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I want now to go through some of the details of the legislation, as the Chancellor did, and to deal with the central measure, the special resolution regime. I positively welcome the fact that the Government are giving themselves powers, or what they call tools, other than nationalisation or part-nationalisation, to deal with a bank failure. There are the new powers to create a bridge bank or facilitate a private sector purchase, which again the Government rightly say is the one solution most likely to maintain financial stability, provide continuity of banking services and protect public funds. Of course, there are also the important powers—extraordinarily, the current law did not allow us to do this—to put a bank into insolvency. It is correct that those matters should be addressed in this legislation.
It is important for the House to understand that, when we are discussing the special resolution regime, we are talking about extraordinary powers to seize private property and to dismiss privately entered into contracts and loans, potentially wiping out the savings and investments of millions of small shareholders who have ordinary shares in banks, many of whom are the employees of those banks, working in the bank branches and the call centres. We can only contemplate the use of such powers because of the central role that banks and financial institutions play in our economy, and that justifies not just the bail-out yesterday, paid for by the taxpayer, but the extraordinary powers that the Bill grants.
However, much rests on the circumstances in which the new powers would be exercised, and in particular there is an interesting debate to be had over the power to set aside the claims of creditors. We should remember that in all the different actions that the Chancellor has taken—Northern Rock and Bradford & Bingley, and the action that he took yesterday—to my knowledge, he has never set aside the legal claims of the majority of the creditors. In what circumstances would he in future wipe out the creditors? What would the threat be that would force him to do that? The very fact that the threat is on the face of the Bill is something that, for example, the banking industry is concerned about. In commenting on the Bill, the British Bankers Association puts it like this:
“without appropriate safeguards, interference in creditor rights would undermine the competitiveness of UK financial services firms and inflict serious damage on the role of London as an international financial centre.”
As I say, there must always be a balance between the interests of the taxpayer, protecting the stability of the system, and maintaining the competitiveness of the City of London, but if there is concern about the powers—they were not used in the extraordinary circumstances of recent weeks—it might be good to hear from the Government about the kind of scenario in which they might be used, and that might be set out in the code of conduct, which I am glad that the Chancellor promised we would be able to have sight of at some point in Committee before we discussed the particular issues around the special resolution regime.
Mr. Redwood:
My hon. Friend is making some very sensible observations on what a regulatory structure should do. However, should such a structure not also act at a much earlier stage, before a bank is greatly overstretched and in trouble? It should say privately to such a bank, “We expect you to rein in your lending,
raise more capital, cut your dividend or cut your costs because we think that your balance sheet is getting too bloated.”
Mr. Osborne: My right hon. Friend is absolutely right; that is a key part of prevention. In a short while, I shall propose extra powers that I think the Bank of England should have, and a new relationship between the Bank and the Financial Services Authority which would help ensure that what he suggests is done on a more systematic basis.
Mr. Mark Todd (South Derbyshire) (Lab) rose—
Mr. Osborne: I shall give way to the hon. Gentleman, and then move on.
Mr. Todd: The previous intervention was very apposite because it referred to the private process of briefing those in the financial sector on their behaviour. The importance of privacy in these matters was drawn to my attention when I looked at the article on bank capitalisation by the shadow Chancellor’s colleague, the hon. Member for Chichester (Mr. Tyrie); it appeared rapidly to have succeeded a meeting that the shadow Chancellor held with the Governor of the Bank of England on confidential terms. Can the shadow Chancellor assure us that he did not brief the hon. Member for Chichester for the basis of that article following that meeting?
Mr. Osborne: The hon. Gentleman is slightly confusing the attack point that he wants to make; he is roping in my hon. Friend the Member for Chichester (Mr. Tyrie), and that has not been the main line that No. 10 has taken—this does not apply to the Treasury, to be fair—in briefing against me for the past week while we have been trying to offer some cross-party support for what the Prime Minister has been doing. [Interruption.] Let me make it absolutely clear to the hon. Gentleman: I did not, and neither did my colleagues on the Front Bench, take any private briefing from the Bank of England and repeat it on any television programme or in any newspaper article. The issue of recapitalisation, or the possibility of it, had been discussed openly in the press for some time; Martin Wolf had written a fairly convincing piece about it in the Financial Times the previous week. More to the point, Dominique Strauss-Kahn, the head of the International Monetary Fund, had said, also in the Financial Times, that recapitalisation was the approach that European Governments should be considering, rather than the TARP—troubled assets relief programme—approach put forward by the United States.
I know that the Prime Minister now casts himself in the roles of Churchill and Roosevelt in dealing with this crisis, but the idea that somehow recapitalisation was not being discussed across the world is somewhat bizarre. By the way, I met all the different members of the tripartite committee that week; the idea that I took a private briefing and repeated it is simply not true. I give the hon. Gentleman and the House that assurance—not, I suspect, that that will stop the Prime Minister’s boot boys from doing their job.
