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I want to say just two more things. The first is about regulation. I fear that we would see decent regulation as ticking boxes. Even after this crisis, I do not think that we have learned the lesson of decent regulation in this respect. No central banker—neither the FSA nor a central banker on the model of Greenspan—will be willing to regulate. Let me explain. We, the FSA and the Bank of England clocked the dangers with such securities. Our criticism was that they were not spoken about loudly enough and that no effective action was taken, either. That does not surprise me, because of the comment made by Greenspan. Northern Rock was not the problem. Securitisation was the problem, but, as we see from the losses, securitisation was making tremendous profits. It would therefore have taken a brave central banker to take the big step, which would have avoided the problems with Northern Rock and the worries that we are experiencing, of speaking out loudly and taking action against the contaminated securitisation that was going on. Greenspan put his finger on it: no central banker has that courage, or sees that as their role. It would be interfering in the market, and the market makes money, so people interfere at
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their peril. People watch and put on record a bit of what they see, but they let things run their course, and when things fall apart, they go in to pick up the pieces. That has been the history. When we speak about regulation, we are speaking about regulation at the margins, because the other type of regulation would be seen as interfering with the operation of the market. If the market is making great profits, it is a brave central banker who steps in.

Lastly, I want to say a word about shareholders. I do not shed tears for them, and particularly not for the market hedge fund shareholders—the vultures who bought shares when they knew that Northern Rock was in trouble. They knew what they were getting into, and endangered the sympathy that people might have felt for the employee shareholders and small shareholders. The behaviour of the market hedge fund shareholders has been disgraceful. They forced an extraordinary general meeting, upped the ante and upset people. I fear that they may have caused a loss of sympathy for the shareholders as a group. If we could divide them, I would be all for a suitable payment being made to the small shareholders, in place of the shares that we have taken. To the hedge fund shareholders, however, I would say, “Of all the shareholders, you were the people who knew what you were getting into, and you deserve nothing,” but this is not a perfect world.

6.21 pm

John Thurso (Caithness, Sutherland and Easter Ross) (LD): May I begin by echoing comments made in the first two contributions to the debate? The first contribution was made by the right hon. Member for West Dunbartonshire (John McFall), and I echo what he said about the staff who helped to produce the Treasury Committee report. They gave not only great quantity, but great quality. The second contribution was made by the hon. Member for Sevenoaks (Mr. Fallon), and he paid tribute to the Chairman; it is worth restating what he said.

I should also like to pick up on a comment that the hon. Member for Leeds, East (Mr. Mudie) made about my hon. Friend the Member for Twickenham (Dr. Cable). He is probably right to say that my hon. Friend’s comments were harsh but accurate. The hon. Gentleman asked me to have a word with my hon. Friend after the debate. I say this to my hon. Friend: he is absolutely right, but it is worth bearing in mind that since we issued our report back in January, much evidence has come out. We were working on the basis of the evidence that we were given. My hon. Friend raised with me the point that although many eminent people gave one level of evidence, there are now somewhat different views coming out. He said that we might like to look again at the matter at some point, and perhaps it is an issue to which the Committee will return.

I do not want to go over the whole report; I will cherry-pick a couple of points. The hon. Member for Leeds, East made a valuable point, the theme of which was people. That is the issue that we ignore at our peril. Interestingly, when I attended an industry dinner last week, I sat next to an eminent director of an eminent company, who said to me, “Why on earth did you bother to rescue Northern Rock? Why didn’t you just let it go under? What was the purpose of rescuing it?” It is worth reminding ourselves of what we all set out to
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do. There are, of course, two reasons for what we did. The first, obvious, and probably most important, reason to act was to avoid contagion in the banking industry. We saw what contagion could do, if let loose, when we saw a televised run on a bank. Not only was it the first run on a bank in more than a century, but it was televised. The run gathered pace like a brushfire, so the Government were absolutely right to act quickly to deal with the situation.

