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Mr. Kenneth Clarke (Rushcliffe) (Con):
I refer the House to my entry in the Register of Members’ Interests. As people are inclined to make mischief in that area, I should probably also mention that I am a shareholder
in most of the banks that have been mentioned in the course of the debate, although I am happy to say that the modesty of my shareholdings is such that they threaten neither my financial stability nor that of the banking system. It does mean that my interests are aligned with those of the taxpayer who has made a deal to take a substantial stake in various banks.
En passant, I notice that on the first day’s trading the taxpayer lost £2 billion on the value of that investment. Given that I have heard, in various speeches in the past day or two, the cheery assumption that the taxpayer is bound to make a profit when withdrawing from the deal—so we should not be concerned by the staggering impact that the borrowing will have on the public finances—we should all note that shareholdings are capable of going down as well as up. It is completely uncertain as to whether we will eventually take any profit.
The Bill is obviously necessary in the current circumstances, and I shall support it in the unlikely event that anyone chooses to vote against it. The current powers that the Government have will lapse in February if we do not make progress from the Banking (Special Provisions) Act 2008, and those powers are needed to enable the Government to intervene in the manner in which they have. It is not a perfect Bill, as it does not address some of the problems with the regulatory system in this country. Once we get past the worst of the present crisis, the most important need will be to contemplate how we avoid getting into a similar crisis for many years ahead. I anticipate that a new Government will have to return to the subject and readdress, in particular, the position of the so-called tripartite regulatory arrangement and the relationship between the Treasury, the Bank and the FSA.
The Bill has been a long time coming. Like most of the Government’s actions in the present financial crisis, it should have come sooner. The Government started consulting on this a long time ago. Such a Bill was obviously necessary at the time of Northern Rock, but only now—when the crisis is enormously worse than it was then—do the Government come forward with it, and most of the provisions still have to be left to a code of practice. I intend to ask questions about how the Bill is supposed to operate, and the Government should be in a position to answer them—although they do not seem able to do so. That is, of course, of a piece with their whole approach to the financial crisis and the background to it. The Government have been astonishingly complacent and negligent in taking no action whatever until the crisis began to hit us. Ministers, especially the Prime Minister and—as far as one can see—the Chancellor when he first took office, were more oblivious than most other people to the likely threats to the financial system, and hence the economy.
We are committed to a bipartisan approach to the Bill, but I shall be very irritated if Ministers criticise us every time that we are critical of anything that they say. I agree with my hon. Friend the Member for Tatton (Mr. Osborne) that we must return in time to the extraordinary negligence that led to Britain being one of the worst placed countries in the developed world when the tsunami—as the hon. Member for Twickenham (Dr. Cable) described it—actually hit us.
Mark Lazarowicz: Does the right hon. and learned Gentleman seriously expect the House to believe that if the Government had made proposals two or three years ago to put £50 billion into buying shares in banks and to provide £400 billion of support for the banking sector, the Conservatives would have happily supported the proposal?
Mr. Clarke: Two or three years ago, the Government declined all invitations to deal with the out-of-control credit bubble that was obviously affecting the country, not to mention the out-of-control housing bubble that was inevitably going to end in grief. The hon. Member for Twickenham talked of us rewriting history, and I do not want to dwell on that for too long, but we all need to establish our credit in this area. I have dug out one of my several references to the problem. In the debate on the 2006 Budget, I said that GDP growth was sustained
“on a sea of household debt, and public debt and borrowing”.
“was not sustainable, and what is not sustainable always stops”.—[ Official Report, 28 March 2006; Vol. 444, c. 722.]
I said that on many occasions, and more distinguished people than me said it in the House and outside, but the Government treated those predictions with disdain.
On other occasions, we will tackle the Government and especially the then Chancellor on their total negligence on dismissing the alarm calls about the mounting level of debt and the unsustainability of the growth—what was left of it—of our economy two or three years ago, and about the threats to the banking system. As we all recall, he actually took credit for it. Far from trying to restrain boom and bust—a phrase that he took from me in the first place—he led the public to believe that the top of an uncontrollable boom was the result of the remarkable economic policy over which he was presiding, and that it was spreading wealth as never before through a country that somehow had become free of the economic cycle.
Not only were the Government complacent, but the regulatory system completely failed. Some of the more excitable left-wing members of the Labour party now like to say that this issue reignites the old argument between laissez-faire capitalism and the role of the state and Government intervention. That argument has been dead not only since the birth of new Labour, but ever since the second world war. There are very few advocates of laissez-faire capitalism in this country and very few advocates of a command economy. Everybody has always accepted that the free market requires a proper system of regulation to protect stakeholders and to avoid the obvious dangers of potential financial crises of the kind that we have had on occasion ever since the Dutch tulip bubble and, more recently, after the 1929 crash.
