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Albeit from different standpoints, the right hon. Member for Holborn and St. Pancras and the hon. Member for Sevenoaks have both asked what banks are for in the new world and what they should look like. Mr. Don Cruickshank raised those questions seven or eight years ago, when he pointed to the apparent anomaly that the industry is ultimately underwritten by the state but makes well above average profits in terms of the rate of return on its capital over a long period of time, which, from his point of view, is unacceptable.
There are two ways to resolve that situation. The first is to treat the banks as utilities by making them highly regulated and highly controlled. That would directly or indirectly control their profits, which is what the right hon. Member for Holborn and St. Pancras wants. The alternative is to say that provided deposits are protected, the banks should compete and the industry should be treated like any other. I am more sympathetic to the latter approach, but getting there will be difficult. We need a clear understanding and commitment from the Government and the Financial Services Authority about which of those two models they are going for, because simply adding a new layer of regulation to the existing system will not help.
Frank Dobson: I understand the hon. Gentleman’s point, but it assumes that if banks were allowed to go broke, subject to looking after the depositors, they would behave differently without further regulation of their activities. I am not confident that that is the case in view of the number of apparently reputable banks that have lost a fortune either directly or indirectly in the sub-prime mortgage scandal in the United States.
Dr. Cable: If some of the banks were to go bust, lessons would be learned. Historically, banks, like any other set of companies, have short memories, so the pattern returns after a generation. However, I take the right hon. Gentleman’s point.
4.57 pm
Mr. Charles Clarke (Norwich, South) (Lab): I am delighted to contribute to this discussion as the Member of Parliament for Norwich, South, where 25 per cent. of my constituents work in financial services. I must also point out that the headquarters of Virgin Money, which was directly involved, is in my constituency.
I begin by paying tribute to the report, which is first class. In particular, I pay tribute to my right hon. Friend the Member for West Dunbartonshire (John McFall). The Committee has done an outstanding job on both the principal report and “Financial Stability and Transparency” by clarifying the issues, which will hopefully enable us to avoid problems in the future.
The main reason why I want to contribute to the debate is to support the banking reforms proposed by the Select Committee in paragraphs 314 to 317, which deal with the role of the proposed deputy governor and head of financial stability. I support that role, which is the right way forward. Before I discuss those reforms, however, I want to discuss one or two other specific aspects of the report.
On moral hazard, the report describes the controversy among senior people in the world of financial services about the extent to which moral hazard should or should not be taken into account and dealt with. I am
nearer to the view expressed by the Governor of the Bank of England, even given all the proposals, that moral hazard is a real factor. That relates to our earlier debate about the responsibility of shareholders and of businesses for business practices. The right hon. Member for Holborn and St. Pancras (Frank Dobson) and the hon. Member for Twickenham (Dr. Cable) discussed the responsibility of considering mortgages in terms of the sub-prime issues. It would be a serious mistake to relax the regulatory obligation, and indeed the competitive obligation, on financial services businesses to be responsible in their practices, and we should have mechanisms to make that clear.
As the report indicates, there are failings in the existing system. The responsibility of the institutions to their shareholders is not at all clearly set out, and many shareholders are simply ignorant of the business practices that were there. But fundamentally, despite the real sadness for many small shareholders who owned shares side by side with major hedge funds, the report’s comments on financial stability and transparency indicate the range of issues and the importance of companies taking responsibility for their own acts.
I accept the report’s recommendations about the need to protect depositors better; a number of other contributors to this debate have referred to that. At the beginning of all this, there was insufficient clarity about the importance of protecting the depositor in contrast to the importance of the role of the shareholder. That is an important distinction that the report brings out well, but it was not brought out so well during the public debates at that time.
That brings me to my second point, which is about the role and effectiveness of the Financial Services Authority. I do not have a great deal to add to what the Treasury Committee Chairman said, except to emphasise the point that it is the key role of the FSA to offer proper judgments in matters such as this, rather than simply going through process and procedure. The report mentions two aspects—that of the rapid expansion of the business and that of the declining share price of the company. They should have made the FSA judge more carefully what was happening in the organisation. The hon. Member for Twickenham referred to the quality of assets in relation to such issues. The FSA has learned lessons from this whole debacle, but the fact is that it should not have needed to learn them from a debacle. The lessons should have been learned before.
