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“stability of the monetary system”.
It is also the lender of last resort—although we know that the Government are actually the lender of last resort, because the Bank is not big enough to perform that role by itself. Furthermore, it has a thorough understanding of markets. It operates in the gilt and foreign exchange markets every day, both on its own account and on the Government’s.
The problem with the current system is that there are three parties to it. When one person makes the decisions, there is a problem; when two people make them, there is three times the problem; when three people make them, there is about 10 times the problem, and so on. It is a geometric progression. I believe that it would be better if we could return the system to the two essential players, and I believe that the Bank’s knowledge of the banking system through regulating it would enable it to advise the Treasury much more closely and in a much more timely fashion on what sort of market operations should be conducted in the circumstances.
Ms Sally Keeble (Northampton, North) (Lab):
This is obviously an important issue, which we also have to examine in the Select Committee. Does the hon. Gentleman not think that if the Bank is the lender of last resort and is also responsible for regulating the
same institutions, the decision making will be too close and there will be a conflict of interests between regulator and lender?
Mr. Maples: I do not think there is a conflict of interests, because our interest is in doing what is best in terms of public policy. It may be difficult to draw the line between which institutions to save and which not to save, but I do not think that that is made any more difficult when the regulator is also the lender of last resort. We had that system for a very long time, until 10 years ago.
As I have said, I understand why the Chancellor did what he did. I am not criticising him for it. I am merely saying that in the light of what has happened we should consider the issue again, and that there is much to be said for bringing the two organisations back together and returning the Bank’s regulatory powers.
What the Chancellor found, what the country found and what we found 15 or 16 years ago was that pretty soon we were guaranteeing a large chunk of the liabilities of the banking system. The guarantee given to Northern Rock has led to potential deposit liabilities of about £40 billion, and so far the loan on the guarantee has amounted to about £35 billion, but when it comes to big clearing banks we find pretty soon that we are guaranteeing much larger sums than that. As an overt and unabashed free marketer I hate to find myself saying this, but if we, the public—for that is what it amounts to—are to give such a guarantee through the Treasury, we must have a little more control over what it is doing.
People who are reasonably sophisticated financially will know that if they can obtain 5 per cent. from one bank and 6 per cent. from another, they should ask what enables a bank to pay 6 per cent. when most can pay only 5 per cent. What Northern Rock had was a lot of depositors. I was shocked to discover how many of my friends had money in Northern Rock. They had gone there for the extra interest, without asking themselves whether there was an extra risk attached to it.
When we talk of risk, we should bear it in mind that the public risk is enormous. If we are to guarantee all a bank’s liabilities—at least to retail depositors—the regulator should look much more closely at what the bank is doing, and second-guess its risk assessment. I believe that a good many banks did not assess the risk correctly. Northern Rock certainly did not price its risk, and I do not think that its strategy took it into account.
I want to say a bit about moral hazard. We come back to the question: at what point do we bail people out? It is a fancy phrase but what it means is, “If I bail you out, am I simply going to encourage you to make the same mistake again?” As far as I am concerned, the shareholders in Northern Rock have lost it. If they lose all their money, that is tough but that is the name of the game. They made an investment. I do not have any time for the executives. I agree with the right hon. Member for Oldham, West and Royton on that. I am sure that in short order they will be gone because the institution will be either bought or liquidated.
We come to the depositors. They fall into two groups: what I call the professionals and the retail depositors. I see no reason to protect the professionals.
That is why I asked the Chancellor the question that I asked. In a press notice, the Treasury said:
“In the case of wholesale market funding...the Treasury confirmed that the arrangements”—
“would cover: existing and renewed wholesale deposits; and existing and renewed wholesale borrowing which is not collateralised.”
That is the £11 billion of medium-term notes, which have maturities of between one and six years; the average, I think, is 3.4 years. I do not understand why the Treasury guaranteed those. I do not believe that it is necessary. What was necessary to stop the run was guaranteeing the retail depositors. The professionals can be left to look after themselves.