Before I move on, I want to touch on one point about the special resolution regime: the trigger. As the Chancellor said when I intervened on him, I do not intend to insist on this point, but I draw the House’s attention to who
exactly pulls the trigger. No one doubts that the FSA should pull it, but there is some disagreement about whether the Bank of England should also have access to the trigger. The Governor of the Bank of England told the Treasury Committee that he felt that he should have that power. We were convinced by his arguments to the Committee. We have spoken to regulators and central bank governors in other countries and we know that they can see an argument for a central bank having such a trigger. All I say to the Chancellor is that although we will not insist on the point—we will not try to get the House of Lords to insert it into the Bill—we reserve the right to return to the issue later. Although between its first report in January and its second report in September, the Treasury Committee amended its view on whether the Bank of England should have the explicit trigger, it said that the Bank should have explicit powers in primary legislation to recommend the pulling of the trigger to the FSA; such a provision, however, is not in the Bill.
Moving on to part 4 of the Bill, I welcome the increase in the deposit protection limit to £50,000, and we are glad that the Government have agreed to it. It would be interesting to hear whether there are any further proposals on that, given that some Governments around the world are still increasing their deposit protection limits and issuing general guarantees. The key thing is that people have rapid access to their money, and it will be interesting to know when the FSA will introduce its proposals.
Although it is not directly relevant to the Bill, with your indulgence, Madam Deputy Speaker, I ask the Chancellor—or whoever from the Treasury will reply in this debate—to tell us how he intends to deal with Equitable Life, which is another compensation issue that arose from a failure of regulation. We have the parliamentary ombudsman’s report and we are awaiting the Government’s reply. Most people would regard it as somewhat bizarre that the Government can compensate people—quite rightly—for losses in foreign banks because of regulatory failures in Iceland, but cannot compensate people for losses caused by regulatory failures in the UK in relation to Equitable Life. It would be interesting to know when the Government propose to deal with that.
I shall touch briefly on clause 156 and pre-funded compensation schemes. I know that the Government are giving themselves the power to have a pre-funded scheme, but the Chancellor knows, as he acknowledged, that the industry is nervous about that. The Association of British Insurers says that it would impose a heavy cost on the financial services industry that is undesirable given the current economic weakness. In what circumstances would the Chancellor consider introducing a pre-funded scheme? Would there be some test about how strong the industry had become? Such a test is not likely to be passed for a considerable period.
On the new structures and procedures for the Bank of England, more than two years ago, we proposed that appointments to the Monetary Policy Committee should be more transparent and made in the way that other Government appointments are. I am glad that there has been some movement in that direction, but we could do more to entrench the independence of the Bank. Recent events have shown that there is no shortage of politicians
who are willing to jump up when times get difficult and call for the Bank’s independence to be suspended—indeed, the hon. Member for Twickenham (Dr. Cable) was one of them—but it would be more serious if the Chancellor or Prime Minister of the day was tempted to use the power to reappoint the Governor for political purposes. Whether it was intentional or not—we have our own views on that—we have been through the reappointment of Eddie George and Mervyn King, and in both cases the decision became somewhat charged. Our proposal is that, rather like the European Central Bank and other central banks, we should move the Governor to a single, non-renewable term so that there is no question of independence being challenged by a reappointment.
Susan Kramer (Richmond Park) (LD): Do I gather that the shadow Chancellor would not support in an emergency some temporary adjustment to the remit of the Bank of England to allow it to set aside the strength of its commitment to inflation targets, and to allow the interest rate to be set to deal more with the crisis in the economy?
Mr. Osborne: I absolutely would not allow the Bank of England’s remit to be changed in a crisis. There is no point having an independent central bank if at the moment we get any kind of trouble we suspend the remit or change the target. No independent central bank in the world would last if that were the case. The target set by the Government includes not just an inflation target but a responsibility on financial stability, and as last week’s decision by the Governor demonstrated, he is perfectly capable of taking into consideration broader issues of financial stability as well as his inflation target remit. Frankly, it would not be sensible to suspend the independence of the Bank. The very concept of suspending independence is almost a contradiction in terms. It would not be independent.
Susan Kramer: The shadow Chancellor keeps using the term “independence of the Bank of England”, but surely it is within the gift of the Chancellor to set the inflation target, therefore putting in abeyance or adjusting the inflation target, which still leaves the Bank independent to make a decision on the facts as it sees them.
Mr. Osborne: Again, I come back to the point that if the Chancellor of the Exchequer changes the target in the middle of a crisis, and basically mandates the Bank to pursue another course, we cannot properly call it an independent central bank. While the hon. Member for Twickenham has said some sensible things in the past year, I do not think that that was one of them. I am sure he is reconsidering his position, or is at least glad that his course of action was not pursued and that the Governor was able, within his existing remit, to act in the way that the hon. Gentleman wanted. By the way, I do not think that it is particular sensible either for politicians speaking from the Front Bench to call on the Bank to cut or increase interest rates. Indeed, I make it a practice not to comment on them.
