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Olympic Legacy

3. Mr. Mark Harper (Forest of Dean) (Con): If she will make a statement on the legacy of the 2012 Olympic and Paralympic Games. [192305]

The Minister for the Olympics (Tessa Jowell): The question picks up the important point about legacy. The Government’s position is clear. The strength of the legacy left by the Olympic games is as important as the quality of the sporting experience and its delivery on time and on budget. The lasting legacy is being developed around five specific ambitions—sport, young people, jobs and skills, sustainability and the regeneration of east London. We will shortly publish the first of the detailed plans indicating how the legacy will be realised across Government.

Mr. Harper: One of the legacies of the Olympics should be a more accessible transport system in London. What assurances has the Minister received from the Secretary of State for Transport that the collapse of Metronet will not delay the development of a more accessible underground beyond the Olympics, which would damage that accessible transport legacy?

Tessa Jowell: All the transport infrastructure will meet the highest standards of accessibility. As the hon. Gentleman knows, between now and 2012 London’s transport will benefit from investment of more than £11 billion with Crossrail to follow, which is why it is important that London has a Mayor who understands the importance of transport to the people of London.

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Estimates day

[2nd Allotted Day]

Supplementary Estimates, 2007-08

HM Treasury

Northern Rock and Banking Reform

[Relevant document: Fifth Rep ort from the Treasury Committee, Session 2007-08 , HC 56, entitled The run on the Rock. ]

Motion made, and Question proposed,

3.35 pm

John McFall (West Dunbartonshire) (Lab/Co-op): It is a pleasure to open today’s debate on Northern Rock and banking reform. The Treasury Committee was quickly off the mark with this investigation. On 20 September, the Governor of the Bank of England and his colleagues came to the Treasury Committee ostensibly to consider a report on inflation, but in particular to discuss the issues surrounding Northern Rock. In the intervening period, we produced two reports, “The run on the Rock” and “Financial Stability and Transparency”.

I thank my colleagues on the Committee for their commitment and hard work in producing those two reports in the past few months. The reports are unanimous, and to date they have been well received by Parliament and the outside world. I also want to put on the record my thanks and those of my colleagues for the hard work of the staff and for the leadership of the Clerk of the Committee, Colin Lee. A tremendous amount of work was involved, but the staff stuck to the task. One measure of their success was that the report was out in time for the Government’s consultation exercise at the end of January.

The Committee examined what went wrong with Northern Rock and recommended changes in banking law, regulation and practice, with the aim of ensuring no repetition of the Northern Rock saga. My speech has three parts. First, I will present the Treasury Committee analysis of why Northern Rock needed state support in September and how the tripartite authority responded to that. Secondly, I will briefly examine the available information on the extent of state support to Northern Rock. Thirdly, I will consider banking law and regulatory changes, which are reflected in the Treasury Committee report and in the Government’s proposals.

Turning to the first item, what went wrong? Undoubtedly, Northern Rock employed a reckless business strategy, and the executives and the non-executives did not live up to their responsibilities.

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Andrew Miller (Ellesmere Port and Neston) (Lab): Did my right hon. Friend find any evidence on how the executives reported their actions to the shareholders? Did his Committee identify any weaknesses in communications with shareholders?

John McFall: With regard to the executives, I have mentioned that the business strategy was reckless. The non-executives gave the chief executive, Adam Applegarth, his head, and no company should aspire to that model.

The other aspect of what went wrong with Northern Rock was that it relied on the wholesale markets—in other words, it drank from one well, which was a reckless business strategy. The non-executives should have been asking questions such as, “Why are we doing so well?” In the first six months of 2007, Northern Rock was responsible for 19 per cent. of all new mortgage lending. Both the execs and the non-execs did not address basic questions.

Mr. Alan Beith (Berwick-upon-Tweed) (LD): Many of us are receiving representations from former Northern Rock shareholders who say that the Financial Services Authority’s failure to recognise the dangers in that business model ought to be a factor in the consideration of what compensation should be paid to shareholders. What is the right hon. Gentleman’s view on that?

John McFall: I do not want to get into pronouncing on the shareholder issue; today, I am focusing on our Committee’s report. However, I am coming to the FSA and its failings, so I will take up what the right hon. Gentleman has mentioned.

The FSA failed because early warnings were ignored and there was an inappropriate FSA response. The Committee was concerned about the resources used in supervising Northern Rock, particularly in the light of what we called the “outlier status” of the business model. For a year or two beforehand, there had been murmurings about the type of model that Northern Rock was following. My own opinion is that the FSA gave its best regulators to the large banks and its less well-accomplished ones to the smaller banks and the building societies; it thought that it had to keep its eyes on the big banks and it let the former building societies go. The FSA has learned that lesson; from my personal discussions with FSA officials, I can say that the point has been well taken.

There were also shortcomings in the legal framework. There was no special administrative system, such as that in the United States of America, for failing banks. Furthermore, a legal uncertainty seemed to prevail with regard to the European Union market abuse directive. That issue needs further examination—not only at a UK level, but at a European level.