Thirdly, I want to comment on what the report calls
“the support operation and stopping the run”
and on the ability to plan to deal with such crises. It is clear that the tripartite system did not work as it should have. Paragraph 280, on the overall operation of the tripartite system, and paragraph 289, which is about the communications system in particular, are powerful and, to an extent, damning. I hope that the Government will deal with them fully in their final response to the issues.
Essentially, there is a serious criticism of the preparation and work that were done. I hope that the contrast that I draw will not seem too extreme: my experience as Home Secretary in the period of the 7/7 disaster—the explosions in central London. Whatever the causes and circumstances at that point, tremendous, fully prepared emergency
service co-operation immediately came into operation, as I and the current Chancellor saw from close by. That co-operation involved the taking of responsibility and a clarity of command and control issues that was impressive to see.
I shall give an illustration from the communications side. Some hon. Members may recall that early in the afternoon on that 7 July, there was a major press briefing in which all the services spoke together to the country. They said, “This is what we are doing and this is how we are dealing with the circumstances.” The key point, shown so well when contrasted with the run on the bank, is that the people themselves were players in the events as they emerged. It is critical to communicate effectively with people. The report has drawn that point out well. As I said, there are serious points in paragraphs 280 and 289. It is important that the Government give a lot of attention to those in their response; I am, by the way, absolutely sure that they will.
My fourth and main point is about the section of the report entitled “Dealing with failing banks”, which addresses some of the criticisms made by the hon. Member for Twickenham. The section says that the FSA has to find a way of dealing with issues of the type that we are discussing and change its practices and procedures. The section tries to address those issues. It makes a whole string of proposals in respect of an improved legal framework and procedures. I broadly support those, and the Government have already constructively responded to them to try to find the right solution to the problems.
The section also deals with the question of the European Union market abuses directive, which I found confusing at the beginning when evidence was given to the Committee but which is now fully explained in its report. I want to add the rider that in the modern era it is almost impossible to try to run covert operations in relation to this area. One can see why that was how it worked as recently as 20 or 30 years ago, with the tradition of the Governor of the Bank summoning all the players into a quiet room somewhere in the square mile and saying, “We’re going to sort it out like this, this and this.” However, predicating a system on the operation of such a covert system is very difficult to achieve, irrespective of the detailed formulation in the market abuses directive or in other legislation, and the Committee was right to acknowledge that.
I particularly want to reiterate the point made by the Chairman of the Select Committee when he called for leadership in these matters. If the command and control systems are to be got right as between the various aspects of the tripartite system, if the preparations are to be got right, and if there is to be an authority that means that financial institutions, Government agencies and so on will operate in a co-ordinated way, that requires leadership and authority that people accept, and no ambiguity of any kind about where the buck stops in such a situation. That is why the Treasury Committee is right to recommend, as it does in paragraphs 314 to 317, the establishment of a new post of deputy governor and head of financial stability.
There can be arguments about how that is carried through in detail, what is precisely the right way to do it, and whether the Committee has got it right in every aspect of those paragraphs; I do not commit myself to the specific detail on each point. However, there should not be argument about the need for an individual who is responsible for taking decisions in this field—someone who is publicly known to be responsible and to whom people, including the Chancellor and Prime Minister, will naturally turn for advice in these situations.
I mean no disrespect to the FSA in saying that I fear that if the FSA is chosen as that vehicle, the individual concerned will not have the authority that would go with the role of a deputy governor of the Bank of England. I know that it is a difficult question and that there are plenty of arguments to the opposite effect. However—I have talked to the Chairman of the Select Committee about this—the reason why I was keen to speak in this debate was that I wanted to lend my support to the Committee’s proposals. In such circumstances, when we are dealing with potential crises that can be deeply destructive of this country’s economy and political structure, we need clarity, and that is what it recommends.
