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Lord Ezra: My Lords, I too wish to express appreciation to the noble Lord for repeating the Statement. The noble Lord, Lord Eatwell, pointed out that there have in recent times been three significant banking crises. I consider that the Barings crisis is the worst of the three because it was at the heart of the City of London. It was the longest established merchant banking organisation in Britain. Of the other two, Johnson Matthey represented a bank which was a subsidiary of a firm which dealt mainly in trading precious metals. BCCI was a firm of enormous proportions but it largely traded abroad. This crisis hits at the heart of the City of London. It is fitting, therefore, that we should have this long and detailed report on it.
The noble Lord, Lord Eatwell, has already referred to the limited nature of the proposals that are made about the supervisory role of the Bank of England. So I very much fear that, although this is an excellent report in analysis, what it comes out with at the end gives little reassurance to thosethey represent everyone in this House, and indeed in the countrywho fear that this might occur again.
I wish to ask the Minister whether, even in the light of the limited recommendations, there is to be a further report by the Board of Banking Supervision to find out whether the various banking institutions are taking the necessary actions. Furthermore, in regard to the Bank of England's supervisory role, the noble Lord, Lord Eatwell, is perfectly right to draw attention to the alternative possibilities. We should have a major debate on whether the supervisory role should remain with the Bank or should be transferred. I have an open mind on the subject, but if it is to remain with the Bank, the whole thing needs to be sharpened up a good deal more than is suggested in the report.
The third area of importance is co-operation with overseas supervisory bodies. As the noble Lord, Lord Eatwell, pointed out, the fact that the Singapore authorities were not prepared to co-operate in the inquiry does not bode well for the arrangements for co-ordination by the various authorities. Because of the global nature of financial operations in the world in which we live, unless there is much more effective co-operation with the various supervisory bodies, I do not suppose that we shall be able to avoid such crises occurring again.
I conclude by asking the Minister whether the report, which is good on analysis, is only the start of the story. Do we not need to take it a good deal further? Do we not need to be assured that when these and further measures are effectively taken, we avoid this kind of occurrence in the future?
Lord Mackay of Ardbrecknish: My Lords, I am grateful to both noble Lords for thanking me for repeating this Statement. I shall try to address some of the points that they raised, although I cannot promise to
To reply first to the point raised by the noble Lord, Lord Ezra, as to what was happening in regard to the recommendations, so far as the Bank is concerned there are 17 recommendations for action by the Bank which have all been accepted. They include improving its understanding of the risks in the non-banking business in the groups for which it is responsible; various improvements to its internal guidelines; efforts to improve co-operation with other regulators; and other measures to improve its effectiveness. The board asked forand the Bank indicated that it will providea report on the recommendations and what has been done about them by the end of the year. As I said in my Statement, I am absolutely certain that all the banks in the City and all the other financial institutions will read carefully what this report discovered about this incident in order to see whether there are any lessons to be learnt by them over the way that they control their operations.
Perhaps the major point raised by the noble Lord, Lord Eatwell, is the argument that he advanced, as did some others, in favour of separating the functions of banking supervision away from the Bank of England. There is nothing in this report that supports the need for that major change to the regulatory framework. What it points to is a failure of practice, not a failure of policy. The noble Lord, Lord Eatwell, will of course remember that Lord Justice Bingham concluded in his report on BCCI that there was nothing in the history of BCCI that argued against the Bank's dual role. The noble Lord will also be aware, and I remind him of it, that the Treasury and Civil Service Committee of another place, in its 1993 report into the role of the Bank, concluded that there was no overwhelming case for separating out banking supervision to a separate body; rather the balance of argument was in favour of maintaining the status quo.
The Treasury and Civil Service Committee is currently looking into derivatives and at the implications of the Barings collapse. I do not know whether it will revisit this issue, but that is what it said; and that is what Lord Justice Bingham said in previous investigations on this issue. I do not think that the noble Lord, Lord Eatwell, was quoting from the broad base of views on this matter, but from a rather narrower base, when he invited me to remember quotations from articles previously.
The Board of Banking Supervision was set up under the Banking Act 1987 to advise the Bank of England on the discharge of its supervisory responsibility. Apart from the Governor and one other Bank official, the other six members are all independent outsiders with considerable experience. They were appointed precisely to deal with and pursue thoroughly, under their powers in the Banking Act, the sorts of issue that arose in this incident.
The noble Lord, Lord Eatwell, asked me about the bondholders and about the bonuses of those who left Barings as a result of this incident. So far as I understand, almost all of those who are criticised in this report have left Barings. Equally, my understanding is that they did not receive any of the bonuses about which the noble Lord asks.
On the general question of whether the Government or the Bank of England should stand behind shareholders and bondholders in these matters, there is no suggestion in the report that the Bank should do so. Of course, we very much regret the fact that people lost money in Barings. But the capital of any company is exposed to higher risks than ordinary creditors and will receive a return only after other creditors are paid. If the Bank or the Government were to stand behind all failed banks, this would lead to moral hazard. People could chase the highest returns, regardless of risk, knowing that someone else would pay the Bill if things went wrong. That would not be right.
I was asked why the Bank did not pick up the market rumours when others did. The Bank of International Settlements, one of the others quoted, has a substantial balance sheet which requires it to deal on a regular basis in all the world's major markets and with all the world's major banks. Therefore, it is not really surprising that its dealers picked up a rumour in talking to Tokyo business counterparts. Bank dealers have very many fewer regular links with the Far East, and they did not pick up that particular rumour.
On the question of solo consolidation, which is a tricky issue on its own, I was asked by the noble Lord if I thought that it should be ended. I believe that it is sometimes right for the Bank to regard very closely linked institutions as one. The report makes clear that solo consolidation was a problem only because it was combined with such inadequate internal controls and general misreporting. The point is not that we should rule out a potentially useful technique, but that we should ensure that it is employed only where appropriate. The Bank is reviewing its rules on that subject.
Lord Boyd-Carpenter: My Lords, I support the view of the noble Lord, Lord Eatwell, that it is very important that this matter should be debated by this House before we rise for the Recess. This House contains an enormous amount of expertise and knowledge on these subjects. The matter is obviously one of considerable urgency. The only extent to which I would perhaps differ from the noble Lord opposite is in so far as it might be better to defer our rising for the Recess and take the debate early next week. That would give rather more opportunity and time for those of us who are concerned about this matterand there are manyto read and digest this report. There is no necessity, so far as I know, to rise on Friday. It is purely a matter of convenience. This House has always been prepared to subject questions of convenience to questions of real public duty. It seems to me that this House can do a great deal by debating this subject. I hope that my noble friend will not just pass us off with the usual formula about "the usual channels". Some of us have no undue confidence in the usual channels. We should have far more confidence in my noble friend the Minister were he to say that he would himself take steps to see that we have an opportunity to debate this subject.
The only other matter that I would raise with him is this. I did not understand from his Statement, although I endeavoured to follow it closely, whether he, the Government and the Treasury are satisfied that the steps so far taken are sufficient to prevent a similar early repetition of a ghastly episode of this sort.
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