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The hon. Gentleman will recall that Bradford & Bingley had difficulties in the summer and autumn. It became obvious—not just to the Bank of England but to us at the Treasury and to the FSA—that the question was whether it would fail on the weekend that it did fail or whether it could struggle through the following week. I took the view, as did the Governor and Lord Turner, that we should not take the risk of trying to run the bank through the week. The hon. Gentleman will know that it is much more difficult to resolve a problem when markets are open, but in any event the FSA came to the view on that particular Saturday—I forget the precise date in September—that Bradford & Bingley no longer met its threshold conditions.
There was never any disagreement between us. I think that there was an inevitability about the fact that Bradford & Bingley was getting into difficulties, but what we did was triggered by the FSA saying on that Saturday morning that it had looked at the matter and decided that the bank no longer met its threshold conditions and that it therefore could not take any deposits from the following Monday. That is why we had to take the action that we took.
What happened with Bradford & Bingley again demonstrates the use of the legislation that we have now, through the special provisions, and which we want to replicate in this Bill. It was possible at least to separate out the bank’s branches which, as the hon. Gentleman will know, were sold to Abbey Santander. That safeguarded the interests of savers although, for reasons that I think that most people will understand, it was not possible to find a buyer for the remaining part of the bank.
Mr. Pelling: I thank the Chancellor for giving way, and my question has to do with the special resolution regime. He has said already that the US may follow the Government’s lead on recapitalisation, but why has he set his mind against the idea of taking bad debts off the balance sheets, as America’s troubled assets relief programme attempts to do? Will the special resolution regime still allow that capability to be used as a public policy tool if it is judged to be appropriate in the future?
Mr. Darling: The Americans have decided on an approach that is suited to the present position of American institutions. The special liquidity scheme does something similar, with the difference that, instead of the taxpayer taking on what might be called the toxic assets, in our system the risk stays with the banks. The scheme has worked quite well, and I announced last week that I had authorised support worth £200 billion.
I think that the scheme is working, but I refer the hon. Gentleman to the point raised by the shadow Chancellor. In practice—and unfortunately we have had some practice over the past few months—there was no dispute among the three people who had to make the decisions in relation to Bradford & Bingley. It was quite obvious what we had to do, but the model that we have is based on the regulator—the FSA—finally saying that a bank has failed its threshold conditions. Only it can decide that, and that is right, although the Bill makes it clear that there has to be consultation.
There are three options for dealing with a failed bank. We can transfer it to a private sector purchaser or, so that we can decide how best to proceed, to a publicly controlled bridge bank. Also, if necessary, there is temporary ownership as a backstop. There are also powers in part 1—clauses 42 and 11—to allow for partial transfers, as in the case of Bradford and Bingley. That gives the necessary flexibility.
Mr. John Redwood (Wokingham) (Con): When these difficult judgments are being made, it appears recently that the regulators want a higher tier one capital ratio, and that lies behind the recent capital raising. Is it the ambition to do it all by raising more money, or will some of it be done by reducing the amount of borrowing?
Mr. Darling: As I said yesterday, certainly in relation to RBS, HBOS and Lloyds, capitalisation was by the Government investing capital in those banks. The other banks have decided to proceed in a variety of ways, as I set out.
Clause 65 of the Bill gives us powers to disapply various pieces of legislation. I want to make it clear that that will be done only in pursuit of the powers necessary to make the Bill work—for example, in relation to the competition regime or to modify insolvency legislation. I dare say that the clause, like other parts of the Bill, will be discussed in Committee, and if there are improvements that we can make, we will do that.
Briefly, part 3 deals with the administration procedure in case it is necessary to provide services from one part of a bank to another part that has been transferred to another party. Part 2 also means that any liquidator who is appointed will have to work with the Financial Services Compensation Scheme to ensure prompt payouts to depositors.
Part 4 deals with the FSCS. Clause 156 deals with the issue of pre-funding. My view is that in an ideal world the schemes would be pre-funded because when a claim is made against them, the chances are that it will not be the only claim by the only institution. To have funds available already would clearly be sensible. However, for us to attempt to pre-fund the FSCS in the current climate would exacerbate an already difficult situation. I made that clear in connection with what we did with Bradford & Bingley, and I hope that the House will support me on that.
There is also provision in the Bill in relation to Scottish bank notes. We had extensive discussions with the issuers of Scottish notes and Northern Irish notes. We want to bring the law in Scotland into line with the law in the rest of the United Kingdom so that, put simply, the holder of a Scottish bank note can expect to obtain the full face value of the note in the event of the bank getting into difficulty. That was not the case before; it is now the case. That is why we are making this change. It has the agreement of the Scottish and Northern Irish banks, and I hope that the House will approve it.
Sir Robert Smith (West Aberdeenshire and Kincardine) (LD): There is concern about what the new definition of “authorised bank” in the Bill would imply for future mergers of Scottish banks and whether the legislation would allow the same quota of notes to be issued by a newly merged bank.
