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The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish): My Lords, with the leave of the House, I should like to repeat a Statement made in the other place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:
"Barings' problems have arisen from major losses caused by unauthorised dealings by the chief trader in its Singapore incorporated subsidiary. The losses arise from contracts on the Singapore, Osaka and Tokyo exchanges. At the close of business last week total losses appear to have been in excess of £600 million. Crucially, these contracts have further to run, exposing Barings to further unquantifiable losses. As a result, Barings was unable to continue to trade without the injection of substantial new capital.
"As the Bank of England announced last night, the British banks were prepared to supply all the capital needed to recapitalise Barings but only if it were possible to cap the potential liability of the outstanding contracts. In the event this did not prove possible. Other parties were not prepared to take on open-ended and therefore unlimited liabilities. The governor did not recommend, and in any event I would not have agreed, that public funds should take on these liabilities. Regrettably, in the circumstances there was no alternative to Barings having to apply for administration.
"Although it was not possible at the end of the day to recapitalise Barings, I would like to take this opportunity to pay tribute to the governor and his staff and the London financial community for their commitment over the weekend to the search for a solution.
"I would stress to the House, Madam Speaker, that these circumstances are unique to Barings and should not apply to other banks operating in London. The Bank of England is ready to provide liquidity to the banking system to ensure that it continues to function normally. Deposits at Barings are, of course, at the moment frozen and the extent of any losses on them will not become clear for some time. The deposit protection board will be writing to all of Barings' depositors potentially eligible for assistance.
"Madam Speaker, the House will be rightly concerned about how such huge unauthorised exposures could be allowed to happen and build up so quickly without the knowledge of the company, the exchanges or the regulators. I am determined to address that question rigorously and to review the regulatory system thoroughly in the light of this collapse. However, before we come to any firm conclusions, it will be necessary to establish in detail
"I have asked the Board of Banking Supervision to investigate fully and urgently all aspects of this episode and to report back to me. The investigation will include the circumstances under which such unauthorised transactions were able to take place and to remain undetected until too late. The board will need to work closely both with Barings and with the Singapore, Osaka and Tokyo exchanges. The House will recall that the Board of Banking Supervision is chaired by the Governor of the Bank of England and comprises six independent members and three members appointed ex officio from the Bank.
"In today's global markets, the regulatory tasks are international and must be tackled internationally. Over the past two years, with other Finance Ministers in the G7, the G10 and the IMF, I have taken part in discussions of the need to ensure effective regulation of international dealings in derivatives and other instruments in high technology 24-hour trading conditions. The problems are obvious but practicable solutions are less self-evident. No system of regulation can ever guarantee total security. There is always the chance of unwise or fraudulent dealing by one or a group of individuals. The better the bank's systems and controls the less likely this is to happen. Every regulatory authority and every bank must now be considering what further steps it can take to protect itself against this sort of risk.
"Madam Speaker, I will report back to the House at the earliest opportunity on our analysis of this case, the lessons to be drawn and any proposals to strengthen security in highly complex financial markets. I would expect to publish a full report on the facts of the case subject only to the need to protect the legitimate confidentiality of innocent third parties and my other legal constraints.
"Meanwhile we must also be concerned about the implications of this for the employees of what was, until a few days ago, a successful and highly respected firm. The administrator will no doubt take early steps to clarify the position of the 4,000 or so employees, some of whom will be needed to administer the assets of the business and many of whom work for successful and profitable businesses for which purchasers will no doubt be found. Some redundancies will be inevitable but the employees in this country will of course be able to rely on a measure of statutory protection in the event of their employer being so insolvent that difficulties arise in the payment of salaries and redundancy payments.
"This failure is of course a blow to the City of London. But it appears to be a specific incident unique to Barings centred on one rogue trader in Singapore. There has inevitably been some turbulence in the markets since the announcement but global markets should be quite strong enough to absorb it without lasting damage since these events have not changed any of the fundamentals that underline foreign exchange, equity and bond markets".
Lord Peston: My Lords, I thank the noble Lord for repeating the Statement made by his right honourable friend the Chancellor of the Exchequer. I am aware that I and any of us who wish to comment on the Statement or ask questions must be sensitive to the effect of anything that we say on the value of sterling. Although I am second to none in my willingness on other occasions to criticise the Government's economic policies, I agree with the last sentence of the Statement; namely, it seems to me that the Chancellor is entirely right when he says that nothing that has happened in the past few days has changed any of the fundamentals that underline foreign exchange equity and bond markets, at least so far as this country is concerned. My own judgment, for what it is worth, is that certainly at the present time if anything sterling is undervalued and should not be moving in a downwards direction.
To turn to various aspects of the Statement, we have heard about losses in excess of £600 million. I assume that that is simply the Chancellor's best guess at this moment. There must be a doomsday scenario figure that someone in the Treasury must have which I assume is much larger. I do not know whether the Minister can enlighten us on that.
