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Apart from greater powers for the Bank and whatever powers the regulator needs to regulate intelligently in the way that I have described, I would also like to see some kind of control in the Bill of the ability of the Government and the Bank to use the special powers of acquisition. I strongly believe that in practically every case, if not in every case, it should be possible to solve such problems with private sector solutions, such as
through private sector fundraising or by cancelling the dividend, cutting costs, shedding some assets, having some disposals or ensuring that capital can be found from sources outside over a reasonable time period.
Those are some of the panoply of ways a business can try to get its capital ratios into shape and get the cash that it needs to continue its business. It should be in the interests of all well-meaning people in the House to keep those things in the private sector, to make businesses accept the disciplines of the private sector, to blame those in charge of them when they get it wrong and to ensure that the new management sort things out as quickly as possible.
However, my worry about the proposals before us is that the taxpayer is being asked to take on too much risk. The three banks to which public capital might be subscribed—I say “might” because a number of votes have to take place and there are still opportunities for private shareholders to come forward with money—have, in aggregate, balance sheets of almost £3 trillion. That is twice the country’s national income and around five times its annual tax revenue. If something went wrong and just 1 per cent. of those assets had to be written off, the owners of those banks would collectively lose £30 billion.
Thirty billion pounds is a very large sum of money, even for the British taxpayer. It is 5 per cent. of tax revenue in a single year. Are we sure that there could not be a 1 per cent. loss on the assets of those banks when they come into public ownership? I know that some of those assets are as risk free as one can get, and include Treasury bills and that sort of thing, but some of them are not. Some of them are the mortgages and the loans to companies that we have been worrying about. We are being asked to absorb those assets as we go into recession, when it will not be just the mortgage book that deteriorates in quality, but the loan book to companies, as I fear that we are about to enter a period when companies will find it difficult to keep going. In some cases they will find it difficult to earn a profit or generate cash and will look to their bankers for more support. In some cases, businesses will stumble and be incapable of keeping the payments going.
I would therefore like a reminder in the legislation— and perhaps a requirement to come back to the House in an emergency—that there must be some limit. Just as we are now preaching to the private sector that banks should not get over-geared and over-borrowed, should we not be preaching to ourselves that the Government and the public sector should not get too over-borrowed and over-extended? I hope that the Government will go away over the next two or three weeks, work with those banks that have given an indication that they might like public capital, go through the figures again and ask, “How can you get the demand down? How can you generate more cash for yourself? How can you get more private sector capital coming into your bank to cut the taxpayer risk?” Otherwise, the British state will be left in a weakened condition, which is not what we want at this juncture.
8.7 pm
Mr. Andrew Pelling (Croydon, Central) (Ind): My declarations are on the record, but I should add to them the risks that I have with a NatWest overdraft and a NatWest mortgage.
The Bill is welcome if it allows for the opportunity for bad debt to be brought off the balance sheets of the banks. In response to my earlier intervention, the Chancellor reminded us that there is already temporary provision for those bad debts to fall upon the balance sheet of the nation, but it is not a permanent change. My view is that what we are seeing is purely a relief rally. The prospects for things to get a great deal worse are still there. That is because, without the masking of Government support, the trust in those financial institutions still does not exist. They are badly wounded institutions that need that bad debt cleansed from the wounds that have done them so much damage. What has been done is a powerful palliative, but it is not a cure.
There is something very British about this debate, which is about pulling together. Also the Bill is perhaps about closing the barn door after the horse has bolted, because unfortunately the crisis will, I think, get worse, particularly if we rely upon some of the current consensus on how financial affairs should have been pursued over the past 25 years. It is not necessarily the case that the Bank of England’s performance is so good that it should have more power. The Chairman of the Treasury Committee referred earlier to the experience of Japan, where the lack of a policy initiative led to interest rates being held far too high, damaging the economy for almost a generation through the destruction of asset value and the subsequent destruction of economic growth.
I attended an induction for a vicar in one of my local churches recently, at which the Bishop of Croydon spoke. He spoke from a moral point of view, but he also gave us an economic lecture about the value of money. He said reassuringly to the large congregation that the assets of the nation remained the same. That is very much an economic analysis, because in reality it is money that has been devalued over recent years.
Serious consideration should be given to the shadow Chancellor’s proposals for the introduction of what I would call circuit breakers. In a bastardised means of pursuing Keynesianism through monetary policy, every time there has been an economic crisis, misjudgments have been made about the weakness of the economy. Recently, that has been seen in the collapse of the equity market in 1987, the Asian financial crisis and the dotcom boom. We also saw exaggerated easing maintained for far too long. Most importantly, the economic and political consensus has been about the targeting of retail price inflation, with no one taking responsibility for asset price inflation. The problems can perhaps be dated back to 1971, when President Nixon moved the dollar away from its gold link. In many ways, the abuse of money by bankers has been the problem.
