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We have today a submission from the Labour party, which will be implemented in full only if it is re-elected, and proposals from the Conservative party. The Labour
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party wants to stick with the financial system that failed us, which it created. We propose to overhaul that system and put the Bank of England in charge. People will know at the next election that if they want to change the way in which the City and our banks are regulated, they need to change their Government.

Mr. Darling: The hon. Gentleman seems to be trying to reduce this debate to a football match between the Bank of England and the FSA. It is not a matter of which institutions do what. It is about ensuring that the regulatory system delivers on making sure that it has tougher regulation. The hon. Gentleman argues that the Bank of England should take over the prudential supervision and regulation of what he calls important banks, building societies and insurance companies. That is not a power that the bank is seeking at the moment, but he is entitled to hold that view. I have said on many occasions that we can argue about where to draw the line as to who does supervision of banks, who does supervision of building societies and who does consumer protection, but the key issue is ensuring that regulators can do their jobs properly, that they have the tools to do their jobs and, crucially, that they bring to bear the right judgments whenever problems arise.

The hon. Gentleman will recall that, 10 years ago, one of the reasons why we ended self-regulation was that, quite simply, it did not work. He will recall, too, that in the past there had been criticism of the Bank’s regulation of BCCI and Barings. The fact that there have been mistakes in institutions is not a good reason for saying that we have to tear everything up. I believe that we should build on the strengths of the system that we have. It does not matter where we draw the line—when it comes to a crisis and to identifying problems in the future, we will need the Bank, the FSA and, because a cost will inevitably be involved, the Treasury at the same table.

I believe that the present system of co-ordination between the Bank, the FSA and the Government needs to be strengthened, reformed and put on a proper basis. Why do I say that? When the Bank of England next warns that there is a risk building up or that perhaps there is too much credit flowing, someone needs to react to it and to do something about it. That is why we have to have both the Bank and the FSA at the same table. That is why I believe that the arrangements between the three institutions need to be strengthened and that is why I am making these proposals.

I do not believe that what the hon. Gentleman is proposing—that one can somehow say that some institutions are systemic and some are not—would work. For example, three years ago people would not have argued that Bradford & Bingley, Northern Rock or the Dunfermline building society would have been of systemic importance to this country. However, the truth is that when they got into difficulties they were systemic. That was why we had to do something about them to stop the problems from spreading wider. I do not believe that the divisions that the hon. Gentleman is proposing are workable. I believe that the measures that we have at the moment need to be strengthened and improved to ensure that in future, when these warnings are seen, they can be dealt with and the people who are charged with the responsibility can be held to account.

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I agree with the hon. Gentleman that this has international implications—I am grateful to him for recognising that—particularly if one wants to dampen down the availability of credit. In today’s globalised market, we cannot do that in one country alone. We need an international agreement and to ensure that people are working in the same way, and that is why international co-operation is very important.

Finally, I am very sorry that the hon. Gentleman did not get the document on time. I can assure him that I saw a man with both the document and the statement leave the Treasury shortly before half-past 11 this morning. I have no idea how the hon. Gentleman got the statement and not the document.

Dr. Vincent Cable (Twickenham) (LD): I acknowledge that there are many things in the paper that can be welcomed—which, indeed, we have advocated in the past—but their implementation has a timeless quality, as if we are on a kind of progression from White Paper to Green Paper to blank paper. Almost all of the important recommendations would happen after the next general election. I know that a couple of weeks ago the Chancellor was advocating that banks prepare living wills; one rather gets the feeling that this is a living will for the Chancellor.

Having advocated macro-prudential regulation of bank reserves for five years or so, I very much welcome the Government’s embracing it. Surely it must be right, however, that in anything that requires an understanding of the overall economy the Bank of England must have a central role—not a unique role, but a central position. That is not clear from the statement.

I welcome, too, the strengthening of consumer protection. We have at last got to the idea of generic independent advice, but it has taken 10 years of campaigning by Citizens Advice and others to get there. I am not clear, however, about how the Government continue to preserve a fragmented system of consumer protection with responsibilities confusingly divided between the FSA and the Office of Fair Trading. Will that be clarified?

I welcome, too, the emphasis on competition. However, does the Chancellor buy the argument of the European Commissioner, Neelie Kroes, who said that, if we are to have real competition in British banking, banks must be broken up and subdivided, and in particular the Lloyds-HBOS merger might have to be unscrambled? Does the Chancellor agree?

The big issue, as the Chancellor rightly emphasised, is the major question about the banks that are too big to fail, too big to supervise and too big for the taxpayer to underwrite. He correctly said that small banks as well as big banks can go wrong—that is absolutely right—but is there not a fundamental problem that when very large interconnected banks try to be the biggest investment bank in the world, the exposure to the British taxpayer is then wholly unacceptable? Therefore, these banks have to be subdivided for that reason.