On the overall position, although I was personally extremely sceptical about the possibility of a private sector solution to these events as they emerged, I am sure that it was right to look, even briefly, such solutions. Nevertheless, I have been of the view from the very beginning that public ownership and rundown was the best strategy, and I am concerned that leaving the key question—“rundown or going concern?”—as an open matter will make it more difficult to resolve the situation than in other circumstances. The principle of a level playing field for all financial services institutions guarded by the institutions of the state, the law, EU law and so on is very important for all the people who have investments in a wide range of financial services institutions. There must be no question of one particular financial services institution being picked out for public sector support in contrast to others. That is a controversial point, but I think that it is what will, and should, ultimately emerge out of this state of affairs, and it is where we need to go in future.
I look forward to the Government’s response to this excellent report. I hope that the Select Committee will continue to give attention to these matters and will consider one or two of the questions raised earlier in the debate.
5.8 pm
Mr. Mark Field (Cities of London and Westminster) (Con): This has been a very interesting debate. My hon. Friend the Member for Sevenoaks (Mr. Fallon) was absolutely right to identify the need to avoid at all costs the knee-jerk reaction of rapid regulation that might unravel and be regretted in future. That was implicit in the Treasury Committee’s report.
The right hon. Member for Norwich, South (Mr. Clarke) made a very interesting contribution, drawing a parallel with the events of 7/7, when he was Home Secretary. It would be difficult to have the clear command structure among people in financial services that there was for the armed and emergency services on
that day. It is a little idealistic to assume that we could put such a structure into place, however it worked. The Select Committee and the Treasury will continue to debate the issue.
There have been more spectacular banking crises than the one that affected Northern Rock in recent months. The phenomenon of a run on a bank was, after all, almost commonplace in Victorian times. More recently, the collapses of Bank of Credit and Commerce International in 1991, and of Barings only 13 years ago, show that even a highly regulated banking sector is never immune to mismanagement or to fraudulent activity. The fiasco of Northern Rock is a modern-day, sorry catalogue of poor judgment and woeful indecision.
I agree with relatively little of what the right hon. Member for Holborn and St. Pancras (Frank Dobson) said about the City, but some elements of his comments were right. Certain enormous incentives for the banking industry have allowed some of the problems that have emerged in the credit crisis to come into play. It is not for the Government to regulate on the matter entirely, and the right hon. Gentleman recognised that implicitly, but some perverse incentives in the banking industry have contributed in bringing us to this pass.
Some have been keen to point the finger of blame entirely at the actions—or inactions—of the Treasury and especially at the erstwhile Chancellor of the Exchequer. In truth, responsibility for what happened at Northern Rock should be more widely spread. First and foremost—it was absolutely right that the right hon. Member for West Dunbartonshire (John McFall) referred to this—the senior management of the Bank, in particular its former chief executive, and the array of non-executive directors bear some responsibility. Collectively, they should have realised that the aggressive growth in Northern Rock’s turnover strategy depended on continued economic blue skies and liquidity in the money markets. Northern Rock’s strategy was so diametrically opposed to those of its competitors that alarm bells should have been ringing about its sustainability among the well-remunerated non-executives—a roster that included some well-known City names.
Once the credit crunch hit in early August, the Bank of England should have been far more fleet of foot. Reference has been made to the role of the Financial Services Authority, but I believe that the Bank of England was at fault to a certain extent, particularly with regard to its amenability or otherwise to Lloyds TSB’s proposal to take over Northern Rock before the public became aware of the nature of the crisis. That would, no doubt, have required substantial Treasury guarantees, but UK taxpayers would almost certainly have been in a more favourable position than the one in which they find themselves now, several months on.
One of the biggest, longer term casualties of the whole affair will be the Governor of the Bank of England, who has played an important part in overseeing this debacle. His credibility in the City has been severely damaged, and it is difficult to see how he would be the right man to lead any restructuring of the Bank of England, which is my party’s preferred approach.
This episode, coupled with the rapid internationalisation of the ownership of financial institutions in the City, puts into perspective some of the harking back to the pre-1997 arrangements. The City is a club no more and the Bank of England’s role as judge and jury is probably best confined to the past. Meanwhile, as a number of hon. Members have pointed out, the Financial Services Authority lacks clout and respect among leading City institutions, meaning that banking reform should be informed by 21st century requirements, rather than by a return to some bygone era.
