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Mr. Alan Beith (Berwick-upon-Tweed) (LD):
It is clear to me that there were failures on the part of the regulatory bodies and also on the part of the directors of Northern Rock, who should have been questioning
the extent to which their bank had become dependent on short-term lending, far out of line with all other banks.
Does the Chancellor recognisehe has already indicated in part that he doesthat the bank as an institution is hugely important in the region, and that the Northern Rock Foundation, with its 5 per cent. share of the banks pre-tax profits, is also hugely important throughout the north-east? Whatever emergeswhether the institution is reformed or others participate in it to give it a futureit will be necessary to recognise the social responsibility that has been shown by Northern Rock as a company, and the need to support the work done by the Northern Rock Foundation in future.
Mr. George Mudie (Leeds, East) (Lab): I agree with the shadow Chancellors analysis: a lack of liquidity was central to the problem. We need to know from the Chancellor whether he has had a satisfactory explanationperhaps even an apologyfrom the Bank of England for its bizarre initial decision not to follow the lead of the Fed and the European Central Bank in putting that liquidity into the system. That decision was reiterated a week before the event, and in full knowledge of the Northern Rock position, in a three-page letter which was made public and sent to the Treasury Select Committee, and was reversed after the Northern Rock fiasco. A good, sound bank was brought down by strange decisions, and I think that the House should know whether the Chancellor has spoken to the Governor and received an adequate explanation.
Mr. Darling: As the House would expect, I have had many conversations with the Governor, as well as with the chairman of the FSA. As I said in my statement, the Bank of England did make funds available to the market, but Northern Rocks position was such that even with the money in the system, it was clear that it was experiencing more and more difficulties. As I said in reply to the shadow Chancellor, the market quickly became aware that Northern Rock had a problem which meant that it was finding it difficult to obtain funds, and the price of the funds that it did obtain was rising. That is one of the factors that eventually made it clear that only specific help for Northern Rock would be appropriate.
Philip Davies (Shipley) (Con): Can the Chancellor explain what he and the Bank of England are doing to ensure that the turmoil we have seen in the credit markets and in Northern Rock does not reduce competition in the mortgage market, and to ensure that any advantage does not fall into the hands of big United Kingdom and overseas banks?
I agree that it is important for us to have a competitive mortgage market, and we have such a market. There are many different mortgage providers. But I do not think it would be right for the Government to decide whether a particular company
should or should not be taken over. We have a Competition Commission to examine such matters, and if it considers that anything is happening that is anti-competitive or would affect the mortgage market as a whole it has the power to intervene.
Ms Sally Keeble (Northampton, North) (Lab): I welcome what my right hon. Friend said about changes in the regime for the credit-rating agencies and the liquidity rules. Will he tell us what he will do to ensure that discussions are speeded up internationally so that we see improvements here, and will he assure us that the United Kingdom, as the leader in financial services, will also take the lead in ensuring that those improvements are implemented?
Mr. Darling: My hon. Friend has made some very good points, especially about credit-rating agencies. I agree that international action is needed to ensure that reforms are implemented. It should also be borne in mind that information from a credit-rating agency is just one piece of advice on which directors draw. Ultimately, the directors of an institution must form their own judgment on whether the lending into which they are entering is sound, orif they are buying pieces of commercial paperwhether they know what lies behind them.
My hon. Friend is right about another aspect of international action. I said that I hoped to be in Washington next week at the meeting of the International Monetary Fund. I think that the events that originated in America and have now spread across the world must serve as a wake-up call alerting those who have talked of the need for changes in relation to liquidity, in particular, to the necessity to do something about it. I am ready to show a lead in this country, and I will do all that I can to persuade my fellow Treasury Ministers to take action as well.
Mr. Mark Field (Cities of London and Westminster) (Con): I broadly agree with the Chancellors observations about transparency, but in lamenting the lack of flexibility, does he not recognise thatas my hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell) rightly pointed outmuch of the blame must lie with the Government, who changed the regime in 1997? With hindsight, would the Chancellor prefer Northern Rock to have been taken over by another bank? Would that have been preferable to the rather unseemly and hasty reaction that we saw from him?
Mr. Darling: The decision on whether Northern Rock should merge or be taken over by another institution had to be a decision for the directors. The advantage of the Governments continuing to provide support is that the directors will now have several weeks in which to consider which option is best for them.
I strongly disagree with what the hon. Gentleman said about the regulatory regime as a whole. I am not sure whether he was advocating a return to the pre-1997 position, but as far as I am aware no one outside the House has advocated such a course. As for the boundaries between the FSA and the Bank of England, obviously we will keep that under review; but I think that fundamentally the structure is right, although there are clearly lessons to be learned from what has happened over the last few weeks.
Mr. Deputy Speaker: Order. Mr. Speaker has a rule that Members who wish to put a supplementary question to a Minister who has made a statement should be present at the start of the statement. I understand that one or two Members have powerful constituency reasons for wishing to ask a supplementary question, but I will place them at the end of the queue, and give priority to those who have been here from the beginning.