Not only were the Government inactive during the credit bubble of recent years, the regulatory system was ineffective. The then Chancellor made a fatal error in 1997 when changing the regulatory system and moving to the tripartite arrangement that has plainly failed. The Bill acknowledges that in a way, because it proposes strengthening the powers of the Bank, and shuffling the arrangement of responsibilities between the partners. However, the Bill does not convince me.
The most obvious problem is that tripartite arrangements give rise to confusion and differences in information between the parties, and there is always the possibility
of dissension—always denied thereafter—between the three institutions. The failure of the tripartite structure became clearest at the time of the Northern Rock debacle. A very good report by the Treasury Committee showed how useless the FSA had been as the lead regulator. It did nothing. There was no mystery about Northern Rock: it had a strange business model in which it relied on the money markets to give extremely generous loans. It is fashionable for Ministers to claim that the problem stemmed from the US, with the so-called sub-prime crisis causing a tsunami to fall on these fair shores where nothing of the kind was happening. We may not have called them sub-prime mortgages, but they were being granted here. There were mortgages for more than 100 per cent., lent on self-certified income at rates of six times income. Reckless banking practices included the abuse of the securitisation of such debts, by bundling them into instruments to be sold on to others so that they were taken off the balance sheet to avoid the regulatory arrangements. Such practices were all raging in this country and it was first the duty of the Government to prompt its chosen regulator, the FSA, to look into that and to consider the sustainability of the model and the likely effects if it continued.
Not only was the then Chancellor, the present Prime Minister, totally dismissive of such fears—he constantly made speeches about the lighter regulatory touch that was helping to make the City of London a financial centre in the world—but so was the FSA. As far as I can see, the FSA never even raised the telephone to Northern Rock when the first hints of the credit crunch began to enter the money markets as they started to get sticky in the beginning of 2007.
Frank Dobson: The right hon. and learned Gentleman has just said that it was first the duty of the Government to do something about the situation, but surely it was first the duty of the management of the banks to do something about it.
Mr. Clarke: Of course. The primary responsibility lies with the banks—I agree with that—but we do not leave the fate of the nation entirely in the hands of the banks, for good and obvious reasons. We therefore have a regulator and regulations with which the banks are meant to conform. They had a silent regulator who saw nothing wrong with what was happening and the Government presided above them, taking credit for the boom conditions that were breaking out.
In my day, regulation was carried out wholly by the Bank of England. I do not think that we will ever go back to that, but it worked rather well. We had one bank that went bust—Barings—and I think that might have been why the present Prime Minister decided to change the regulatory arrangements. I have never quite worked out why he wanted to change them, but there is no protection against a deliberate fraud when the management of the bank are ignorant of what is being done in Singapore by a fraudulent employee.
The Bank intimately knew the banking system and took its regulatory processes extremely seriously. The only explanation that I have heard from the then Chancellor’s friends is that he thought that he would make the Bank too powerful if he made it independent on monetary policy while allowing it to keep its regulatory duties. I do not understand that, but he set up the new arrangement and so far, plainly, it has not worked.
The Bill tries to address that problem and that is welcome, so far as it goes. At last, a statutory footing is at least given to the Bank of England’s responsibility for financial stability. That is a very vague phrase and giving the role a statutory form does not alter present practice, although it gives a vague overall responsibility to the Bank, which is also given statutory immunity when it exercises that responsibility. That is all well and good, but the Bill also gives the Bank a responsibility to execute the new regime—the special resolution regime—in which alternative paths can be followed to step in when a bank fails to ensure that it does not threaten the system and is kept trading. That is going on now.
Although the Bank is given a role in the regime, whether the regime is triggered is dependent on the opinion of the FSA. The Chancellor has said that the system works quite well and that the system set up in the 1998 legislation has led to a clear division of responsibilities between the various players. I do not believe that it has. I have not been intimate to the discussions but along with 60 million others I can see with the evidence of my eyes that the system has not worked at all. I can see that when I read the newspapers and could have seen it in my bank balance had I happened to have had an at-risk deposit with an Icelandic bank—I have not been so unfortunate.
To go back to the example of Northern Rock, it was quite obvious at the time that the three parties to the tripartite arrangement did not agree. They were shovelling blame on to each other at various times and had totally different approaches to what exactly to do in the short term. I said this at the time, so I shall not repeat it too much, but in the middle of it all the Government did not have the first idea of what to do. Now, they are taking the credit for taking the lead in solving the global crisis—that is, in how to deal with the insolvent banks.
Mr. Todd: Will the right hon. and learned Gentleman give way?
Mr. Clarke: I am sorry, but I do not have the time.
Other features of the Bill prompt the question of whether things are really moving. The Bank can now access the information that it needs for its role from the banking system, but it has to get all that information from the FSA—the FSA is given the power to share information with the Bank, and it is astonishing that it has not had that power for the past 10 years. We are putting in place a potential shambles, with which a new Government will have to deal.