One basic question that the Committee asked itself was whether Northern Rock was a systemic bank. We concluded that it was. It had grown over the years, certainly since demutualisation, but it was not a huge presence other than in its heartland area of north-east England. In essence, it was systemic because it identified weaknesses within the tripartite system for dealing with failing banks. Depositors could get only £2,000 of their money in full, so when a run started, they were likely not to get the full amount and also
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likely not to get it soon. As the Governor of the Bank of England stated during his appearance before our Committee, once a run had started it was logical for people to queue up for their money. The Northern Rock run was a message to consumers that other banks might be weakened by the crisis and that they, too, could lose deposits. There was a spectre of contagion, and it comprised a systemic risk.

I well remember getting a phone call at home one evening from a constituent who told me that he and his wife had their money in Northern Rock. They had not had much money for most of their married life, but had received some lately and put it all into Northern Rock. He asked me for advice on whether he should take it out; that was a rather awesome task for me. I told him that because the Government were supporting the bank, he should keep it there. However, there was a real concern among people, who took a logical stance, about the future of Northern Rock and of their deposits.

The Committee concluded that the Chancellor was right to authorise the support operation for Northern Rock because of its systemic nature. The Northern Rock failure identified to the public a lack of protection for depositors and further weakened the confidence in which financial institutions were held in the public eye. A run on other banks and a more widespread systemic failure could have been possible.

The Committee also identified a failure of the tripartite authority in respect of the handling of an announcement about the problems of Northern Rock and the support being provided to it by the authorities. The announcement that public funds were being injected into Northern Rock should have reassured the public; perversely, however, it led people to see the bank as fatally injured—hence the run. That was compounded by a lack of speed as regards the support operations announced by the tripartite authority. Everyone was aware that a leak was possible, yet when the decision to proceed with the support operation on Tuesday 11 September was made, it was not to be announced until Monday 17 September—that was far too long a period. In my opinion, no journalist can be blamed for the leak. Rumours were circulating prior to the press statements, and a leak to the press was a matter of when, not if. The Committee concluded:

That was exacerbated by the failure to prepare for the Government guarantees for the Northern Rock depositors. The Committee says:

Had such preparations been made, Northern Rock might not have been as weakened by the run as it was.

The second issue is the extent of state support and the accountability for that public commitment. Concerns have been expressed regarding the lack of transparency in the state support appropriate to maintain the bank, given that we are being asked to approve the revised spring supplementary estimate, page 22 of which shows
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that the first two commitments are there, but with no moneys against them. Public accountability is very important, and those columns should be filled in by the Government, not just left blank. In the initial stages of the crisis, and prior to public ownership, the Treasury incurred contingent liabilities relating to its underwriting of the Bank of England support operation and the guarantees that it offered to Northern Rock—the first two elements in the spring supplementary estimate. I am making a plea for the Treasury to be more forthcoming in reporting such contingent liabilities.

The third and final area to which I wish to refer is banking reform. Banks must be allowed to fail, because market discipline must form the core of banking regulation in the United Kingdom. If the likes of Northern Rock take unacceptable risks and the market turns against them, they should be allowed to go to the wall. The profits from banks cannot be private while the risks of their failure are public. However, that failure must happen in an orderly manner. In the case of a company, the shareholders must be the key losers. Small depositors should not lose out, nor should they lose the banking services needed to operate in our modern economy. Those who are financially excluded in this society are socially excluded, so it is important that they do not lose out.

Mr. Mark Field (Cities of London and Westminster) (Con): The right hon. Gentleman has uttered the usual incantation about not privatising the risks and ensuring that we have the profits in the public sector, but that is not quite the case for a bank, which is a very different kind of organisation. Because of the risk of contagion in the entire banking system, the risk in relation to depositors must ultimately be in the hands of the state, in some form or another, whether through the Bank of England or the Treasury, or in some other way. The depositors need to be looked after, and to that extent there must, if we are to have a working banking system, be some opportunity for intervention to take place. The right hon. Gentleman seems not entirely to recognise that banks are different organisations from the average public or private company that is about to go down.

John McFall: I could devise a great headline for that intervention along the lines of, “State Support Essential for Organisations that Made £40 Billion in Last Fiscal Year”. The hon. Gentleman should get real and understand that banks have to operate in the market like everyone else. The depositors, however, need to be protected because they cannot do due diligence with regard to the Royal Bank of Scotland, Barclays, Lloyds or whatever. We all recognise that.

That point leads me on neatly to the depositor protection fund, which is a key way in which small depositors can be assured in times of crisis that their funds are there and can be made available quickly. The Treasury Committee recommended a pre-funded system for that process. The benefits we identified were that it would reassure depositors that their money is there and that they can have it, and prevent banks from being called upon in times of crisis to bail out their insolvent competitors’ depositors. On the pre-funded aspect, funds should be allowed to build up in good times so that they are available when things take a turn for the worse.

