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That highlights the need to address, not now but fairly soon, the more general question of the strategy for the UK’s entire banking sector. What are we going to do under the new state of affairs? Where do we see things going in the years ahead? A number of hon. Members have already highlighted the questions that are raised by the prospect of banking activity being concentrated in ever fewer banks. The issue of consumer interest has been raised, and the reduction in competition. Again, in Scotland, at least in the short to medium term, the vast majority of banking provision is likely to
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be in the hands of banks on which the state has a major impact. That will apply in other parts of the country, too.

What about the issue of stability in future? What happens if, some years hence, there are fewer but larger banks, and there is a threat to one of them? How do we react to that situation? These are real issues that need to be addressed and thought about so that a strategy can be worked through.

What is the role of the mutual sector? There is concern that what is happening now may lead to pressures and further diminution of the mutual sector. This is the time to promote the sector and encourage it to grow and expand. Why, for example, does it seem to be assumed that Northern Rock will gradually be run down and sold off in its entirety? Why not use that as a basis for re-establishing Northern Rock as a mutual—a building society—solidly based in north-east England, with the remit to provide an opportunity for people to save and buy houses on a sensible basis?

The same could be said of Scotland. I do not believe that those who suggest that the HBOS-Lloyds TSB merger should not go ahead are doing the interests of Scotland any good at all. Even the speculation over the past day or so about that arrangement highlights what would probably happen if that deal were to fall by the wayside. There would be severe consequences for HBOS if the deal were to collapse, so it is important that it should go ahead.

In the long term, what are the possibilities of creating some separate Scottish institution to deal with the building society end of business, so to speak? Perhaps TSB could be resurrected as a separate mutual from parts of businesses that were brought together under HBOS-Lloyds TSB, with similar arrangements for other parts of the country. Such thinking may seem radical, but after the past few days all options, solutions and new directions should be on the agenda. Challenges can also be opportunities, and there are certainly plenty of opportunities, and plenty of challenges, to do some new thinking and to come up with solutions that may not have been conceivable a few weeks ago but which we can now discuss as a means of addressing some of the wider economic needs of the country, as well as the short-term emergency situation in which the Government have rightly intervened.

Finally, I shall say a few words about international agreements, the talk about a new Bretton Woods, and new international arrangements to stabilise financial markets across the world. That is essential. I recognise and welcome the steps taken by the Prime Minister and the Chancellor. It is sad that we have not had even grudging acknowledgement of that from those on the Opposition Front Benches. Instead, we have heard attempts to do down what has been achieved. The fact that at last over the past few days the world has moved to stabilise the situation, we hope, is in no small part due to the leadership shown by the UK Government and by the Prime Minister and the Chancellor in particular.

Let us not forget other international agreements, discussions and arrangements that are not going forward so quickly or so apparently successfully—the agreements on international debt relief and on international aid, on which the United Kingdom has taken the lead and has
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been complying with its commitments, whereas other countries have been falling behind in carrying out what they said they would do in agreements made over the past few years.

Let us not allow the interests and concerns of some of the poorest in the world to be forgotten in the discussions and debates about the international financial system. Those are the people who would lose more than any of us from the type of collapse that we hope has been prevented. They are the people who could lose out because of a failure to meet the commitments entered into a few years ago. Let us make sure that those international agreements are also kept on the agenda, as well as the arrangements and agreements needed to stabilise the financial sector.

7.24 pm

Mr. John Maples (Stratford-on-Avon) (Con): The hon. Member for Edinburgh, North and Leith (Mark Lazarowicz) makes some interesting points about international institutions. We have the Bank for International Settlements and the IMF. I hope that whatever additional role is needed can be found through them, rather than by inventing new institutions. It is a matter not of institutions but of political will to solve these problems. That is what we have seen in Europe. The political will was not there two weeks ago, but it has been there this week and people have done things. It was not the lack of another ECOFIN or European Central Bank that led to the delay. It is a matter of political will and those institutions should be built on.

I have supported the package of recapitalisation and liquidity measures that the Government have taken. Perhaps they could have got away with doing a little less if they had done it a little sooner, but that is easy to say now. They have done the right thing, but I would be grateful if the Minister would comment on one aspect.