The second reason concerns our relationship with depositors—an issue that a number of speakers have raised. It is important that we look at what we mean when we talk about financial stability, as the hon. Member for Sevenoaks said. An important part of it is that the ordinary citizen should have confidence that when they place an amount of money in a bank, they do not find themselves the lowest unsecured creditor in the chain. We have heard the term “moral hazard” applied to banks, but during our inquiry, I heard the term applied to the high street depositor. That is why the old system was not 100 per cent. The idea was that there should be some moral hazard attached to the depositor. That is ridiculous, and has been proved to be so. If the entire weight of the regulatory system cannot ensure sufficient due diligence, how on earth can the individual in the street be expected to ensure it? A clear lesson from our report is that there should be 100 per cent. protection, up to an amount, to ensure that depositors are looked after.

Our report makes it quite clear that the start of it all was the board of a bank that made some fairly disastrous decisions. It followed a very high-risk model. There are a few points arising from that, all of them about people. One of them concerns the board. Comment has been made about its composition, but there is a general point to be made. I serve on a plc board as a non-executive, and have served on other boards. I am deeply concerned that, after Greenbury, Cadbury, and all the other reports that have been produced, a box-ticking mindset has entered into many sectors of corporate governance, replacing an old-fashioned, common-sense duty of care. That duty of care needs to be recaptured. If the board of Northern Rock had applied a common-sense test, as opposed to ticking a lot of boxes, it might have realised what was so obvious to all of us, with hindsight—that its model was extreme.

The last point about the company itself is that it was under tremendous pressure from the City and City investors to produce good-quality figures quarterly. I question whether banks are the appropriate vehicles for high risk and high return; we debated that point today. In return for banks having a degree of protection and a safety-net available to them, there must be a degree of utility as regards them. I would not take that too far, and I certainly would not go as far as the right hon. Member for Holborn and St. Pancras (Frank Dobson) does, but if banks are to be in that position, there has to be a balance. We should not really look to them for high risk and high rates of return.

I now come to the tripartite authorities. Again, it is a question of people. The point was well made by the Chairman of the Select Committee and the hon. Member for Leeds, East that the relationships that existed in 1997, which were left over from a previous generation, no longer exist. The war game aspect is
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important, because while all three entities made mistakes, and all tried to do their best, things failed totally when the three of them had to act in concert in a crisis. It is that kind of work, which the right hon. Member for Norwich, South (Mr. Clarke) likened to Cobra planning in the services, that needs to be done. It is not yesterday’s crisis, which has been regulated for, that has to be dealt with. What are needed are the people with the training and the skills to move in to deal with tomorrow’s crisis.

My last point on the topic of people concerns leadership. It is clear that we all expected the Treasury to be the lead organisation of the tripartite authorities in such an affair. There are many mitigating circumstances. Many of the key players in the Treasury at official level had moved next door not long before. There was a relatively new ministerial team. There were several reasons why the people were not necessarily in place, as they could have been. Concern is expressed in articles in the Financial Times today and in other financial pages about whether the Treasury has the skills in depth that it needs. That is not a criticism of any person. I recall that when I used to run businesses, one would look at the organisation and say, “These are good people, but have they been trained sufficiently? Between them all, are there the necessary skills?” It is a worry that the Treasury does not have those skills, and I hope it will be put right.

A further point, which is not to do with people, is the stigmatisation of the lender of last resort. As the right hon. Member for Hitchin and Harpenden (Mr. Lilley) so eloquently pointed out, in order to work, the system must have an inherent flaw in it, and that is dealt with through the lender of last resort. Effectively, the status of the lender of last resort was stigmatised in the press. I do not remember which of the big five banks it was, but one of them had a little borrowing operation earlier, and newspapers were ringing up anybody and everybody to try and find out whether another bank had the same thing. If we are to have a lender of last resort, which is a prerequisite for ensuring that the system works smoothly, there cannot be a stigma attached to it.

Finally, on house prices, we in the United Kingdom have a curious house market which, for historical reasons, delivers an increase in price and equity that is not shared with many European countries. Two parts of the market work simultaneously. One is a lack of supply of houses and land, and the other is an over-supply of money. When those two come together, the problem arises. My hon. Friend the Member for Twickenham has often made the point that we cannot rely on that kind of growth in the future.