On the deposit protection scheme, it is a mistake to go for 100 per cent. of £35,000. The previous system may have been too small but I think it guaranteed 100 per cent. of the first £2,000 and 90 per cent.—I am looking at the hon. Member for Coventry, North-West (Mr. Robinson)—of the next £33,000. That seemed to be about right. There was a modest loss for the risk that was taken. One did not lose all one’s deposit. However, if we are going to guarantee 100 per cent. of people’s deposits, which is where we have been led to in this crisis, we are creating a moral hazard where depositors will feel free to go for the largest interest rate, regardless of the risk, because they know that the Government will bail them out.
The deposit protection scheme should not go to 100 per cent. Perhaps it should go close to it. It should not go much higher than about £50,000. Sooner or later, a Government are going to have to let a small bank go bust, and take some retail depositors with it, and allow them to rely on the deposit protection scheme. When it happens, that will be a rather nasty, but healthy dose of reality.
Mr. Mark Todd (South Derbyshire) (Lab): The hon. Gentleman anticipates some of the things that, if I catch your eye, Mr. Deputy Speaker, I will refer to. One other thing has to be done: greater information has to be provided for depositors so that they are aware of what that guarantee is and so that they spread their risks. I was struck by how many people put £100,000 or £200,000 into an institution without understanding at all that there was a risk.
Mr. Maples: The hon. Gentleman makes a good point. I was staggered. Some of the people who were interviewed in that queue had deposited large six figure sums, which they said represented their life savings, in one building society. I agree with him. Perhaps a bit of education needs to be given as to the exact nature of the deposit protection, but of course they now have a Government guarantee, which is better than the deposit protection scheme. The hon. Gentleman is right that people are not aware of the risks that they are taking. Perhaps they should be made more aware.
Those were my policy suggestions. I want to come to where we are with Northern Rock. I do not want to take up too much time. I am staggered that it is still in business. It has made a catastrophic mistake. One could argue that there were unforeseen circumstances. People get things wrong in business. It is not a criminal offence to make a mistake or for companies to go bust; they do.
I find it extraordinary that the Government have allowed Northern Rock to continue in business and are still trying to conduct a sale when it seems clear that no one is interested in buying it without a huge loan from the Bank of England.
That runs into enormous problems. The first is the state aid legislation, which is going to create a difficulty. Secondly, why should the Government and we taxpayers help to finance to an enormous extent —£30 billion or something—a takeover? We should not. If that is the only way that that organisation can be sold as a going concern, it should be put into receivership. That is what should happen. If, when the bids are due in, there are no satisfactory ones without the Government’s guarantee, I hope that the Government will put it into receivership.
The shareholders will almost certainly take a complete loss at that point, but it will be the consequence of a badly flawed business model and business strategy. At that point, the right hon. Member for Oldham, West and Royton will be pleased to know, the executives will almost certainly go, too. I doubt that the receiver would need them. At least then a couple of things would happen. The organisation would stop taking new business and new deposits; it would stop increasing the problem, which we might have to sort out at some point. Secondly, the receiver could run down the portfolio. The worst case is that it could simply sit back and collect the money on the mortgages, and sooner or later it would pay off the loan. I also suspect that it could collateralise the mortgages; it could sell or refinance the portfolio and pay off the loan much quicker.
It is extraordinary that we are allowing the bank to continue in business. I hope that that does not last much longer. If by the end of the week we do not have a solution—in terms of a buyer—without the Government continuing their loan, it should be put into receivership and we should seek to get the public money back as soon as possible. This was a temporary measure to give depositors confidence in the banking system. It was never intended to be a medium or long-term loan to keep this particular institution going. There is a danger that sight of the measure’s purpose will be lost. We should let Northern Rock go into receivership and seek to recover the public money as soon as possible. It is important to remember the scale of the sums involved. People bandy around figures such as £25 billion or £30 billion; those are enormous sums of public and taxpayers’ money. We simply cannot afford to take the loss. We must seek to recover that money as soon as possible.