I raised with the Chancellor yesterday the fact that the Government are saying, on the one hand that, despite their shareholding, they will let the banks be run on an arm’s length commercial basis and, on the other, that the banks must immediately restore mortgage and small business lending to 2007 levels. That is contradictory and potentially dangerous. It was the 2007 levels of mortgage and small business lending that got us into this trouble in the first place. That was the peak in broad money supply growth. It was growing at 13 per cent. a year in 2007. Perhaps I am the only monetarist left in this place, although I expect my right hon. Friend the Member for Wokingham (Mr. Redwood) is one, too. There may still be a few of us who think that there is some connection between money supply and inflation, as was shown by the figures in 2007. To go back to that seems dangerous.

The housing market will have to adjust to the problem. That may be painful for some people, though it will be a wonderful opportunity for first-time buyers. For every winner, there is a loser, but the idea that, by taking the steps proposed, we can prop up the housing market at no cost in terms of inflation or future problems is a mistake.

Between 1997 and 2008 total personal borrowing trebled. It grew at 10 per cent. compound, about the same rate at which the money supply grew—those are very similar measures—and it all wound up in housing
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values. Housing prices tripled in that period as well. That released money for people to spend improving their standard of living and their consumption, but the Bank of England failed to control that. I shall return to the point, because one of the failures was in the Bank of England during that period. I urge the Government not to insist on returning to 2007 levels of lending in those areas. There may not even be enough borrowers to take up that lending.

In an intervention on the hon. Member for Twickenham (Dr. Cable), I made a point about deposit protection. We are in an extraordinary situation in which there is a series of banks—six or seven of them, three of which have big Government shareholdings and the rest of which are too big to fail—in which the Government would have guaranteed the depositors in any circumstances, and another group in which the same level of protection is now afforded, at least up to £50,000. At one level, one could say that there is unfair competition because the group of big banks have a Government guarantee behind them, but I am worried about the moral hazard point.

I have been staggered by the number of constituents and friends who had money in Northern Rock or Icesave—banks which I am sure they had never heard of. I had not heard of Icesave until about a year ago. Perhaps that is my ignorance, but I suspect that those friends of mine who had money in Northern Rock had not heard of that 10 years ago. People were prepared to risk their life savings for half a per cent. That was a big mistake on their part. If we protect them from that, we will pay the price of more and more money going into institutions that are taking higher and higher risks. That is how they earn the extra money to pay the extra interest.

When these extraordinary times are over, depositors will have to bear part of the risk of their own choices. In the past, they would have got the first £2,000 back and 90 per cent. of the next £33,000. Obviously the £2,000 was to save the administrative hassle of having to knock a couple of hundred pounds or a hundred pounds off what people were paid back. However, at the £50,000 level, there must be some risk, and 10 per cent. seems not unreasonable. People may need to be educated about this. At present they take no risk at all. The risk has been passed on to the rest of us and, essentially, passed on to the taxpayer.

Frank Dobson: I have some sympathy with the hon. Gentleman’s point of view, but is it not the case that if somebody had checked up on some of those products on the internet, they would have discovered that Standard & Poor gave them a triple A-plus rating. It is noticeable that Standard & Poor advised Northern Rock on the formulation of a particular product and then—surprise, surprise—gave it a triple A rating.

Mr. Maples: The right hon. Gentleman makes a fair point. The only point that I am making is that if in future the taxpayer or all of us collectively through a deposit insurance scheme are to pick up the costs, people cannot be left free of the consequences of choosing the more risky investment. Whether it is triple A or double A, most would recognise that depositing money with Lloyds bank—at least I hope so in my case—is a slightly safer bet than depositing it with Icesave. Perhaps I am about to get a rude shock.

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Stewart Hosie: Will the hon. Gentleman give way?

Mr. Maples: No, I have made my point on that and I want to move on to bank regulation, which is really what the Bill is about and where the failures have been.

The fact that the Government have had to underwrite the system in the way that they have and put in unprecedented sums of public money will, I am sure, lead to much tougher regulation. I hope that that regulation will be really intelligent, but I suspect that the Americans will make this mistake too. We do not want to put London in a position where we drive financial services business away. It is still a big industry and not everyone has been at fault here. Not everyone has been a greedy spiv. There are plenty of people in the City doing very ordinary jobs as secretaries, receptionists and computer programmers, and they will lose their jobs too. We need to protect the industry by regulating it intelligently. I do not know whether the regulation should be light touch or heavy touch, but in our search for the solution to this crisis, we should not lay up such problems.

