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4 Nov 2008 : Column 7WH—continued

9.59 am

Mr. Andrew Pelling (Croydon, Central) (Ind): I have declared my interests in the Register, but we all have additional personal interests. I currently enjoy the pleasure of a NatWest overdraft and mortgage, and I hope that
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the credit crunch will not immediately impact on those. I am also prospectively a Royal Bank of Scotland pensioner.

I congratulate the hon. Member for Warwick and Leamington (Mr. Plaskitt) on securing the debate. His speech was an example of Parliament at its best—pre-scrutiny work on the challenges that the Government will face in upcoming meetings, during which how to deal with the medium-term implications of the current credit famine will be considered.

The hon. Gentleman emphasised particular issues that are worthy of consideration. He said that additional state support for the banking system might be necessary further down the line, and he rightly emphasised how we need to bear in mind that there are many national interests in the debate about the altered regulation that might be introduced. We must be aware of and cautious about the implications of change to regulation, because that will impact on our country’s interests.

I should declare an additional interest: the World Bank has been and is a client of mine, and I know people at that organisation. For those who have not been to Washington, it is notable that it is only a two-minute walk from the White House to the World Bank headquarters buildings on I street. The closeness of that institution to the Washington consensus is important. Crucially, the hon. Gentleman mentioned how there is a real debate about what the new regulatory regime will be like; will it be unipolar or will it be diverse? I wish to take this opportunity to caution strongly against the dangers of adopting one overall system of regulation.

Following the theme of globalisation in relation to regulation, we must recognise that one issue connected to the financial crisis is that of financial contagion. If one goes down the route of ensuring that there is similarity in terms of regulation across financial markets and the globe, that contagion is more likely to be enhanced in any future crisis. To some extent, the degree of semi-detachment of the Asian financial markets from the rest of the financial global system means that they benefit from having some protection from the current problems. I wish to press upon the Government that when they seek to protect our interests during international debates on regulation, they should be aware that there is an argument for what might be described as regionalised circuit breakers and that there is an advantage in having some difference.

We must also bear in mind that if there is complete similarity in terms of regulation, it is possible that, geographically, businesses will find it easy to move from one place to another within the international financial system. Clearly, we have an interest in defending the concerns of the City of London. That is particularly important because, in terms of employment in Greater London as a whole, the financial industry has become dominant in our capital city—almost to the extent that it is the cuckoo in the nest.

There is a danger in following one solution to rescue the international banking system. There is no doubt that the Government have shown real leadership—even just in terms of installing confidence in financial markets—by taking vigorous and rigorous action. They have created an economic value by ensuring that they are seen to take quick and speedy action. However, I have some doubts about the medium-term efficacy of the equity capitalisation that has taken place. Unfortunately,
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there is a great danger that such an approach is badly flawed. In my constituency, the south London economy is dominated by small businesses, which are being crushed by the credit famine. As Members of Parliament, we all complain and rail at Ministers from the Treasury and the Department for Business, Enterprise and Regulatory Reform about why the banks cannot deliver on providing 2007 levels of credit. However, it is quite unreasonable of us to complain in that way to Ministers. We are saying, “We own the banks; why can’t they deliver?” However, the reality is that the banks cannot do so because they are badly wounded institutions, as the hon. Gentleman has mentioned.

Prospectively, up to £1 trillion of additional damage and risk might have to be considered for coverage. I earnestly believe that in their desire to be seen to act as quickly and responsibly as possible, the Government have alighted on the wrong solution. We should have followed what happened in 1992 in Sweden in terms of trying to remove the bad debts that exist on bank balance sheets and transferring that into a bad bank. That is the same model recently employed by the Swiss National Bank regarding UBS. The crisis in Sweden in 1992 was especially severe. The overall private sector bank defaulted debts were the equivalent of 15 per cent. of gross domestic product. On the basis of the figures in the hon. Gentleman’s speech, our crisis could prospectively be even more significant. I cannot speak with the same clarity as him, but I shall try to bring the matter down to a simple comparison: the Government’s policy is like someone saying, “I will buy your house because you’re in trouble,” when in reality the patient is bleeding to death and needs to go to hospital.

In many ways, the current level of confidence in financial markets is dependent on the credibility of the Government’s actions. I fear that if the Government are driven to make a second round of bail-outs, their credibility will be greatly damaged and we will all suffer as a result. The Government made a good announcement yesterday about the creation of the new UK Financial Investments Ltd. That institution will be well positioned to form the new bad bank structure that has operated so successfully elsewhere—it was greatly successful in Sweden and proved to be profitable for the Swedish taxpayer.

In terms of the proposals for a singular global regulation, I fear that we might unknowingly end up successfully proselytising the unfettered free market style of markets that has brought us into this mess. I know that I am well away from the political consensus when I say this, but there is always a danger that as politicians, we will try to cling on to one or two items of consensus in a storm. We have to recognise that the free market fashion of central bank independence has failed. Central banks have shown an incapacity to deal with the issues of asset price inflation, which the hon. Gentleman so rightly emphasised in his speech. The Bank of England’s performance has not exactly been stellar, so it amazes me that in the process of blaming the Financial Services Authority, people suggest that we should transfer powers to the Bank of England.