Like all great calamities, the run on the Rock, like the Tay bridge disaster, required a series of events to take place in an unforeseen order. It is easy, with hindsight, to point out all the things that went wrong. We must ensure for the future that there are the right people in the right place with the right skills and sufficient training. We need to make sure that banks as individual organisations are properly regulated and that—the point that our report makes—the system as a whole has overarching supervision.

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6.34 pm

Ms Sally Keeble (Northampton, North) (Lab): I am grateful for the chance to take part in a debate that has been thoughtful and constructive. As a member of the Select Committee, I add my thanks to the staff of the Committee, who did a superb job, producing two complex and extremely good reports in a short time, and to our Chairman, for making sure that we achieved consensus in an area that could have been fraught.

I shall focus on the topic of moving forward and the broad themes discussed by previous speakers. The right hon. Member for Hitchin and Harpenden (Mr. Lilley) said—I hope I do not summarise him unfairly—that there was a problem with the macro system, and indeed there is. Others said that political factors drove some of the decisions that were made. Some acknowledged that things went wrong, but argued that that does not mean that the regulation needs to be changed or increased for the entire system.

Of course there are difficulties in the macro banking system, but I do not believe that the system is totally fractured. It needs to move forward, not back to where banking used to be some years ago. I refute the idea that there were political factors driving the decisions. The Treasury took the best decisions in extremely difficult circumstances, and we must move forward cautiously. No doubt over the coming months there will be many more difficult decisions to take in respect of Northern Rock.

Changes are needed to regulation in the banking system. I shall pick out parts of the Select Committee’s report which deal with that. One of the frustrating aspects of our inquiry was that everybody said that they did their job. Every box was ticked, yet we ended up with a disaster. In the course of the investigation it became clear that there was no interface between the regulatory system and what was going wrong in Northern Rock. Everybody said, “We all saw that it was an extreme business model. We all knew the kind of mortgages that were being provided. We all knew that they were over-reliant on the wholesale market, even if we did not know the full extent”, and so on, yet there was no intersection between the regulatory requirements and what was happening in Northern Rock, until it was too late.

A section in the Committee’s report, “The run on the Rock” highlights the fact that Northern Rock had a Basel II approval and on that basis had agreed to increase its interim dividend. That was a reflection of slightly different factors, but it fed the impression that Northern Rock was doing well and could afford to pay out. It increased its payout at just the time that it was running into liquidity problems. That was one symptom of the fact that the regulatory system at the time did not deal with the problems that would cause, as everyone has said, the first run on a bank in the UK for about 140 years.

A few of the weaknesses emerged in the course of our inquiry. In many ways the FSA has done a superb job, but it has always focused on macro issues and preserving the reputation of the industry internationally which, ironically, has been so damaged. Previous speakers mentioned the slowness of response, especially in the case of the tripartite system, and prior to that, the slowness of the FSA in recognising and tackling the problems that it had clues about.

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My right hon. Friend the Member for West Dunbartonshire (John McFall) spoke about the proposals for structural changes in regulation. I agree that those are important, as he said, to put a bit of grit into the system, to make it impact more on the problems, and to identify a lead person who would deal with problems of the kind that emerged in Northern Rock.

I want to discuss two aspects of regulation in the changed circumstances. First, what will happen to the credit rating agencies? Our inquiry highlighted some serious problems, and the Committee’s proposals are set out in the sixth report of the Session. We identified a conflict of interest by which the credit rating agencies provide both advice to financial institutions on how financial institutions should package products and the ratings for those products. Although the agencies assured us that they have safeguards and Chinese walls, the whole Committee felt that the safeguards are not adequate.

Secondly, there is a lack of competition, because two US agencies and one European agency mop up almost the entire business.

Mr. Hands: That is a common misconception about credit rating agencies. The ratings are best viewed on a relative basis: the fact that something is rated AAA does not mean that it is infallible; it means that it is much more credit worthy than something rated AA. If comparators are necessary, a concentration in three or four firms is inevitable, because the agencies require global reach to compare, for example, a small bank in Japan with a large multinational corporation in the United States.

Ms Keeble: The hon. Gentleman has set out the defence for the credit rating agencies. The Committee heard that view at great length, but I was not convinced by organisations that advise on structuring a package to obtain the necessary credit rating to sell the products, but—this emerged in the evidence hearings—do not scrutinise the details of the products that are being bundled up, which is a real weakness.