I want to identify a couple of mistakes. First, it was a mistake to downgrade the role of the Bank of England. That point has been made by Opposition Front-Bench spokesmen extremely well. It was operating in the markets the whole time. It was operating in the bond markets, the foreign currency markets and the money markets. It understands what is happening there in a way that I do not think the FSA ever has. Secondly, the FSA brought together a series of regulatory organisations with a preponderance of interest in the consumer. That is absolutely right; the retail consumer needs to be protected, but the culture of the FSA has been about protecting the retail consumer, depositor, investor or pension fund holder, and it has not concentrated sufficiently on, or understood sufficiently, the money markets in the way that the Bank of England does.

I was in favour at one time of going back to where we were and giving all this power back to the Bank of England, but the difficulty of that is that the counter-party risk in securities houses now is so great that it can bring down banks as well, so it probably does require the securities regulator, the FSA, to be involved. I hope that the new system will give the Bank of England not just an additional enhanced power, but the primary role in this. The problem with tripartite regulation is that everyone thinks that somebody else is doing it. That is pretty clearly what happened here. Everyone’s eye was off the ball until a few months ago. It would probably be best if the Bank of England had the lead role in this.

Warren Buffett, who is my capitalist guru to put up against the interventionist guru of my right hon. Friend the shadow spokesman, said that bankers seem to have spent the last 10 years inventing a whole new series of ways of losing money, which was completely unnecessary because the old ways were working fine. We will have a credit crisis every so often. There is a credit cycle, but the important thing is that if the monetary and regulatory authorities get a grip on that and do not let the money supply get out of control and raise capital requirements as risks increase, we can ameliorate this and not end up with the crisis that we are in at the moment.

The next crisis will be different. Each one is different and the next one will be caused by something else. In trying to ensure that this one does not happen again, let us not take our eye off the more general ball of what is
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important, which is that banks maintain adequate capital and that the authorities do not allow the money supply to grow too fast.

Those points have been made by many who have spoken, but I want to make a couple of others. I have a list of culprits and first, in ascending order of culpability, I perhaps put myself and some of my colleagues, because I noticed too late that this was happening. I used to follow this subject the whole time and I like to think that if I had not moved off to worrying about foreign affairs more, I would have noticed what was happening. But the fact is that until the Northern Rock fiasco, I did not realise how bad this problem was likely to get, and I think that goes for some of us, though not others, particularly on the Treasury Committee, who have flagged up some of the dangers.

Secondly, for every reckless lender, there was a reckless borrower, and people must take some responsibility for their own actions, not just in deposits but in what they borrow and being confident that they can afford to do that. They were, of course, encouraged to do so by people who were a lot more sophisticated than they were, and some innocent borrowers are paying the price for that.

My third culprit in ascending order of culpability is the Bank of England for allowing broad money to grow so fast and reducing interest rates while it was doing so, and then being surprised that inflation on the retail prices index had risen to 5 per cent. I do not believe that it is all due to the oil price, because when the price of one commodity rises, people have less money to spend on something else. It may alter the index, but it does not alter inflation—if one, like me, is still a monetarist. Therefore, the Bank of England has some pretty serious questions to answer. The only role it really has at the moment is inflation and monetary policy, and its eye has been a bit off the ball there. It happened in the mid-1980s when we had an excuse, which was that the market had been deregulated at the point and the authorities thought that there was a one-off adjustment in people’s willingness to carry debt, which there probably was, but it still resulted in inflation towards the end of the 1980s and partly caused the stock market crash of 1987. So the Bank has plenty of history to draw on here so that it does not make the same mistakes again.

My fourth culprit—now we are getting to the serious culprits—is the FSA. It has been asleep at the wheel or on the bridge, whatever metaphor one wants to use. It is extraordinary to me that the Government have not insisted on any resignations from the FSA over this. It is a total, comprehensive and abject failure of regulation that this crisis was allowed to get as bad as it did. I am not saying that people should have spotted three or four years ago that this would happen, but should they have done so one or two years ago? Very little, if anything at all, seems to have been done during that period by the regulators.