What lessons can be learned from this situation? The Governor and Chancellor had to make difficult judgment calls, but there are a couple of policy prescriptions: we must take regulation back to the Bank of England, and when we give guarantees we must give the minimum guarantee that is necessary—we should protect the retail depositors but not the professionals, and if we revamp the deposit protection scheme we should leave some risk for the depositor so that we do not risk creating moral hazard in the market, as that would come back to haunt us in a bigger way in the future.
3.51 pm
Mr. Geoffrey Robinson (Coventry, North-West) (Lab): I am pleased to follow the hon. Member for Stratford-on-Avon (Mr. Maples), who spoke in measured tones about a serious topic, and raised serious issues. I am not as definite in my opinions on them as he is, although I noticed that there was a tentativeness even in his pronouncements. I must say, however, that I think that to move the Financial Services Authority in its entirety back to the Bank, having done what we have previously done, is an unnecessary structural change. There must be liaison, whether within the Bank or between the Bank and another agency. Liaison must take place—there must be co-ordination of policy and the sharing of information. It could be argued that that would be easier to do within one organisation than between two, but I do not know. Whether that is the case is down to the attitude and understanding of the people running the organisations; it is up to them to make things work properly. I do not, therefore, think that such a structural change is worth while. We should consider the Bank’s record when it did have responsibility for such matters; we could put the Bank of Credit and Commerce International case to one side, but there were other such situations. I do not know what the hon. Gentleman’s contacts were like at the time, but I know that there were great misgivings at the Bank when we split off responsibilities and formed the FSA, combining several agencies to do so. However, whichever course of action we had taken, it would probably not have made much difference in the current case; I think that is the hon. Gentleman’s judgment, too.
Although I would not go down the structural change route, I largely agree with the hon. Gentleman on the moral hazard route. As for the denouement that we can expect to this great crisis, I agree about the sum the Government have already been called on to put in—£23 billion. The extent of the Government’s commitment beggars belief. There is also the guarantee on top of that, and I gather there might be the prospect of further injections of cash in due course if some of the large-scale loans on maturities are not rolled over but are withdrawn. The sum could go much higher than £23 billion. A resolution in some form or other is, therefore, urgent; this situation cannot be allowed to continue to drift.
There are really only three solutions. One of them is receivership, which I would not rush into. Another is that Northern Rock continues as a going concern, which I am told the loan book is good enough to sustain. If that can be achieved without an undue Government commitment—and certainly without an indefinite commitment in terms of time or sums—it would be my preferred route, as receivership is always a hazardous and uncertain business and is outside anyone’s effective control. The third option is that we might be driven into what, in effect, we have now: public ownership. I agree with what the hon. Gentleman says about the shareholders having lost—“Tough, but you’ve lost”, or words to that effect—but that did not work too easily in respect of Railtrack. We were right to take it back into public ownership—it was right for the maintenance of the rail track and the entire integral system—but it did not work out as smoothly as it was thought it would.
Mr. Maples: The Government did not sell the shares in Northern Rock to its shareholders, but they did sell those in Railtrack, and that is the difference.
Mr. Robinson: I do not think that there is any difference, because the shares were bought by punters in both cases. Normally, people did well out of privatisations, as the hon. Gentleman knows. We recouped some of that with the windfall tax, based on the underestimation of the sale at the time of flotation. I do not think that there was any difference, because punters who were good for their money bought equity, which is the last in the line of security, and so they should have done—I agree with him on that point. I am anxious, as he is, to see a positive resolution to this situation, but unlike him, I would prefer a sale of an ongoing business if that can be achieved.