A number of hon. Members have criticised the securitisation process, but I have not criticised it, because such products are bound to exist in a complex world that contains global financial markets. It keeps the system going by providing products in which the Chinese and others can invest, but bundled products require close scrutiny. Throughout the Northern Rock fiasco, people said, “We did not know that sub-prime mortgages were so risky,” or “We did not know exactly what was being bundled up in that product.”

If, for example, my constituents’ pension funds are going to rely on those products, I want security and assurance. The credit rating agencies did not provide that, and it is right to criticise them and demand more. As my right hon. Friend the Chancellor has repeatedly said, the ratings are just health warnings, and it is down to everyone to observe due diligence. There is no particular reason why people should accept the ratings as gospel, and they should consider other factors, too.

The evidence presented informally and formally by the industry suggested that the due diligence to back up the assessments of the credit rating agencies is not routinely conducted, which is a severe problem. I am not worried about sophisticated investors, economists
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and hedge funds, but I do not want my constituents’ pensions and homes to rely on financial products that have not been sufficiently scrutinised and properly assessed by the banks and financial institutions that have invested in them.

The recommendations in the report are modest, and it is important that they are chased through the financial system. I am pleased about the debate in the financial press about the need for greater scrutiny of credit rating agencies. I am also pleased that the Financial Secretary and her colleagues in government are taking the matter forward, and I hope that she will say more about that.

Frank Dobson: In view of what my hon. Friend has rightly said about the recognition by some of the financial columns that things are wrong, does she find it strange that whenever Standard and Poor’s or a similar firm provides a credit rating, it is still treated as if it were a tablet of stone?

Ms Keeble: Yes. There has been a lot of discussion about the complexity of the products and whether people understand them. If people are not prepared to undertake the necessary scrutiny and due diligence, there is still an over-reliance on those assessments. The health warning that those ratings are just one measure has fallen on deaf ears, which is one reason why the credit rating agencies should be examined more carefully.

On the liquidity rules, Northern Rock ticked all the boxes on liquidity, which is 5 per cent. or five days’ business falling due. I am concerned that the measure is not adequate, and we should revisit the issue. Other banks have similar liquidity profiles, albeit that they are not so reliant on the wholesale financial market, which was Northern Rock’s problem. If we are to implement a regime that minimises the likelihood of the Northern Rock situation being repeated, we must re-examine the rules and requirements on liquidity. However, we cannot do that on our own, and I would be grateful if the Financial Secretary discussed progress in the international discussion.

On the future of regulation, big changes are taking place, which should produce lighter-touch regulation—so-called principles-based regulation. I hope that there will be careful oversight as we move towards that, because I have some qualms whether that approach will provide the rigorous scrutiny and detailed management that is needed given the current rather turbulent times.

I repeat that the Government were right to consider the private sector options before going for nationalisation. As the process moves forward, I hope that we achieve a realistic and rational discussion about Northern Rock and its future and learn some of the hard lessons spelled out in the report, which will ensure that the chances of a future Northern Rock are kept to the absolute minimum and that our constituents feel more secure in their finances and more confident about the financial and banking system.

6.49 pm

Mr. Greg Hands (Hammersmith and Fulham) (Con): I do not want to talk much about banking reform. Instead, I want to have an urgent look at what has been
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happening at Northern Rock in the two weeks or so since the nationalisation on 22 February. One of the most interesting things is that there has been virtually no press, media or parliamentary interest in what has been going on at the bank during that period. With the exception of a few well placed questions from Conservatives at Treasury questions, there has been remarkably little interest.

The Financial Times has covered only one aspect in the past two and half weeks; I shall come on to the coverage of the Financial Times shortly—it is not infallible by any stretch of the imagination. That one aspect was that representatives from the British Bankers Association had been to see the Treasury to discuss possible market distortions, to which I shall come back in due course.

At Treasury questions last Thursday, the Chancellor put everything down to the business plan; he said that everybody would have to wait for that and that there would be no answers to any questions until then. The Chancellor also said:

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