Mr. Darling: If there is any difficulty with that, I will happily look at it, but it is our intention that the notes will still be issued by the banks. If any difficulty is caused as a result of any changes, of course we will look at it.
The final part of the Bill to which I want to draw the attention of the House is clause 214, which provides powers to the Treasury to use public funds to protect depositors. We need to make some changes; the clause would help us to deal with the situation that we have with the Icelandic banks. I can tell the House that negotiations with the Icelandic authorities are continuing, and I hope that we will have something more to say about that in the not-too-distant future.
The Bill is, of necessity, lengthy, but it will provide us with the options that we need on a permanent basis to deal with the situation that we have seen over the past year or so. It is sensible and prudent to have the Bill on the statute book on a permanent basis. I repeat what I have said on many occasions. We will continue to have the special powers at our disposal until February next year. I hope that we will have the Bill enacted to take over from then. We will continue to do whatever it takes to ensure the stability of the financial system. That is absolutely imperative, and I commend the Bill to the House.
5.9 pm
Mr. George Osborne (Tatton) (Con): Yesterday, of course, we discussed the massive bail-out needed to deal with the near-collapse of the banking system. Today, we will debate how to prevent such a near-collapse from happening again, and how to make sure that such a bail-out is never again required. Let us be clear: when a house is on fire, it is right that all hands go to the pump, which is why we offered our constructive support. However, when the smoke has cleared and we see the debris around us, we are entitled to ask who built the house, who let it catch fire, and how we rebuild it so that it never catches fire again.
The Bill goes some way towards making the changes to our banking laws that are needed to give the Government the power that they need to deal with a bank failure. That is why we support it, and why I made an offer of support to help get the legislation through by the time that the Northern Rock powers expire. However, we believe that the Bill could go further, and I shall go on to explain why.
Giving the Government the power to deal with a banking crisis is one thing, but preventing such a crisis is quite another. The legislation is mainly about dealing with a bank once it has failed. I would have liked to see more far-reaching changes to the management of overall debt levels in the economy, and a strengthening of the Bank of England’s role in that process. However, as I say, the measures in the Bill are welcome, as far as they go. Indeed, we on the Conservative Benches proposed quite a few of them.
Stephen Hesford (Wirral, West) (Lab): As I have previously reminded the House, the hon. Gentleman is on record as saying that no Government could have foreseen the sub-prime mortgage tsunami that has hit the system. If that is right, and if he sticks by what he previously said, I am not sure what point he is now making. We were hit by circumstances that we could not have foreseen, and are dealing with them.
Mr. Osborne: If the hon. Gentleman does not think that a regulatory system has failed when one ends up having to nationalise half the banks in the country, he may not have been paying attention to recent events. I was going to make this point later, but I will make it now—
Mr. Osborne: Let me answer the point that the hon. Gentleman raised in his intervention. The Prime Minister talks about international co-operation between regulatory systems. Of course, no one is against that, but an international system will not regulate the sale of sub-prime mortgages in Alabama; we will have to rely on the US regulatory system to do that. Nor will an international system prevent the sale of mortgages in this country to people who cannot afford it when house prices turn down. That was part of the problem with Bradford & Bingley, as was the closure of the wholesale markets. Of course we want greater co-operation, but surely the regulatory system that we are hoping to design—not just by means of the Bill, but perhaps through future legislation—would help us to deal with the situation that has developed over the past year and prevent it from happening again. If the hon. Gentleman does not want to prevent it from happening again, that is rather bizarre.
Mr. Charles Walker (Broxbourne) (Con): Does my hon. Friend not agree that it was crazy for the Financial Services Authority and the Bank of England to allow Northern Rock to offer mortgages in excess of 100 per cent. of the value of a property, and sometimes worth up to 125 per cent. of that value? Also, was it not crazy to allow self-certification of income? People could just pick a number, and the banks and building societies would accept it.
Mr. Osborne: I certainly think that we need to learn the lesson that one cannot build an economy on unsustainable levels of personal debt. The Opposition made that point—and, more to the point, so did the Bank of England on various occasions. The International Monetary Fund also said that there were concerns about levels of indebtedness and so on. My hon. Friend’s point is therefore well made.
Mr. Brian H. Donohoe (Central Ayrshire) (Lab): Did the shadow Chancellor endorse yesterday’s £37 billion intervention, or did he not?
Mr. Osborne:
Yes, I did endorse it, from this Dispatch Box. After all, not only must the Government decide how to deal with the crisis, but the Opposition must decide how to respond to it. The decision that I took, and the judgment that my right hon. Friend the Leader of the Opposition made, was that in this time of banking and financial crisis, and faced with the near-collapse of the entire system, we would give our support to the measures that the Government were bringing forward. Indeed—this is a point that some Labour MPs have put to me—I actually talked about recapitalisation before the Chancellor did. We made our suggestions and, as I say, we are very happy to support the specific measures— [Interruption.] The Chief Secretary to the Treasury should appreciate the fact that the Opposition in this
country, unlike Oppositions in other countries, have done their best to support the Government in decisions where the Government are rightly taking on public opinion, which might question why very large sums of public money need to go into propping up banks. We have gone on television and radio and tried to explain as well as she has why that is the case.