I have no time to cover any other major points, but I want to conclude with one of them. We are dealing with the part-nationalisation of banks and we are in the extraordinary situation where we are about to take into public ownership a substantial part of the banking system. Ministers should therefore explain on what basis the Government will conduct their relationship with part-nationalised banks. My hon. Friend the Member for Chichester (Mr. Tyrie) raised that point earlier.
Yesterday, we heard vague remarks about an arm’s length arrangement for managing the shareholding and appointing the directors. There are serious worries about how we will work with nationalised banks, and that is why the taxpayer lost £2 billion in the markets yesterday. The only banks that went down on the markets were
those that had been given the privilege of a Government investment. Why? The Government have not really explained why they have made such a move.
The Government will appoint directors, which they did not seem to be thinking of doing last week when they first outlined their proposals. They will take ordinary shares, not just non-voting preference shares, as we were first told. There are also astonishing apparent targets for levels of mortgage lending and small business borrowing, which are quite inappropriate and will distort the markets if they are imposed. There is the whole question of why Lloyds TSB is still taking over HBOS, which would never have been permitted under the previous competition rules. Apparently, now that the bank is publicly owned it does not matter that it will have a dominant market share that two private banks would not have been allowed to amalgamate to obtain.
Will the Government have a view on jobs in Scotland when the banks are rationalising their arrangements? Will the Government have a view on a bit of pork-barrel lending in the run-up to the election? They have to satisfy us that that is not true, but they cannot tell us what the mechanisms will be to prevent such activity.
There are serious problems with the Bill. We are supporting it on an all-party basis because there is a pistol pointed at the nation’s head and these powers are required. The Government will need to answer more questions, including questions about their record, before we are happy.
6.47 pm
Frank Dobson (Holborn and St. Pancras) (Lab): I had better declare two interests. First, my wife and I have deposits with the Royal Bank of Scotland. Secondly, I am a supporter of West Ham United, which is currently in Icelandic ownership.
To listen to the distinguished former Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), one would never realise that the debate springs from the failures of market forces and uninhibited competition in this sphere worldwide. The results of the failure are that fanatical advocates of free markets and people who usually denounce public spending and Government intervention have come cap in hand to the Government to ask to be bailed out by the British taxpayer. In other words, some bankers have become the new scroungers and we should recognise them for what they are.
I welcome the Bill, which is a second instalment in the attempts to deal with the crisis. The first was the Banking (Special Provisions) Bill, which I remind the House that the Tories opposed. The hon. Member for Tatton (Mr. Osborne), urging us to oppose that Bill, commended the views of the British Bankers Association, which wanted the powers to exist not for a year but simply for a month. Had we taken that short-sighted advice, the Government would have been unable to take the measures to sustain the banking industry and consequently the British economy that they have taken—in taking such measures, the Government have set an example to other countries round the world.
We need further instalments beyond the Banking Bill, because it deals with a limited sphere. The people of this country always seek security: in their homes, for
their jobs and for their pensions. In recent times, they have seen all of those imperilled by grasping, greedy, arrogant and stupid bankers.
Mr. Redwood: Will the right hon. Gentleman give way?
Frank Dobson: No, as I need to get on. The actions of banks, finance houses and the related organisations that prop them up were made possible by the Tory deregulation initiated by Reagan and Thatcher. A lack of transparency that is a probable product of that deregulation has compounded the difficulties by in effect promoting the obscurity of dealings in the financial sphere. Above all, deregulation has promoted a system based on debt.
Mr. Redwood: Will the right hon. Gentleman give way?
Mr. Redwood: I am grateful to the right hon. Gentleman. The directors of Northern Rock said in the company’s 2007 report and accounts that they needed to reduce capital and increase lending to get in line with regulatory requirements. How does he account for that? What does it tell us about the regulations?
Frank Dobson: It says that the directors were as daft as brushes, but we knew that already, before the right hon. Gentleman asked his question.
We have also seen, as a result of deregulation, the development of hedge funds, the increased involvement of private equity and the further promotion of tax havens so that rich people can get out of paying tax. If there is to be a new Bretton Woods agreement, I hope that it will clamp down on the minor tax havens around the world that have allowed rich people to rob everyone else.
The banks have carried out what they portrayed as sophisticated financial transactions. Time and again, their representatives went on television and radio and gave the impression that what they were doing was too complex for the average viewer or listener to comprehend its wonders. They were constantly announcing new products—ever more obscure and nearly always involving debt piled on debt. Those products were all dependent on inter-bank transactions so complex that several members of the boards of directors of the companies involved now say that they did not understand what was going on. Apparently the only thing that they understood was the whacking great cheque that came in at the end of each year to thank them for not understanding what their banks were doing. They apparently could not distinguish between assets and liabilities, and a banker who cannot do that has not got to first base in banking.
We have also had things like off-balance sheet transactions, and so on. There has been a feeling recently that the problem really had to do with mortgages extended to a few badly off individuals, but in fact most of it springs from what might be described as the wholesale, rather than the retail, end of the business, and from transactions between one bank and another.
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