I noted the comment by the right hon. Member for Holborn and St. Pancras (Frank Dobson) about the way in which bankers can also devalue the use of language. The word “innovation” was often an alternative way of describing moving away from transparency in financial markets, which has left the financial institutions badly placed to take a proper measure of their risks and losses. Indeed, I was much taken by a commentary by Jon Moulton of Alchemy Partners, who very appropriately said that the economy needed innovation among investment bankers as much as we need innovation among airline pilots.
The problem of the loss of transparency ought to be addressed in legislation, as there is a continued desire by financial markets to move further and further away from transparency. There seems to be some support in the City—and, indeed, some blessing from the Government—for the idea of encouraging what are called dark pools. These involve the ability to trade in equities off the stock market and out of sight in terms of the immediate reporting of substantial trading in a market. That strikes me as a counter-intuitive approach.
A further issue that cuts against the general consensual thrust of the thinking on how our financial markets should be run is the impact of globalisation. There was a time when the Bank of England would have had real responsibility for giving permission for transactions to be issued within the sterling market. Perhaps there is a role for authorities to give such approvals, particularly for products that are sold from outside our own European region.
One of the strengths of the Asian financial system is that it is, to some extent, separate from the rest of the international global financial system. Some of the protection that has lessened the effect of the crisis on the Asian markets is a result of that market stepping slightly aside from markets elsewhere. We need to consider whether the liberal economic approach that we have taken over the past 25 years is indeed the right way to progress. Given our very damaged domestic financial institutions, we need to ask whether, even with capitalisation from the taxpayer, they will be in a position to lend for mortgages and for commerce.
There is a lot to be learned from what happened during the Swedish financial crisis. It was felt important to set up separate governmental organisations, such as SBAB and Finansius, to act as a spur to encourage competition and confidence in private sector institutions so that they would continue to lend money to the economy, to keep it robust.
There is also the issue of who gets the most protection in this kind of financial crisis. The reality is that it is not the small individual who has taken on large debts who will be bailed out, because they do not have the same fundamental impact on the overall macro-economy that the large financial institutions have. It is incumbent on any legislation—this Bill or any further legislation—to deal with the question of social and commercial responsibility, in relation to the danger of a further downward spiral in the performance of the economy if we were to pursue foreclosures and the shedding of assets, which would further complicate the economic crisis.
There is a need to impose on financial institutions some kind of circuit breaker, in regard to the disposal—and forced disposal—of assets. I am certain that my constituents in Croydon will think very little of the idea of bailing out banks and senior investment bankers if they themselves are not to be offered at least some breathing space in which to determine how best to cope with the financial crisis.
8.17 pm
John Howell (Henley) (Con):
It is worth reiterating that a major banking failure in this country is extremely rare. That makes the need to answer questions about this crisis sooner rather than later even more important.
We are told, however, that we are required to deal not only with the present crisis but to introduce a regime for long-term confidence—hence the Chancellor’s reference to this legislation being permanent.
The problem that I have with the reference by the hon. Member for Twickenham (Dr. Cable) to a tsunami is that tsunamis are natural and largely uncontrollable. The image of a house fire used by my hon. Friend the Member for Tatton (Mr. Osborne) is much more apt, because house fires are often caused by the carelessness of owners, and they can be prevented. We have heard a series of recommendations from Conservative Members on how reform needs to take place. To give the Government credit, we have also been teased with opportunities for reform that will be brought forward in due course, including the much-awaited report from Lord Turner.
It would be a much greater reflection of confidence in the UK financial system in the long term if, as I would have liked, there had been some provision in the Bill to return to parts of it at a future date, in the light of experience and of needs. The impact assessment highlights the potential for shareholders’ interests to diverge from those of depositors in times of financial stress. That is seen most clearly in the balance that needs to be struck between making rapid payouts to depositors and the need to maintain value in the banks. Disorderly bank failures will affect the City’s pre-eminence as a financial centre, but so too will maintaining a divergence between the interests of shareholders and depositors, when they do not normally conflict. It is important to ensure that these are brought back into alignment as quickly as possible, and I would like some assurance from the Minister that he feels comfortable that that is embedded within the Bill.
I raise this issue because the time scales for the Government holding shares and being involved in the management of banks are likely to be long. The impact assessment hints at that, in showing that the average length of the crises in the developed countries is five and a half years. As the Bill proceeds, we need more detail on how and when intervention will occur, more modelling of the effects on shareholder confidence and a reassurance that the Government will resist micro-management for long periods. There is a follow-on from that in respect of the work done for the impact assessment, as we must ensure that the costs of the proposed measures have been accurately defined, given the lengths of time that are likely to be involved.
The Bill is heavily dependent not just on secondary legislation, but on the code of practice. I was grateful for the comments and assurance earlier that the code of practice will be produced in parallel with progress on the Bill. I would like to make two points about the code. A restricted number of people are presently envisaged as consultees for the code of practice. It needs to be wider, and we need input from practitioners to ensure that the code is practical and avoids unintended consequences. I look forward to hearing the Minister’s comments on that.
The list of areas to be covered in the code is set out in clause 5. Given the emphasis elsewhere on protecting depositors, I am surprised that the code of practice makes no mention of communication with depositors and provides no guidance on it. I would very much like
to see a widening of the code beyond its current narrow confines, so that we can see how it will operate at a wider level.