My fifth culprit—we are now getting to those who are seriously involved—is the banks themselves. What they have been up to is reckless and irresponsible, and bankers are supposed to be extraordinarily intelligent people, who are paid very large amounts of money to run our affairs. The Government seem to have had to insist upon the resignations of the three executives who announced their resignations yesterday. I notice that
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they did not do so voluntarily. I do not know whether anyone saw the pictures on television of the board of a Japanese insurance company that went bust about two weeks ago, but the board announced what had happened, took full blame, and bowed in sorrow, shame and apology. There seems to be no shame on the part of those who have been happy to be paid huge sums. The chairman of HBOS was paid £750,000 a year—and the same applies to the Royal Bank of Scotland—and the chief executives were paid £2 million and £4 million respectively. Is there no sense of honour any more?

I know that people do not resign very often, and perhaps that goes for politicians as much as bankers. They cannot have seen that they made the most horrendous mistakes and that they owe the rest of us an apology in at least resigning, and not being forced to go. However, one cannot just blame them because they have had supine boards of directors who clearly did not understand what was going on. The good and great names of the Scottish establishment are all over the Royal Bank of Scotland’s board, and of the English establishment all over one or two of the others as well. Where were they, and where were the shareholders? Why were not the shareholders saying something about this? It is not just the fault of the executives; they were allowed to get away with this by their boards of directors and shareholders. However, they must bear the lion’s share of the blame.

Usually one would not worry too much if a private sector company, even a big one, got into serious difficulties. The shareholders would lose some money and it would be restructured and recapitalised. The problem with banks is that they can suck the economy down with them too. That is why they have a special responsibility to the community that they serve, not just to look after their own affairs, but when they get things wrong there should be the understanding that they endanger the whole economy as well.

Now we come to the Government, and I am afraid that the bipartisan chorus of the last few weeks has been because the Government have had a huge crisis on their hands and have had to find a solution. I believe that in the circumstances they have found the right solution. We will see whether it works. I am not sure what else they could have done, except perhaps, as I said, do it a little sooner. The Chancellor of the Exchequer has been in office for 15 months. Northern Rock was more than a year ago, and that was a year in which far more could have been done to put right some of the faults in the system.

But the person who has been there for 11 years and who is really responsible for most of what has gone wrong is the Prime Minister. It was he who changed the regulatory system to put the FSA in charge with this tripartite arrangement and took the Bank of England very specifically out of it because he thought that it would be too powerful if it had monetary policy and bank oversight as well. He presided over the debt-fuelled boom of the past 11 years that has been criticised for several years. He is the person who let public spending rip in a way that fuelled that boom. He is the person who ran public sector fiscal deficits at the height of the boom at a point when we should have been running surpluses so that now the Government would have more room to adjust to the recession in the way that they usually would in a Keynesian sense. Now
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they have to do so by racking up even more borrowing on top of borrowing in good times. He is the person who, having given the Bank monetary independence and the FSA responsibility for bank regulation, failed to monitor what they were doing.

Mark Lazarowicz: Will the hon. Gentleman give way?

Mr. Maples: No, I want to finish my point.

The money supply was growing at 11, 12, 13 per cent. when the Prime Minister was Chancellor. I do not know whether he made any phone calls about it to the Governor of the Bank of England, but he certainly should have done. In the arguments over the Governor’s reappointment, that is something that he should have been doing. He has watched the FSA, with the supine attitude that it seems to have had to practically everything that has happened on its watch—an authority that clearly did not have the expertise to regulate the banking system. It seems that everybody could see a crunch of some sort coming, except the former Chancellor.

Mark Lazarowicz rose—

Mr. Maples: No, I shall not give way; I want to finish my remarks.

The Prime Minister tends to seek refuge in the notion that the crisis is all the fault of the United States, but the United Kingdom banking system was and is his responsibility. Yesterday, he made an interesting speech to Reuters. Anyone reading it would think that it had been made by some visiting consultant who had been hired a couple of weeks ago to tell us what was wrong with the system. The speech was about all the things that are wrong and all the things that we should do to put them right. Why did he not recognise those things two or three years ago? Why has he not been doing those things?

We use the fire analogy a lot. The Prime Minister is like the watchman at the office building. He watches an increasing number of all sorts of people whom he has never seen before—some of them looking pretty dodgy—going in and out. Then he watches people taking petrol in, then somebody who takes matches in and when the building goes up in flames, he expects our gratitude for phoning the fire brigade. The Prime Minister was responsible for the system when it imploded and he expects our gratitude for having cobbled together a solution to it. When the banking element of this crisis is behind us and it emerges as what I believe will be an 18-month to two-year recession, people will remember that this Government presided over the ingredients of that recession.

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