Mr. John Redwood (Wokingham) (Con): Given that this was a monetary policy crisis made in Downing street and Threadneedle street, why was no action taken in early September, when many of us were warning that the credit crunch was too severe? If the Monetary Policy Committee is to be anything more than a highly paid monthly debating competition, its rates must be enforced by the vigorous use of open-market techniques by the Bank of England. Unlike other banks, the Bank of England failed to take such action, thus needlessly putting not just Northern Rock but several other financial institutions at risk. Why did the Chancellor not intervene earlier?
no need to continue to regulate the provision of finance, as it is the lending institutions ... taking the risk.
Paul Farrelly (Newcastle-under-Lyme) (Lab): I am afraid to have to admit that I have worked in the banking sector in the City, and I was the City editor of a national newspaper. I am too young to have witnessed at first hand the secondary banking crisis of the early 1970s, unlike the hon. Member for Louth and Horncastle (Sir Peter Tapsell), but I have seen a few rollercoasters in the past 25 years, when stock markets and the banking sector have all too easily forgotten the painful lessons of history. We must remember that Northern Rock did not go bust, unlike Johnson Matthey Bankers and Barings under a previous political and supervisory regime. Also, Northern Rock depositors were protected. Regrettable though those queues outside Northern Rock were, does the Chancellor agree that, as long as lessons are learned by all involved, short, sharp shocks to the banking sector in general are not necessarily a bad thing to warn against unwise lending practices and against forgetting those lessons of the past?
Mr. Darling: It is important that banks and other lending institutions, when they are lending money, satisfy themselves that whoever they lend money to can repay it and that, if they are lending it against security, the security is sufficient to allow the loan to be repaid if necessary. People should also remember that the financial institutions and the financial services industry in this country are generally pretty strong, which is why we have a very good international reputation. I am determined to keep it that way.
Mr. William Cash (Stone) (Con): The Chancellor will know that, under the memorandum of understanding, the principles are unambiguous accountabilitythe public must know who is responsible for whattransparency and avoidance of duplication. Given that the arrangements provide only for partial independence for the Bank of England, can he explain, in the context of the market abuse directivethe MAD directive as it is called, aptlyand other directives how he is able to discharge his responsibility for the overall functions when he has to look over his shoulder the whole time at what is being decided, potentially, by the European Court of Justice in relation to European directives that have a direct impact on this matter? How will he resolve that question?
Mr. Darling: I know that the hon. Gentleman tends to blame Europe for just about everything. It is worth bearing in mind the fact that the market abuse directive governs disclosure of inside information. As I said earlier, I do not think that that was the key determinant in this case. However, I am prepared to look at all those matters and if we need to make changes we will certainly do so.
I welcome the statement and the good advance notice of it. I welcome in particular the intention to have more comprehensive protection for depositors, the issues he raised about his intentions for the Financial Stability Forum, the proposed international warning system, and the discussion paper. I also note the review of the rules on swift takeovers of banks, which I am sure will look at issues of transparency and at weekend takeovers, which was a particular issue in this case. However, the review of the takeover rules is outwith the scope of the consultation in relation to the discussion paper. When does he intend that review to start? When does he expect recommendations or proposals to be brought to the House for further discussion?
Mr. Darling: The discussion paper is pretty broad; that certainly would not discourage anyone who wants to make representations on that matter or anything else from doing so. If it is the case that any of the legislation currently in place would prevent action from being taken, of course we will look at it, although I do not think that that was the fundamental problem in relation to what happened with Northern Rock. Otherwise I am grateful to the hon. Gentleman for his support on our broad approach.
Peter Viggers (Gosport) (Con): When the Prime Minister invented the tripartite system of control of banking, informed commentators said that it would be inadequate in a crisis, and so it has proved. The Chancellor has now joined the FSA and the Bank of England in supporting the present regime, but if this is success, what is failure? Is not the fundamental flaw in the system the fact that the FSA is firmly responsible for the supervision of banks and building societies, whereas the levers of financial control are held by the Bank of England?
Mr. Darling: I am not sure whether the hon. Gentleman is suggesting that the two should be merged, but I would have some concerns about that, because it would create an extremely large organisation that dealt with individual supervision, the stability of the financial markets and monetary policy. I am not sure that that is the right approach. I certainly would not want to go back to the regime that we had before 1997. I am not making a party political point; I just think that that regime may have been appropriate in the 80s and 90s but it is not appropriate for the 21st century markets.
We should not lose sight of the following: it was not because of the present supervisory structure that Northern Rock got into trouble. It had a particular business model which left it very exposed in the event that liquidity dried up. It is important that we keep that at the forefront of our minds when deciding what to do. Whatever changes are necessary, it is important to remember what the problem was in the first place and the problem that we are trying to fix.