The problem of information from the Bank of England is still a live issue. Clause 223 removes the need for the Bank to prepare a weekly return of accounts. I cannot pretend that the Bank of England’s weekly return of accounts has been my favourite bedtime reading, and I understand why the measure is necessary—something my right hon. Friend the Member for Wokingham (Mr. Redwood) hinted at in his speech. However, the lack of transparency over introducing it now, when the weekly return is already in place, will create the impression of doing deals behind closed doors, leading to the inability of shareholders and depositors to hold management to account. I have to say that I do not think that it will work, as I am less sanguine than my right hon. Friend about the City’s ability not to leak. It was never my experience that it was able to keep a secret for very long; indeed, the situation where rumours are about is far more dangerous than where there is real information.
A number of Members have spoken about the role of the Bank of England. I support the greater prominence of its role, as set out in the Bill. I also welcome the Chancellor’s agreement to review the regulatory system. What we need to ensure is that it regulates the right things, but I pick up a point made by some Labour Members: having a light touch and being radical are not incompatible in producing a review of the regulatory system. I welcome the Bank of England being given oversight of inter-bank payment systems, as when the Bill kicks in, customers should see no difference during a crisis.
8.23 pm
Mr. Charles Walker (Broxbourne) (Con): Thank you for calling me, Mr. Deputy Speaker, as I have had the slow torture of being the last Back-Bench Member to speak in the debate. May I say how pleased I am to see my hon. Friend the Member for Henley (John Howell) making such an impression after spending such a short time in this place? I reserve particular pleasure for seeing the hon. Member for Croydon, Central (Mr. Pelling) back in the Chamber; he has been away for a short while, but he made a robust speech and seems to be in robust form. It is very good to have him back.
This is the first chance, apart from the 90-minute debate we had last week, for Members to get near to the events—the almost calamitous events—of the last couple of weeks. I appreciate that this is not a debate on the current banking crisis, so I will try to speak within the bounds of the Bill before us. Clearly, however, there has been a collective failure of the regulatory sector and the banking sector. Of course, having been in power for the last 11 years, the Government have to take their share of responsibility as well, but I do not want to take a gratuitous swipe at the Government at this stage, as there will be plenty of opportunities to do so in the future. The collective failure has been clear and we cannot ignore the fact that the International Monetary Fund has said that, of probably all the developed economies of western Europe, we are one of the least well placed to cope with the current downturn. The Government need to take a good long look at themselves and ask whether they have done the right things over the past 11 years.
Unlike my right hon. Friend the Member for Wokingham (Mr. Redwood), I am not a financial expert; I worked in the City for a mere three months before being given my marching orders. I am absolutely staggered by the amount of risk banks have taken on board. I understand from my right hon. Friend that their liabilities are somewhere in the region of £3 trillion. That is simply staggering. What amazes me about the crisis is that we have moved on from talking about £10 billion as being a lot of money to £100 billion as being the same, and we seem to have moved seamlessly on from that to speaking of trillions of pounds and trillions of dollars. It is difficult to keep up with these enormous figures, but enormous they are.
What amazes me is that we did not learn the lessons of Barings. When Barings failed, the board of directors admitted that they really had no concept or understanding of the derivatives being traded on their trading floors. The complexity was simply beyond them. I thought and believed that the Bank of England and the Financial Services Authority had taken that into account and would do something about it to ensure that the boards of banks did not allow it to happen again. Clearly, however, it has happened again. We have seen banks leveraging their capital thirty-fold or perhaps more. What that means is that one pound of capital on the balance sheet—an asset of £1—is supporting £30 worth of risk or £30 worth of what could be called “make-believe money”. The pyramid has been inverted, with £1 supporting £30. Like all pyramid selling schemes, it works well in the good times, but sooner or later, something goes wrong, the pyramid collapses and everyone is left picking up the pieces. On this occasion, I am afraid that it is the taxpayer who is left picking up the pieces.
This Member of Parliament has some very humble suggestions to make. First, the FSA has to tell banks that if they are going to trade in financial derivatives, as they will continue to do, we have to be able to understand them. We must understand where the risk resides. If we do not understand them, we should say, “Buddy boy in the red braces, you are not going to trade them.” There has always been a sneering regard in investment banks for the FSA. They say, “We employ people who earn £3 million a year, and these thickos in the FSA understand nothing, as they can afford to employ people earning only £250,000 a year.” Well, in this case that is a good thing. All the rocket scientists in the investment banks will have to sit down and come up with financial instruments that mere mortals—talented people, but still mere mortals—understand, and if they do not understand them, they will not be traded. [ Interruption.] Does anyone want me to give way? I think that someone does, so I give way to him. I am sorry; I have taken my glasses off, so I am completely blind.
Mr. Andrew Turner (Isle of Wight) (Con): My hon. Friend is very kind. I understand what he is saying, but, in his opinion, what level of thought is required for an understanding of what is going on? Is he talking about asking people in the street, or on the bus? What sort of people is he describing?
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