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Lord Eatwell: My Lords, the noble Lord is misinformed. It is the Controller of the Currency who is the main regulator of the banking system in the United States, not the Federal Reserve.

Lord Mackay of Ardbrecknish: My Lords, the noble Lord has a habit of jumping in and stopping me continuing. Perhaps if he had shown a little patience, as I did during his speech, I might have come to that point. I was trying to build up a picture of the situation in America. As I was saying, this split of responsibilities is in fact very close to the one we have in the UK and reflects the fact that banks are uniquely prone to

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systemic risk because their business depends on a basic maturity mismatch—borrowing short-term and lending long-term. It is this function that simultaneously makes the banking sector so fragile and so critical to the well-being of the economy.

In the United States the Securities and Exchange Commission regulates only securities houses. Banks are regulated by the Federal Reserve—the bank holding company—by the Office of the Controller of Currency for national banks or by the states for state charter banks. Big banks are supervised by the Fed plus one of the others. So, as I said to the noble Lord, Lord Eatwell, a little patience and I would have made the point that he made for me. US banks often do their securities business through foreign subsidiaries which come within the responsibility of the Fed.

But I asked my advisers another question: how successful are other people at this job? Other countries have had major bank failures to deal with; for example, the Savings and Loans collapse in the United States in the 1980s, Banesto in Spain last year and the massive cash injection needed from the French taxpayer into Credit Lyonnais. An interesting article in the Financial Times compared the cost of banking failures in the UK and the US over the past 10 years. Total payouts from the UK Deposit Protection Fund was £144 million, of which £50 million has been recovered, leaving net costs of £94 million. The net cost in the United States over the same period is over 30 billion dollars. So perhaps the noble Lord, Lord Eatwell, and also the noble Lord, Lord Desai, might have listened to and also read the speech of their noble friend Lord Hollick who, from his own personal experience, looked on the Bank of England as a regulator. He indicated that it seemed careful, methodical and questioning. What puzzled him was the different treatment which appeared to be meted out to Barings. He made a very valid point in questioning that.

Lord Monkswell: My Lords, I query the Minister as regards the figures he gave for bank losses in the United Kingdom and the United States. It appears that he is talking about bank losses which have been made good by the authorities. Can he advise us of the figures for bank losses which have not been made good by the authorities?

Lord Mackay of Ardbrecknish: My Lords, I could not do that without notice. I was comparing like with like in the points I made quoting the article from the Financial Times.

I can do no better than to leave this subject with a quotation from an article in The Times of Wednesday, 19th July about this whole issue. It is by Mr. Alistair Darling who is a Member of Parliament. I believe that he is pretty influential in the Labour Party's policy-making in these matters. He said that the Labour Party would not be rushing into a decision. He added—and some noble Lords should listen to what their honourable friend said:

    "The Bank of England is internationally recognised and before any change is made it has to be justified. For example, moving responsibility for supervision from the Bank, which arguably invented the function, to another body, could have an effect on the City's standing".

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Therefore, I do not believe that this is an issue about which we should move quickly and simply as a knee-jerk reaction. I have no doubt that we shall return to the issue at other times.

I do not want to say much about Mr. Leeson, although I was asked about him on a number of occasions. The position is quite simple. We do not have any charges against him. As my right honourable friend the Chancellor said very firmly, these are matters for the Serious Fraud Office and not for government Ministers. The question before the German authorities is extradition to Singapore where there are charges laid against him. His activities were carried out there. Unlike the party opposite, I do not have the same rather pessimistic view of the justice systems of all foreign countries. I am sure that the German authorities will be looking carefully at the position of Mr. Leeson's extradition.

The noble Lord, Lord Eatwell, asked whether the problem was not of weak United Kingdom merchant banks being taken over by stronger and bigger banks from abroad. He quoted some examples. Of course, some big UK banks own smaller banks in other countries. Why is one thing bad and the other good? Open financial markets are very important. He asked me specifically what role the bank was playing in the international tripartite group on financial conglomerates. Each participating country sends two representatives covering two of the three sectors: banking, securities and insurance. The UK seats were taken by the Department of Trade and Industry, the Insurance Supervisor and the Securities and Investment Board. The Bank was heavily involved in the discussion on the UK position.