We must remember, however, that the difficulties for Northern Rock did not start last September—they only became public in that month. Once the crisis was out in the open, queues began to develop outside branches of the bank. At that stage, the possibility of an autumn general election, and the fact that the bank was a large, almost iconic employer in Labour’s north-eastern heartlands, resulted in a catalogue of ill-advised Treasury decisions. To a large extent, this crisis was driven by political considerations, which has not been helpful. I accept that simply allowing Northern Rock to collapse was never an option. As the right hon. Member for West Dunbartonshire said, banks are different from other companies in that they have depositors as well as shareholders. Although the value of a shareholder’s investment can, in principle, be allowed to diminish to zero, the entire competence of the banking system depends on banks’ depositors being assured that they will be compensated—in my view, fully—in the event of a collapse.
The Financial Secretary to the Treasury (Jane Kennedy): I know that the hon. Gentleman genuinely and firmly holds his view about politically inspired decisions. I would like to understand his point, which I do not think that he makes flippantly, but it would be interesting to know which decisions he thought were wrong and politically inspired.
Frank Dobson: And whether they were supported by the Tory party. [Laughter.]
Madam Deputy Speaker (Sylvia Heal): Order.
Mr. Field: I shall try to make this a solo rather than a duet.
It is fair to say that, when the crisis emerged—I admit that it informed some Conservative policies, too—we were in the cauldron of a likely pre-election campaign. Consequently, we went down another path when we might have moved more quickly to nationalisation, which, many people realised by November and December, was definitely on the cards. I have some sympathy for the Government’s position. They wanted to look for a private sector buyer and perhaps they looked for too long. There was also an implicit recognition that, when we had come to such a pass, things would not get better and were, indeed, likely to get worse. However, in those few weeks in September, decisions were driven by a political agenda. I am not necessarily being naive; a political agenda has its part to play at any time, but let us bear in mind the potential imminence of an election and the fact that the building society had great strength and roots in the north-east of England—perhaps if it had been in the south-east of England, there might have been less of a rush towards Government activity.
Mr. Mudie: Is not that a bit unfair? The institution was not simply a northern bank but a bank with queues outside the door, and there was a genuine fear that other badly placed banks would be caught up in the contagion. That made the Government take action. The decision was nothing to do with northern heartlands; systemic risk brought it about.
Mr. Field: There is some fairness in that, and I discussed systemic risk earlier. The agenda of a 24/7 media makes things difficult. The media got hold of the problem with floods not when they occurred in Hull and Sheffield but when they affected holiday homes in the Cotswolds. Suddenly, floods were a massive national issue in a way they might not have been previously. That reflects the media timetable.
Mr. Bailey: What decisions by the FSA, the Treasury or the Bank of England were influenced by political considerations?
Mr. Field: The hon. Member for West Bromwich, West (Mr. Bailey) must be proud of his football team’s success at the weekend, although there is a heavy match against Portsmouth in the FA cup semi-final to come. [Interruption.] I am trying to show that I have some knowledge of culture, media and sport, if not necessarily of Treasury affairs. However, I have tried to make the point that there was feverish activity in September and October, when, without the perceived imminence of a general election, more long-term decision making might have occurred.
Mr. Philip Dunne (Ludlow) (Con): I am grateful to my hon. Friend for allowing me to offer him a suggestion. The decision not to advance a lender of last resort facility to the one credible private sector bidder that made overtures about acquiring the bank in August and up to the first week of September could be described as a political decision by the Chancellor.
Mr. Field: That is fair to say about one of the Chancellor’s many minor decisions.
The “temporary” nationalisation of Northern Rock has been forced on the Government as an implicit recognition that, economically, things are likely to get worse in this country before they get better. No one should assume that uncertainty in the financial markets is a short-term phenomenon. Speaking to people in the City, I have detected that whereas confidence was renewed in January and early February, there has been a recent slump in confidence, although I appreciate that much of that can ebb and flow. However, there is little doubt that it will take less than five years at the absolute minimum for taxpayers to extricate themselves from Northern Rock without net losses.
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