The hon. Gentleman rightly emphasised the issue of transparency. I am also worried about that to some extent.

The Exchequer Secretary to the Treasury (Angela Eagle): I am very interested in the hon. Gentleman’s comments on Bank of England independence. Clearly,
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that is his view, but will he spend a couple of minutes explaining how he sees the system working instead? If he does not want the Bank of England to be independent, how does he see the regulatory system working?

Mr. Pelling: I am grateful for the Minister’s intervention. A weakness in British politics is the way in which we, as politicians, have been happy to devolve many decision-making powers away from Parliament. My suggestion is that we should have confidence in our Ministers and politicians to make very good judgments themselves. I propose returning to the situation that existed pre-1997.

I was about to move on to transparency, which the hon. Member for Warwick and Leamington mentioned. I want to mention the issue of dark pools, which does not concern the swamp on the way to Mordor. It is the issue of off-stock exchange trading, whereby temporarily, for a few hours, information will not immediately be provided on large block trades that are going through exchanges. After the recent financial crisis, it would be wrong of us to continue to pursue that type of approach. The importance of transparency is a message that we clearly want to send to the financial sector, and it should be retained.

I am also concerned that the International Monetary Fund still shows a capacity to repeat the mistakes, in its obsession with free market solutions, that it made in 1998 as a consequence of the 1997 Asian financial crisis. That was seen yesterday in its determination to ensure that the 84,000 people of the Seychelles went through an immediate launch of their currency into free float at a time when the financial markets are absolutely crushing emerging markets. A country that already had a 175 per cent. debt to GDP ratio was yesterday forced to float its currency, and it saw that currency devalued in those markets by 43 per cent., so that the debt to GDP ratio today is 250 per cent. It cannot be right to expose those countries to that type of free market exposure, and that trend should not be pursued.

We must also recognise that in a unipolar financial market, those countries with very significant trade surpluses have been forced to invest those with just one choice of large liquid supply of US Government and US agency debt, and they have found themselves locked into a financial structure that is not necessarily to their advantage. The obvious Government policy as regards the US is to inflate and devalue their way out of the significant debt that they have secured. It must be a very strong argument, in terms of trying to recreate a structure for a new international financial system, to be able to provide an alternative large pool of investments for large trade surplus countries to be able to invest in.

One of the things most significantly to blame for the current financial crisis is the conduct of Japanese financial policy in the 1990s. That left us with the legacy of very low interest rates in Japan, which has meant that the carry trade has done so much damage in providing extra liquidity in the financial system internationally. Therefore, it is important that in any new structure that is created, there are responsibilities on Government in respect of the way in which that liquidity is provided.

I return to the point about there being an alternative large Government issuer. That large Government issuer of debt could well be the European Union. President Sarkozy is having a good war—perhaps a bit like our Prime Minister. His comments about the implications of the financial crisis are interesting:

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That hints at the logic that comes with the euro: ultimately, if people have a common currency, they need a concentration of common governmental powers. It is incumbent on us to help our European partners by saying that it is not in our interests to join that cause and to let them run ahead with their desire for a much more centralised system.

It is clear to me that many of our European partners are so angered by the damage that has been done by what they see in this financial crisis as a fault with the Anglo-Saxon nations that they will be determined, in their regulation, to stifle the Anglo-Saxon model of freewheeling financial markets, for good or for ill. We must ensure that in being determined to introduce heavy-handed regulation, they do not stifle the financial markets in the City.

10.15 am

Mr. Andrew Smith (Oxford, East) (Lab): This debate is timely and important, as others have said. I congratulate my hon. Friend the Member for Warwick and Leamington (Mr. Plaskitt) on securing it and on his speech. He is undoubtedly right on the scale of the challenge and the urgent need for action. He set out with characteristic thoughtfulness and clarity the key issues and options.

On the question of what went wrong, we have to ask, along with all the other questions, what executives, boards and auditors were doing signing off balance sheets loaded with financial instruments, many of which they evidently did not fully understand and whose value or lack thereof they clearly had not properly appraised. One issue that certainly has to be examined more closely is the penalties for those who fall short on that scrutiny, both internally and externally.

In the spectrum of options that my hon. Friend set out, from light-touch regulation to micro-management, we need to establish clear rules. I take the interesting point that the hon. Member for Croydon, Central (Mr. Pelling) made about regional circuit breakers. That is a valuable concept, but we need some clear, objective and enforceable rules on the issues that my hon. Friend went through, on capital thresholds, the integrity of balance sheets, exposure to risk and transparency, as well as the points about reform of the IMF that he mentioned.