Interesting though that point is, I wanted to contribute to this year’s Queen’s Speech debate on two other areas. They figured yesterday, have recurred throughout the debates and relate to education and skills. I took the point made a moment ago by my right hon. Friend the Member for Oldham, West and Royton (Mr. Meacher) that this Queen’s Speech is much bolder and more significant in certain respects than it is generally given credit for. The measures and intentions on housing are a marked step for change and are probably the most important since the great house building boom of the ’50s ground to a halt. Similarly, the effects on working may not be uppermost in all our thoughts, but together with the things that we have done on maternity leave and on other matters, they are fundamentally changing the life-work relationship and balance in the country, and how young married couples and others are able to organise their lives. My right hon. Friend referred to those two important issues.
It is easy to dismiss two other measures because they will be difficult to achieve successfully. Those relate to our ambition for 18-year-olds. On the one hand, we want youngsters to be in school or in training, while on the other, a legal entitlement has been promised for apprenticeships. I should like to focus our thoughts on apprenticeships for a few minutes, if I may.
In the annual debate about the GCSE and A-level results, when there is great national excitement and headlines in virtually every tabloid and broadsheet, the sad thing is whether we are devaluing A-level A grades, whether GCSE A grades have any meaning and whether we should not go up further to maintain the excellence of our system. Important though that is in some ways, and important as not losing our sense of direction towards excellence in the education system is, it is wrongly focused, in the sense that that is not the real problem faced in our educational system.
The real problem is the more than 40 per cent. of people in our schools who do not aspire to university education and who do not have any clear pathway to a career. That is not improving and has not done so; it has been a characteristic of our system. I have only examined the issue since the second world war, when the Education Act 1944 was introduced and the technical schools, secondary moderns and grammar schools were set up. We tried to deal with the problem then. We tried to get the technical schools to take on the vocational courses and give them a profile and importance that reflected the proportion of our youngsters going through school
who would not be attracted to a secondary education that went up to GCSEs, A-levels and university. We simply have not succeeded in this area, and if anything, things may have got worse.
A year or so ago, an extensive labour force survey interviewed 17-year-olds. Some 20 per cent. said that they felt that they had no qualification whatsoever, and that is a telling statistic. We must do something about this. We must focus our minds on it, in the way that we have done on academy schools, to get the standards up. We are worried about the gold standard of the A-level, but let us consider the 40 per cent. of our children who I mentioned, 20 per cent. of whom, when surveyed, said that they had no qualification at all. This is happening in a world where it has become trite to say that we must face the challenge of China and the rest of Asia, and the need for skills. That is the reality that we start with. I ask myself where we have gone wrong and whether there is a deep cultural problem that never gives technical, vocational skills, even at the highest level, the sort of importance and priority that should be attached to them.
One of the changes that we made, quite unnecessarily, that has contributed to this situation was the disbandment of the careers advisory service in schools. It was changed to Connexions to direct it towards the severely handicapped. One would not want to stop its work in that area, but the careers service was passed to local government two or three years ago, and we have not yet had a report on how it is going. We need a careers service at the earliest possible point—perhaps not by grade two, but certainly by grade four—to inform the youngsters of decent vocational alternatives to A-levels that are just as good, just as important and might even result in better paid jobs in some instances. If that does not happen early in schools, the limbo between those who have a clear path to academic qualifications and the rest will remain in place. The return of the careers service would be a starting point, and that is one of the general points that I think should be included in the education and skills Bill.
However, I am not sure that two of the other general ideas that have been mentioned will be helpful in promoting vocational training and education, and providing an alternative path of equal standing to the academic education path. The two measures are the diploma and the split of responsibility, with skills being put in with higher education and schools remaining with the Department for Children, Schools and Families.
On the diploma, we run the risk of reinforcing the divide. I am not sure who will eventually be responsible for the diploma curriculum, but as I understand it, it will not contain any vocational element. In fact, it will be seen as an alternative route for those who cannot get straight on to the GCSE-A level-university path. The academic will again take precedence over the vocational and it will do nothing to help. I even fear—although I am sure that it is not the intention—that it will be counter-productive.
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