The Chancellor is looking over the distant horizon at necessary reforms, but may I suggest to him that key problems exist today? The publicly owned banks are not responding to the borrowing needs of sound British companies, and the bonus culture is being reinstated in publicly owned banks that are owned by the taxpayer. There is a complete lack of direction, and I suspect that
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a central reason for that is that the Government are so desperate to get the publicly owned banks back into the private sector quickly that too little attention is being given to defining the public interest.

I suspect that the White Paper will be received in the City with a great sigh of relief. It is yet another indication that we are getting back to business as usual.

Mr. Darling: On the last point, I think that most hon. Members agree that we need to toughen up the regulatory system significantly. We need to make changes, but we must not lose sight of the fact that this is an industry that employs over 1 million people in this country, more than half of them outside the south-east of England. It is important that we do not give the impression that we would rather be shot of it, because it is quite important. In the past nine years, it has contributed more than £250 billion in tax revenues—quite a useful sum. When it recovers, I hope that it will continue to make a contribution in the future.

The hon. Gentleman asked about selling. If he looks at the White Paper he will see that we make it clear that we will sell when we think that the time is appropriate. We do not have an artificial time scale and we are not under any pressure to sell, but it will not have escaped his notice that just at the moment the shares in the two banks that we own are worth slightly less than we paid for them. He therefore need have no fear of being confronted with a quick sale: we will do what is right to achieve the best value for the taxpayer.

On lending, I agree with the hon. Gentleman that it is important to try to get credit flowing in the economy again. That is a key part of what we are doing. Mortgage lending and the availability of lending for mortgages have increased but more needs to be done in certain sectors of business lending, such as to small and medium-sized enterprises, and especially to the medium-sized ones. For example, I welcome today’s announcement by Prudential of a fund worth £1.5 billion specifically geared to medium-sized companies. That is an example of a non-bank bringing together pension funds, local authorities and its own funds to make money directly available to medium-sized firms, and it is a useful step in the right direction.

The hon. Gentleman made some broader points, and one of them had to do with the “too big to fail” argument. I understand where he is coming from, but I said in my statement that we must take into account the cost to the taxpayer as well as the wider effects of failure, and that we must regulate accordingly. However, there is a flaw in his argument—I heard him being asked about this on the “Today” programme at 10 past 7—and it is that he seems to back off from the consequences of telling a large bank that it is too big. In response to that, the bank might say, “We’re too big, so we’ll go somewhere else.” Alternatively, dividing such a bank into lots of different companies, as was the case with Lehman Brothers, does not solve the problem. When Lehman Brothers went down, the whole shooting match went down, not just one aspect of it.

The hon. Gentleman made a wider point about macro-prudential supervision. In my statement, I said that given what central banks do, and what the Bank of England in particular does, I anticipated that such supervision would have a wider role, as we work through the present circumstances. The Bank of England is the
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obvious place for it, but I come back to the point that I made to the shadow Chancellor: wherever the lines of responsibility are drawn, we need a regulator who is able to look at the wider prudential supervision of the system, and the wider financial stability. We also need a regulator who will drill down to the nuts and bolts of every single company.

Whether people like it or not, there is no country in the world whose treasury does not have to be at the table. We know all to clearly that either the law has to be changed or there is a fiscal cost, so three people have to sit around the table regardless of how the regulatory cake is divided. That is something that the shadow Chancellor will not face up to.

Several hon. Members rose

Mr. Speaker: Order. There are 23 Members seeking to catch my eye and, as ever, I would like to accommodate as many as I can. However, I am looking to each right hon. or hon. Member to ask one brief supplementary question—and of course to the Chancellor of the Exchequer to provide an economical reply.

John McFall (West Dunbartonshire) (Lab/Co-op): The Treasury Committee has made a detailed examination of the banking crisis. It found nothing wrong with the architecture of the tripartite authority, but a lot wrong with the warnings given by the Bank of England and the FSA, which were too weak. I therefore welcome and the establishment of the proposed council for financial stability. We need it to have strength and grit, and I am looking for reassurance from the Chancellor in that regard.

At the core of the matter is the restoration of trust and confidence. Will my right hon. Friend support the establishment of a banking commission, with a membership of lay people and not those representing narrow City interests? That would ensure that the future of the financial sector served the wider needs of society and individuals, and not just the City’s narrow needs.

Mr. Darling: I am grateful to my right hon. Friend for his comments. I believe that the reforms that we are making to the relationship between the FSA, the Bank of England and the Treasury will make it much better. The relationship will be on a formal footing, with people able to see exactly what has been discussed and decided. When later questions arise about what happened in response to a particular warning or a concern that has been expressed, people will be able to see what was done. I think that that will make a big difference.

I agree with my right hon. Friend’s general point about ensuring that banking serves the wider community because, after all, financial services are a means to an end. Those wider questions need to be addressed, and I know that the Treasury Committee has looked at them. That is something that I would support.