Mr. Bernard Jenkin (North Essex) (Con): As my hon. Friend the Member for Tatton (Mr. Osborne) said earlier, that business model was endorsed by the Chancellor himself in the spring. There is something structurally unsound about expecting the Bank of England to be responsible for the overall stability of the financial system when it is not responsible for the stability of individual institutions, upon which the stability of the markets overall depends. Is he not failing to learn the central lesson of this crisis, which the Government and the Prime Minister were warned about when the Financial Services and Markets Act 2000 was passing through the House? They were warned that dividing the responsibilities left no one in charge. Who should have taken charge? Will the Chancellor answer that question?
Mr. Darling: On the present division of responsibilities, as I said in reply to the hon. Member for Louth and Horncastle, before 1998 the Bank of England was responsible for the prudential supervision of banks but not all aspects of what banks were actually doing. I do not think that going back to that system would be a good idea. I have said on a number of occasions that there are lessons to be learned and we will look at them, but a return to the old days is not appropriate.
Sir Nicholas Winterton (Macclesfield) (Con): I am conscious of the importance of Northern Rock to the north-eastnot only the employment it offers but the valuable contribution it makes to the community through its foundation. However, may I put to the Chancellor a straightforward question, to which I hope he will give a straightforward answer? Did irresponsible lending and the provision of irresponsible packages by mortgage brokers in any way contribute to the problems that were encountered by Northern Rock?
The problem in relation to irresponsible lending was primarily in the United States. When the sub-prime market collapsed there, it was largely as a result of the fact that people had been able to take out mortgages who were in no position to repay them, especially when interest rates went up. According to the FSA, Northern Rock has a good mortgage book. That
point has been made by a number of my right hon. and hon. Friends, who are aware of the importance of Northern Rock.
The difficulty that Northern Rock had was not because of its exposure to the sub-prime market per se. It was because, as I explained in my statement, when credit virtually dried up, it found it very difficult, with the particular model it had, to refinance its loan book. That is why it got into difficulties. I think that there are lessons for everyone here. In particular, institutions have to ask themselves whether they have any particular exposure and, if there is one key element of their business that is critical, what provision they have if something goes wrong. It is the responsibility of directors as well as regulators to get that right.
Mr. Colin Breed (South-East Cornwall) (LD): Is the Chancellor satisfied that the FSA discharged its responsibilities in terms of its supervision of Northern Rock satisfactorily and appropriately, including the normal stress-testing exercise that it would undertake to test any vulnerability to a particular institution?
Mr. Darling: If the hon. Gentleman has had an opportunity to read the evidence that Sir Callum McCarthy gave to the Treasury Committee [ Interruption. ] The hon. Gentleman is a member, so he was there. In which case, he will have heard what Sir Callum had to say about the lessons that the FSA is drawing from this and the steps it is taking to make sure that its procedures can be tightened up.
Mr. Brooks Newmark (Braintree) (Con): As a Newcastle United fan, I think I should declare an interest. I appreciate that there is a consultation process going on over the £35,000 depositor guarantee, but why did the Chancellor speak to a national newspaper about a £100,000 guarantee? Surely that undermines his own consultation process.
Mr. Darling: It is not unusual for Chancellors, Ministers or indeed Opposition spokespeople to give interviews to newspapers. I said earlier that I would publish my consultation, which I do not want to pre-empt. It is important that people have the opportunity to put forward their views, which the Government will then consider with a view to early legislation.
Mr. Fraser Kemp (Houghton and Washington, East) (Lab): My apologies, Mr. Deputy Speaker, for being a little late for the opening of the statement. I was meeting representatives of the staff at Northern Rock.
The decisions that my right hon. Friend has taken are welcomed by people in the north-east, as they have given sufficient breathing space to the company so that it is not bounced into a decision or a sale that would prove unsatisfactory in the short and long term. One of the major considerations in the strategic decision that
the bank has to make should be the future of the staff: the many thousands who work in the constituencies of my hon. Friends the Members for Newcastle upon Tyne, North (Mr. Henderson) and for Sunderland, South (Mr. Mullin), as well as those seeking the 2,000 additional jobs at a development at Rainton Bridge in my constituency. My right hon. Friends decisions have allowed a more rational approach to be taken, rather than allowing the bank to be sold off to a hedge fund, which could have happened within a short period.
Mr. Darling: I am not sure if my hon. Friend was here earlier, but the opportunities are now there for the bank to take some important strategic decisions as to what it does in future. I hope that there will be a satisfactory outcome.
Dr. Roberta Blackman-Woods (City of Durham) (Lab): I, too, very much welcome my right hon. Friends statementI was here for the startand the emphasis that it placed on maintaining stability in the financial sector. I have heard comments about Northern Rock from hon. Friends from across the north-east whose sentiments I very much share. What pressure are the Government putting on Northern Rock to ensure that the jobs stay in the north-east and that the charitable arm is protected in any future negotiations?
Mr. Darling: My hon. Friend is aware of the importance of Northern Rock and its foundation to the north-east. I hope that the directors of the bank can now decide on a satisfactory option for the future, but they have to make the decision; it is their bank. The Government can certainly provide them with support to enable them to get the breathing space to which reference has been made. I hope that the bank and its directors will come to a conclusion as soon as they can that proves to be satisfactory for the future of the bank.
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