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Why did we recommend pre-funding for banks? It is obviously the case that banks have a responsibility to provide funds that assist in the maintenance of consumer confidence in the industry. We acknowledge that the Government might have to provide funding for the depositor protection scheme in case of a systemic difficulty, but a single bank—this is a lesson for the future—should not require Government support. We must put in place a mechanism to ensure that.

It could be said that this is not the time for banks to pay into such a fund. The hon. Member for Sevenoaks (Mr. Fallon) and myself went to the United States in December— [ Interruption. ] We did so with the approval of the entire Committee, to talk to the Federal Reserve, the Securities and Exchange Commission, the Federal Deposit Insurance Corporation and others, and we took the opportunity to meet the American Bankers Association. I felt that the ABA would disagree fundamentally with us about a pre-funded scheme, but it encouraged us with respect to such a scheme, saying that it was important for consumer confidence. The support of such an organisation, which represents American banks, is a big plus in terms of having a pre-funded scheme.

Mr. Adrian Bailey (West Bromwich, West) (Lab/Co-op): I have listened carefully to what my right hon. Friend is saying, and having read his report, I understand the rationale. However, will he make it clear whether he is referring specifically to the proprietary banking sector, or would he include the mutually based building societies in such a scheme?

John McFall: That is still to be worked out. We are looking at the banking sector at the moment, but the Government’s consultation is open on that matter. I suggest that my hon. Friend contributes to that process, because I know that he is interested in the mutual sector. The Committee suggests that the Government provide initial funding through a loan that the banks pay back as they become less constrained. There is a role for Government in the process.

The report, “Financial Stability and Depositor Protection”, is out for a consultation exercise, and it is clear that the Government and the Committee agree on a number of issues. The first thing we agree on is the need for a prompt, corrective action system. If such a system were in place, it would prevent a failure in the first place. Secondly, we agree on the need for a bridge bank authority, which would allow failing banks to be taken into public ownership and allow them to be let out of that ownership, as and when it was convenient. That system exists in America, and it works very well.

Mr. Kevan Jones (North Durham) (Lab): Does my right hon. Friend agree that there should be some control or regulation over non-executive directors of banks? In the case of Northern Rock, the chairman’s only qualification seemed to be the fact that he was the son of Viscount Ridley. The problems that Northern Rock experienced call into question the role of some of the non-executive directors.

John McFall: The prompt corrective action mechanisms should take care of that. I will not follow my hon. Friend down that lane, other than to say that
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the Committee recommended that chief executives and chairmen of banks should have professional financial qualifications, which the Northern Rock chairman and chief executive did not have. For the life of me, I cannot understand it, but it caused a bit of a stir in the City. It would be wise for a chief executive or someone who chairs a large company to have appropriate qualifications. The whole Committee made that point.

The communications strategy is another matter on which we agree with the Government. We welcome the Government’s commitment to that in the tripartite authority. If there had been a half decent communications strategy in place at the time, perhaps matters would not have worked out as badly as they did. When the announcement of lender of last resort was made, the City and the wider public interpreted it as the financial equivalent of the last rites and evidence that the company was on its death bed, instead of viewing it as the tripartite authority supporting a solvent bank with a good loan book, as the FSA and the Governor of the Bank of England said. The communications strategy was disastrous and the Government and the tripartite authority need to get that right.

Mr. Colin Breed (South-East Cornwall) (LD): Of course, banks are going to be solvent. Their problem, because of liquidity, is making their assets able to pay their deposits quickly enough. All banks that borrow short and lend long face that problem. Does the right hon. Gentleman agree that it is amazing that the FSA paid little if any attention to banks’ liquidity?

John McFall: Given that the hon. Gentleman is an esteemed member of my Committee, I must agree with him. We took evidence on that matter—indeed, the Committee went to Sweden to examine the position there. There was a banking crisis in Sweden in 1991 and the state intervened. The Swedes did not suffer the same liquidity crisis as we did recently because they were aware of the problem. It was astounding that we did not plan for that. Neither did we have plans in place for adequate stress testing. The inadequate stress testing was another example of failure on the part of Northern Rock and the FSA. We need to put those mechanisms in place.

Let me consider the Government’s consultation. I make a plea to them not to allow the financial firms to dominate the debate. I say that in the light of Professor Buiter’s comments to our Committee. He said that the FSA regime could have become a “soft touch” rather than a “light touch” one. I do not hold with that point of view, but I do not want one sector to dominate. We must acknowledge that the banks have an incentive to keep the special resolution regime in the FSA rather than the Bank of England’s solution, which the Committee is examining.

The Committee approaches the recommendation from the angle of depoliticisation. Our proposals are intended to ensure that the Chancellor does not need to be involved in many of the decisions about failing banks, except when taxpayers’ money is at stake. The Government suggestion of a Cobra-style system may mean too much political involvement. In 1997, there were laudable reasons for moving the Bank of England and the FSA away from the Treasury. As regulators, they need to act in the overall best interests of markets and consumers, not politicians.

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