see it taken over by some predator and asset-stripped. Will my right hon. Friend do all in his power to prevent that from happening?
Mr. Darling: I know that my hon. Friend also represents a constituency where many people work for Northern Rock. As I said, I am happy, on the part of the Government, to do everything that we can to bring about a satisfactory conclusion to this matter. Obviously, it is for the company to decide what the best option is. If the Government can help in an appropriate way, I will certainly consider any proposal put to us.
Sir Peter Tapsell (Louth and Horncastle) (Con): Does the Chancellor deny that ultimate responsibility for the crisis in Northern Rock, which has done such worldwide damage to the reputation of British banking, lies with our present Prime Minister for removing banking supervision from the lender of last resort? May I put it to the Chancellor that no amount of tinkering about improved liaison between the Financial Services Authoritywhich has never commanded much confidence in the Cityand the Bank of England will overcome that fundamental problem? That was one of the reasons why the then Governor, Lord Eddie George, nearly resigned when that new scheme was imposed on him by the present Prime Minister.
Perhaps I can remind the hon. Gentleman that even in the old days to which he refers the Bank of England was responsible for the prudential
supervision of banks but not for the supervision of many of the activities in which banks were involved, such as the sale of insurance. I also remind him that 10 years ago, no fewer than seven different regulators operated in the market: the Bank of England; the Securities and Investment Board; the Building Societies Commission; the Register of Friendly Societies; the insurance division of the Department of Trade and Industry; and three self-regulating organisationsthe Investment Management Regulatory Organisation, the Securities and Futures Authority and the Personal Investment Authority. No one wants to go back to those days, when seven organisations were sometimes responsible for the same institution. That makes no sense at all. Having the central bank responsible for the stability of financial markets, and one organisation responsible for the supervision of institutions, is the right way to go, and most countries are moving towards that model, not towards the regime that was around many years ago, which would not work in todays markets.
Mrs. Sharon Hodgson (Gateshead, East and Washington, West) (Lab): As a former employee of Northern Rock, a former shareholder and someone who still has an account with Northern Rock, I join my hon. Friends from the north-east in giving personal testimony both to Northern Rocks status as a great employer and to the fondness for it that lies in the hearts of all north-eastern people. Everyone in my constituency, and in the north-east more widely, will know someone who works for Northern Rock, has a mortgage with it or holds an account with it. As has already been said, it is vital for us to give it all the help we can to resist any hostile takeover, and to continue as a north-east based bank.
As my hon. Friend the Member for Tyne Bridge (Mr. Clelland) pointed out, the Northern Rock Foundation is one of the major charitable givers in the north-east. Will my right hon. Friend commend the campaign by The Journal, which has done a great deal to highlight the need for the company to remain based in the north-east?
Mr. Darling: I know that the Newcastle Journal has been running a campaign, and that is not surprising because the Northern Rock bank is of great importance not just to Newcastle but to the north-east.
As I said earlier, the Government are providing support through the guarantee for Northern Rock, which will allow it time to decide which strategic option is best for it. However, as I have said many times this afternoon, at the end of the day it is for the banks directors to make that decision. It is their bank, and they must decide what is best. If we can help and it is appropriate for us to help we will do so, but ultimately the banks directors are responsible for all the decisions that they have made in the past and for any that they may make in the future.
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