My hon. Friend invited us to add to his list of things that were wanted, and I propose to do just that because I want to focus my remarks on another aspect of international banking regulation which has not received much mainstream attention but which is vital to many of the poorest people on our planet. My attention was drawn to it by an article in The Guardian on 7 October written by Paul Collier, who is director of the centre for the study of African economies at Oxford university. In it, after an amusing but telling analysis—I will not repeat it now, but I recommend it to others—of why crooks can more or less safely be left in charge of fish and chip shops but not banks, he homes in on the crucial issue of how well banks have done out of banking secrecy and how that aids and abets the looting of enormous sums of money from Africa and other poor areas.

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The article states:

Paul Collier bases that on a new study undertaken by Raymond Baker of the non-governmental organisation Global Financial Integrity. He then points out that a capital flow of that size is more or less equivalent to the total overseas aid to the region, so if it could be closed off, that would give rise to a similar amount of money as the doubling of overseas aid. Obviously, one would have to get the money out of the hands of the corrupt elites and use it for the benefit of the people, but it is an essential step in getting that enormous resource back where it belongs.

It is clear that current rules on banking transparency and supervision are unequal to the task of keeping track of, exposing and returning money taken from Africa and shifted around the global banking system and in and out of offshore accounts. The world has started to address the need for better scrutiny and accountability in the wake of 9/11, when the need to combat the financing of international terrorism became evident. However, as the article points out, some banks resisted even that. It is right to ask whether the same scrutiny should not now be extended to the salting away of the products of corruption, bribery and extortion from poor countries—and those countries that ought not to be so poor—that are governed by corrupt political and business elites.

The banks, not only here but around the world, now need Governments to use their citizens’ money effectively to give retrospective guarantees, bailing them out in respect of practices that, as we have heard, should never have been allowed to grow in the first place. In return, should we not insist that the global financial system stops facilitating the exploitation of poor people in Africa and elsewhere? Now that the banks are over a barrel, is it not time to force greater transparency upon them?

I therefore ask my hon. Friend the Minister to say first whether she agrees that that is a serious and pressing issue. Secondly, will she undertake to look further into that aspect of international financial regulation? Thirdly, will she let me know what the Government are doing to put it on the international agenda, at the forthcoming G20 meeting and more generally? We cannot allow banking secrecy to collude in the looting of wealth from the world’s poorest, and I very much hope that the Government will do something about it.

10.21 am

Mr. Colin Breed (South-East Cornwall) (LD): I add my congratulations to the hon. Member for Warwick and Leamington (Mr. Plaskitt), not only on securing the debate but on giving us such an excellent resumé on its context. I also congratulate the hon. Member for Croydon, Central (Mr. Pelling) on his interesting comments. I entirely agree with the right hon. Member for Oxford, East (Mr. Smith) that it is timely to consider the fact that banks have clearly facilitated corrupt Governments and businesses putting money beyond the people that they should serve. That aspect is just as urgent as the others, and it should not be lost in the mix.

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We all agree that urgent regulatory reform is necessary. It is salutary to realise that the tightening of rules usually follows a failure. I remember all too well the BCCI scandal. The question is why we do not seem to be able to get ahead of the curve. Why do we have to go through failures, large and small, before getting a grip on what needs to happen? Then, of course, circumstances change, the whole situation goes full circle—and again we find ourselves seeking to regulate something that has already happened.

There is a lively debate between Europe and America over rules-based and principles-based regulation. I doubt whether there will be much meeting of minds. We believe that principles-based regulation seems to be the way forward, although it may have contributed somewhat to the problems. However, the Americans clearly want to insist on a rules-based system, although in many respects that does not seem to have worked well either.

Everybody is blaming everyone else, but it seems that there has been a collective group think between regulators, banks and auditors and that they are standing behind each, or beside each other, supporting each other in saying that everything is okay and that no one has been shouting out that the emperor has no clothes. It seems that no one has been waving a flag, saying that something is wrong that needs to be dealt with quickly. A combination of complex instruments, probably faulty accounting standards, a reliance on credit ratings agencies, substantial leveraging, off-balance-sheet items and internationalisation—the way in which banks now straddle the globe and therefore straddle individual regulatory authorities—has given rise to the problems that we are seeing today.

However, even after yesterday’s Treasury Committee, with the Chancellor, the Governor of the Bank of England and the Chairman of the Financial Services Authority giving evidence, we cannot say that there were no warning signals. Although everyone could see them in hindsight—that is easy—I believe that the signals were clear.

Those signals should have been picked up by those charged with the responsibility. Initially, that was the banks themselves—and not only the boards of the banks but the risk committees. Then there are the internal auditors. The external auditors rely significantly on internal auditing. I suspect that some internal auditors had been waving the flag, but they were drowned out by the need to push on—partly because of the structures that rewarded people and partly because of the share prices and the fact that everything was looking well. None the less, I suspect that there were some who should have been listened to. I do not believe no one was flagging up the problem.

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