Mr. Michael Fallon (Sevenoaks) (Con): The Chancellor seems to have trebled the confusion over responsibility for financial stability by spreading it between the Bank of England, the FSA and the new council for financial stability. Will he explain what powers the new council will have? Page 138 of the White Paper seems to give it three new statutory duties just to discuss risk.

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Mr. Darling: The Bank of England has a statutory duty in relation to financial stability as well as monetary policy. The hon. Gentleman will know that the Banking Act 2009 gave it powers to deal with a bank that has failed. The FSA deals with the individual supervision of banks, and I announced today that it can now have different rules for different individual banks. That is quite an important change, especially with regard to the matters raised by the Liberal Democrat spokesman, the hon. Member for Twickenham (Dr. Cable). We have one body looking at the overall system, and one looking at the particular. They need to work together and, as I said, whether one likes it or not, the Treasury needs to be at the table because of the fiscal consequences of any action that might have to be taken.

The hon. Gentleman asks who is responsible for doing what, but that depends on what is required. It is obviously for the Bank of England to act on monetary policy, for the Treasury to act on fiscal policy, and for the FSA to deal with an individual regulatory requirement.

Ms Sally Keeble (Northampton, North) (Lab): I particularly welcome the proposals for stronger consumer protection, with an improved advice service and a stronger Financial Services Compensation Scheme. The FSCS has been the one organisation to come out of the crisis with real credit after a good performance. How does my right hon. Friend intend to strengthen it?

Mr. Darling: We need to arrange that the FSCS is pre-funded. We say in the White Paper that that cannot be done immediately, and certainly not at the present time when so much is at stake. It will be better in the long term, however, if the FSCS is pre-funded, as then it will have money in the event that something goes wrong.

Mr. Peter Lilley (Hitchin and Harpenden) (Con): Does the Chancellor recognise that the City of London has become the financial capital of the world—to the immense benefit of this country—partly because we have always had a system of prudential supervision that was strong, flexible, unified and not rigidly bureaucratic? As my hon. Friend the shadow Chancellor pointed out—and as was predicted by those on the Conservative Benches at the time—that was undermined by the tripartite system. Why, then, is the right hon. Gentleman handing power over to countries with financial systems that have been less successful than ours? Most of our partners on the continent have much more rigidly bureaucratic regulation of their financial systems. Is it not wrong to hand ultimate power over our system to them?

Mr. Darling: As a general principle, I agree with the right hon. Gentleman’s last point. His thesis falls down, however, when one realises that the City of London’s reputation and size as a world financial centre have grown over the past 10 years, so his argument that it all somehow went wrong in 1997 does not seem to add up.

Where I probably do disagree with the right hon. Gentleman is that, although I believe that the relationship between national regulators and Governments is very important, we are talking about a global crisis. Part of the problem is that banks that trade across the world have got into trouble, and that needs more international co-operation. It also means that we need to work with
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Europe, and that is where the Conservative party is making a huge mistake. If it gets into bed with some weird and odd people in Europe, it will have no influence whatsoever over issues that do matter to the City of London.

Rob Marris (Wolverhampton, South-West) (Lab): The Canadian banking system is pretty solid, with very large banks that are not divided between the retail and investment sectors. Canada has fewer banking regulations than the UK or USA, yet no Canadian bank has failed or been bailed out. Will my right hon. Friend say what lessons he has learned from the stability of the Canadian banking system?

Mr. Darling: Over the years Canada has, in many ways, followed the model that we have been moving to, trying to streamline the regulatory system. I remind the House that 10 years ago there were eight or nine different regulators—self-regulating bodies—and also that the Bank of England never, ever regulated all financial institutions. It was frequently the case that a bank would be regulated by three or four different institutions. That made no sense whatsoever and the Canadians recognised that. Everyone should reflect on that.

Sir Peter Viggers (Gosport) (Con): Does the Chancellor agree that there are two distinct roles to be carried out, one being the detailed supervision of the rules, best carried out by the FSA, and the other the overall financial strategic control of banks? If the latter role is to be carried out by the Bank of England, will he ensure that the Bank is properly resourced?

Mr. Darling: I entirely agree. The hon. Gentleman has put very briefly the point that I was putting to the hon. Member for Sevenoaks (Mr. Fallon). Yes, of course the Bank needs to be resourced to do the job.

Mr. Gordon Prentice (Pendle) (Lab): Sir Fred Goodwin famously did not have a recognised banking qualification. Should chief executives be expected to have one?

Mr. Darling: The FSA has a responsibility to make sure that people who are charged with running banks are qualified to do so. That was recognised by Lord Adair Turner’s report.

Mr. Andrew Tyrie (Chichester) (Con): A moment ago the Chancellor said—I pretty much quote—“I expect the Bank to have a wider role in all this.” Only a few days ago the Governor came before the Treasury Committee and said that he had not been consulted at all about the White Paper or even seen a draft. When did the Chancellor first show a draft of the document to the Governor of the Bank, and why did he not consult him fully earlier?

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