On the specific measures in the Bill, we proposed quite a few of them ourselves. Last December we urged the Government to give the Bank of England new powers to put failing banks into a special resolution regime. I shall come on to that. For a considerable time we have been urging that the Government raise the level of deposit protection for savers, and I am pleased that that has now been done. We would like to see the system of payments speeded up, and I know that the FSA is considering that. All of us would welcome a faster pay-out system, as it would help build consumer confidence.
With reference to the Bank of England, I would go further than the Government on some of the appointments. I shall come to that later. I am glad that there are clauses in the Bill that take us in the right direction. That is why we have no problem backing Second Reading. Even with the commitment to ensure the Bill’s passage by February, plenty of time is still left for debate and proper scrutiny, and to learn the lessons of what went so disastrously wrong with the regulatory system created by the Government a decade ago.
One thing is clear: we need that system to change. We cannot end up having to do a multi-billion pound bail-out again. When one looks at the work that has been done—for example, some of the internal reports by the FSA, and some of the work by the Treasury Committee, which I commend for its two excellent reports on the subject—it is clear that the FSA comprehensively failed to see the problems in our banking system develop, the Bank of England, by its own admission, took its eye off the ball in respect of financial supervision, and the Treasury encouraged an economy to grow on the back of unsustainable debt.
The Bill’s regulatory impact assessment, usually a fairly dull document when produced by Government Departments, is remarkably candid about the shortcomings of the regulatory system created by the previous Chancellor of the Exchequer. Page 7 states:
“The problems faced by Northern Rock plc in 2007 demonstrated...that the then existing arrangements for dealing with banks in distress did not adequately uphold”
“thus exacerbating the threat of financial instability.”
That is the Treasury’s own assessment of the regulatory regime that the Treasury created. In its own words, its arrangements made things worse, not better—they exacerbated the threat of financial instability. That view is shared by the Treasury Committee in its reports. Its various reports point to the systematic failure of the FSA in its duty as a regulator and the fact that the Bank of England was left
“in a no-man’s-land”
The public will draw their own conclusions about who was responsible for the mess. I dare say that the man who oversaw the creation of the regulatory regime
will come in for some blame. However, the question before us today is how we put matters right for the future. Let us start with what we would like to see from an ideal regulatory regime and use those principles to judge what is in the Bill and what the Government might propose after Lord Turner’s report.
First, a regulatory regime should protect us from the kind of systemic risk that we have seen in the past month. Secondly, it should ensure that we can identify problems in individual institutions long in advance, such as unstable business models or risky bonus schemes, and deal with them in a way that prevents contagion to the rest of the system. Thirdly, a regulatory system should give the authorities the full powers that they need to step in and deal with banks if neither of the first two conditions is successfully met. We have discovered that if nationalisation is the only lever that we can pull, pretty soon we end up owning half the mortgage business in the country.
Fourthly, a regulatory regime should protect the consumer from being treated unfairly or being mis-sold products. In all this, we should not lose sight of consumer protection. Fifthly and last of all—this will be the most difficult balance for us to get right in the coming months—a regulatory system should be proportionate and fair. At the end of this, we do not want the City of London simply to go to New York. We must remember that financial services are still, for all the press that they attract at the moment, our largest and most important industry, and they employ people not just in the City of London, but in Edinburgh, Leeds, Bristol, Birmingham, Cardiff and Manchester, and in every single constituency in this country.
Mr. Henry Bellingham (North-West Norfolk) (Con): Has my hon. Friend made any estimate of the chronic deficiency in money coming into the Treasury coffers that will result from these banks and other financial institutions now either breaking even or making a loss, and the number of people who will lose their jobs throughout the country, including in cities where major insurance companies are located? There will be a huge loss of Treasury revenue. Has he estimated how big that loss will be?
Mr. Osborne: My hon. Friend raises an interesting point that the House will have to deal with in the next year, which is that we have basically created a revenue regime that assumes successful and profitable financial services. We rely heavily on corporation tax receipts from the City and we rely on income tax receipts from wealthy individuals, and as well as coming into this economic downturn with a structural budget deficit because tax revenues were not matching spending, we face another kind of structural deficit, which is that the way that we have collected taxes means that the revenue streams that we have depended on and that the Treasury has put in its long-term forecasts, will, I suspect, not be there. That will be the case not simply through this current economic downturn, when tax receipts fall and spending rises, as always happens in an economic downturn, but for the foreseeable future. The cash cow of the City will not be there and that will pose some difficult questions for the Chancellor of the Exchequer and perhaps those who come after him. That is something that we could debate on another occasion, but my hon. Friend makes a good point.
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