Finally, let me turn from the structure of the Bank of England to something that is not in the Bill but should be—this addresses a point that my right hon. Friend the Member for Wokingham (Mr. Redwood) made to me: the central issue of how we prevent problems from arising, as well as how we deal with them once they have
arisen. We should use this opportunity to make some more far-reaching changes to our system for regulating banks and controlling debt levels in the economy. We have learnt the hard way that we cannot build an economy on excessive debt. We have also discovered that no one has the power in our system to call time when debt levels become unsustainable.
The Bank of England used to have that power, but unfortunately the previous Chancellor took it away in 1998. Most people can see now that that was a mistake, for the result was that, despite the warnings from the IMF and the Bank of England itself that growing levels of debt in the economy were not sustainable, nothing was done to stop them. That needs to change. We need to give the Bank of England the power to call time on excessive debt. The Bill does not do that. For all its references to the Bank’s role in financial stability, it contains no formal system for the Bank to implement its concerns about market-wide risk. That is a surprising omission, given the events of last week.
Mr. Russell Brown (Dumfries and Galloway) (Lab): The hon. Gentleman makes a plea about intervention, but could he share with the House his views on how that intervention would happen without its becoming an act of the nanny state?
Mr. Osborne: Of all the weeks to make that argument, I am not sure that this is the best one. However, I was coming on to exactly how that intervention should be made. We should create a new statutory requirement on the FSA to take into account the Bank’s assessment of market-wide risk when setting capital and liquidity requirements on individual banks. We would call that a debt responsibility mechanism. The Bank of England would be required on the basis of legislation to write a regular open letter to the FSA setting out its assessment of market-wide risk and levels of debt in the economy. The FSA would then be required to outline how it would respond to those recommendations from the Bank.
That would force the Bank of England to maintain an active role in macro-prudential supervision and would force the FSA to consider an institution’s risk not just in isolation or at a certain point in time, but in terms of the market context and through the economic cycle. That means that the regulator would have the power to take pre-emptive action to control the overall lending of banks in the system when there was a danger of an asset boom.
We have to address the problem—in the end, the solution offered by Alan Greenspan, the honorary economic adviser to the Prime Minister, did not sufficiently address it—of how we deal with asset price booms. We have got independent central banks to deal with retail price inflation, but how do we deal with asset price booms? After the events of the past month, the Greenspan approach, from the man who opened the new Treasury building, which is just to let the bubble burst and pick up the pieces afterwards, is clearly not one that we should allow to be taken again. Tackling that point will be a big issue for debate, not just in democratic Parliaments, but in central banks.
Mr. Pelling:
Is not the fact that no one was responsible for dealing with asset price inflation fundamental to the crisis that we have faced? The easing of credit during the dotcom boom and the previous Asian financial
crisis meant that we stoked up the problems that have had such severe consequences. It is only by imposing those additional responsibilities on the authorities that such crises can be prevented in future.
Mr. Osborne: The hon. Gentleman is right. We should seek to apply capital adequacy requirements in a counter-cyclical way. In an open and global market, that is obviously best done in co-ordination with other central banks and through the Basel arrangements, if they can be reformed. We suggested that as long ago as March, and it is good that that line of thought is also being pursued by the European Central Bank and the Federal Reserve.
Yesterday, the Prime Minister appeared to acknowledge, apparently for the first time, that that Conservative idea might have some merit. He said that in future banks
“have got to lay aside more for the possibility that there will be contractions”.
Perhaps that is the Prime Minister’s way of admitting that he did not actually abolish boom and bust, and that one needs to fix the roof while the sun is shining—
Frank Dobson: Does the hon. Gentleman think the Government should have put the money in a bank?
Mr. Osborne: I am sorry that the right hon. Gentleman does not like the phrase, but it was in the Prime Minister’s conference speech, so if we are not allowed to repeat it in the Chamber of the House of Commons, we have come to a pretty pass. It is a shame that the Government have not used the Bill to enact the kind of future-looking changes to the regulatory system that would ensure that that happened.
We will give the Bill our support and help its passage because we support the measures in it, not least because we proposed some of them, but we will also remind people of the 10 years of economic policy and regulatory mistakes that brought us to the point at which the banking system in this country was on the verge of collapse and the taxpayer had to bail it out. We will offer people the kind of far-reaching changes that will not only enable us to deal with banks that have failed, but help us to prevent those failures in the first place, by ensuring that we never again build an economy on unsustainable debt.
Madam Deputy Speaker: Order. I remind all hon. Members that Mr. Speaker has imposed a 15-minute limit on all Back-Bench speeches.
5.41 pm
John McFall (West Dunbartonshire) (Lab/Co-op): Thank you, Madam Deputy Speaker, for giving me the opportunity to contribute to the debate. I welcome the introduction of the Bill, and the cross-party approach to the measures to deal with the banking crisis. The Treasury Committee has led the way in forging a cross-party approach to the issues relating to banking that have arisen since the run on Northern Rock in September 2007. We have produced two reports on the legislative changes that we identified as arising from the experience of Northern Rock. One, “The run on the Rock”, was published in January this year. The other, entitled “Banking Reform”, was published in September.
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