The noble Lord, Lord Hollick, suggested that the failure of Barings would make the environment difficult for medium-sized banks. I believe he said that it made it "much cooler". If that means that markets are making a more sober assessment of the risks of the banking business—perhaps this covers points made by other noble Lords—that may not be a bad thing. It is important that market signals keep management up to the mark. They must be convinced that the market they are in is a sensible one and that their controls are in good order in that market.

The noble Lord, Lord Hollick, also asked an important question about the regulatory authority in the form of the Bank. He asked what the Treasury would do to ensure that the Bank of England has the resources it needs if it decides that it needs more to do its job. I can assure the noble Lord and your Lordships that the Bank has accepted the report's recommendations and if there are resource implications, these will no doubt form part of the discussions over the Bank of England's annual dividend. I believe I can give an assurance that lack of resources will not inhibit the Bank in its regulatory role.

I suggest that we should now look to the future. The report is there for all to see, in full, and it is now for all those people in key positions to heed the lessons. I shall not draw on them all because that has been done adequately by many of your Lordships and can be done by all those who will read the report. Provided they do

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that—and this collapse certainly provides a powerful incentive—we can look forward to the enhancement of the reputation of the UK financial system, which is something I think we can all agree is a desirable objective.

4.20 p.m.

Lord Eatwell: My Lords, I have been asked by my noble friend Lord Hollick to convey his apologies to the House for not being able to stay until the end of the debate. I agree wholeheartedly with the noble Lord, Lord Mackay, that we are very lucky that my noble friend Lord Hollick was here to make a most distinguished speech. This evening he is hosting a dinner in Devon for the touring Soweto Cricket Club. We all wish him well in that endeavour.

I am most grateful to all noble Lords, including the noble Lord, Lord Mackay—I am sorry that I have spoiled some of his weekend—who have been willing to spend this last afternoon of the parliamentary Session—and a notably sunny afternoon—in discussion of this Motion. It is a pity that the Minister could not find a single Conservative Peer to speak on his side. Perhaps they are not really interested in the future of the British financial industry or perhaps, more credibly, they are just too embarrassed by the Government's position to turn up.

We have enjoyed a colourful and powerful debate. Some contributions have been notably well informed and incisive. I attempted to argue in my introduction that we desperately need in this country a review of the entire process of banking supervision, a review which goes beyond the terms of reference of the specific investigations into the problems associated with BCCI and Barings. I also argued that finding the right structure for a regulatory system was more important than who was actually to carry out the regulating. Indeed, I have an open mind as to whether the Bank of England should be the basis of that regulation. Perhaps an independent review would conclude that it should be.

As many noble Lords have commented, the problem with the report is that it is not really an independent review. I was most disturbed to find what I believe is perhaps a sad explanation of the distinction which the noble Lord, Lord Ezra, identified in his remarks the other day—that between the analysis in the report and its conclusions as demonstrated in the evidence given by the Governor and Mr. Quinn to the Select Committee on the Treasury and Civil Service in another place on Wednesday. It turns out that, while the analysis of the Bank of England's position was indeed written entirely by the independent members of the Board of Banking Supervision, the writing of those conclusions was chaired by the Governor and by Mr. Quinn. That is unfortunate.

As has been said, any regulatory system will suffer failures, but we want Britain to have the best regulatory system and one which is up to date and capable of dealing with innovation in the modern world. Designing and creating that regulatory system is ultimately the responsibility of the Government and the Chancellor of the Exchequer. The Bank of England is just a division of the Government and the Governor is simply a public

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official. The future of supervision is essentially a political problem and a political responsibility. The Chancellor is shirking that responsibility. The Labour Party will not shirk that responsibility.

In the meantime, I thank all noble Lords who have contributed to an interesting, constructive and wide-ranging debate, and beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.

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