More to the point, given the nature of the transactionsI believe they are connected with the behaviour of various Japanese or Far Eastern stock marketsuntil the contracts are finally closed presumably we cannot possibly know the full scale of what is involved. Equally, I suppose that these contracts will close within not too long a period, given the kind of contracts we are discussing. One will then wish to have a statement on the total scale of the operation.
Obviously the Governor of the Bank of England was right to bring together last night those parties who could be helpful. Can the noble Lord enlighten us on whether there was any hope in what happened last night? I take the fairly ruthless view that if you engage in high risk financial activities in the hope of making a profit you have to accept that you may make a considerable loss; in other words, there is a downside risk, and that is the nature of the game that you play. I hope that no noble Lord will wish to be party to the view that it is the role of the Bank of England to meet these losses, certainly on an open-ended basis. I cannot see that the taxpayer can be asked to do that. Was there any hope of a formula being found? I am sure we all agree that, if there was a possibility of saving this bank, it would have been worth doing.
That leads to a more general issue which I believe financial markets will wish to have explained to them. Since other banks can engage in precisely these activities while acting as banks, are we to believe that if the same thing happens in futureI do not mention any names in terms of clearing banks or anything like thatprecisely the same line will be taken by the authorities, whether it be the Bank or the Treasury; namely, that in the end, if it is an open-ended commitment, they cannot guarantee any of it on a stop loss basis?
The Chancellor of the Exchequer is quite right when he says that he is determined to address the general question of regulation rigorously and thoroughly. He has told us what the Board of Banking Supervision will do. Surely we must support that. However, is the board capable of doing that job? In particular, will it be able to get all of the information that it needs to find out what happened? As the Statement makes clear, that body has to work closely with Barings and foreign exchanges in the Far East. What obligation do those exchanges have to be totally transparent and tell the Board of Banking Supervision all they know about what has happened?
That takes me to the matter of uniqueness. The Statement has used the word "unique". I have to say that I am not persuaded. I find it difficult to believe that this is the only example of this kind of activity that has occurred. I ask whether in looking at the specific transactions the Board of Banking Supervision will have regard to perhaps a large number of earlier transactions at least undertaken by Barings and possibly the same trader. In order to get an understanding of what has happened it must not be assumed that this is unique; we need to approach it with an open mind and ask what more generally has been going on.
The Chancellor has said that he is determined to discover the full facts and to learn the appropriate lessons. He has also said that he will report back to the House at the earliest opportunity. I hope that that also means that there will be a report back to your Lordships' House. I remind your Lordships that not very long ago I had to deal with a similar Statement relating to BCCI. At that time I said that it would be appropriate for your Lordships to debate the matter. I remind the House that there has been a deathly silence from that day to this. We have not debated it and have not had a chance to say what lessons can be learnt from it. In some ways this matter is more important. Once the facts have been established, an opportunity must be found for your Lordships to look into it in detail and debate it.
I am totally sympathetic to what the Chancellor has said in his Statement. I wish to be as supportive as possible when he says that these regulatory tasks are international and must be dealt with internationally. He says that the problems are obvious but the practical solutions less self-evident. I agree with that. Nonetheless, I feel that we can do better. I hope that the Chancellor in grasping this nettle is saying essentially that he is determined, together with international colleagues, to produce an agreed regulatory framework without destroying international markets and freedom of operation in international markets.
I raise one other matter of a slightly delicate kind. I can see who the losers are to some extent but in this kind of esoteric finance we have the classic problem of seeing precisely who are the gainers. Do the Government at this stage have any information to indicate that anything of a fraudulent kind has been going on? One view is that we are discussing incompetence; another is that we are discussing fraud; and a third view is that we are discussing both. I should like to know whether we can be enlightened on that or whether the Minister's answer at this stage will simply be that he does not yet know. I must be right in saying that among the losers will be those who have deposits in Barings. One's immediate intuition is that perhaps they are simply big businesses: who cares about them? They have tonnes of money and this loss will be peanuts to them. I do not take that view. I do not know who the depositors are, but I guess that among them will be public sector institutions, or near public-sector bodies, which bank with Barings. Does the Minister have any information about that? For example, if there are such public sector institutions that bank with Barings, will they at least fall to be recompensed by the Treasury on the grounds that they are in the public sector and therefore need to be looked after?
Some of us will remember being taught in school about the Baring crisis which occurred 100 years ago. I feel very old when I now talk about a new Baring crisis and think that in future schoolboys and schoolgirls will be asked exam questions on both crises. Having said how serious it is, one has to keep a proper perspective. I believe that every day on the London markets about 90 billion or 100 billion dollars worth of foreign exchange is traded. In comparison with that, £600 million is not a lot. Though I do not withdraw my criticismsand next time that we debate the economy I shall be my normal nasty selfI hope your Lordships will agree that in the end this is not the biggest event to have hit the world and I believe strongly that it is one with which we ought to be able to cope.
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