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Hylton, L.
Jones of Cheltenham, L.
Judd, L.
Lee of Trafford, L.
Listowel, E.
Livsey of Talgarth, L.
McNally, L.
Maddock, B.
Masham of Ilton, B.
Methuen, L.
Miller of Chilthorne Domer, B.
Newby, L.
Northover, B.
Oakeshott of Seagrove Bay, L.
O'Cathain, B.
Plant of Highfield, L.
Razzall, L.
Redesdale, L.
Ripon and Leeds, Bp.
Roberts of Llandudno, L. [Teller]
Rodgers of Quarry Bank, L.
Rogan, L.
Roper, L.
Saltoun of Abernethy, Ly.
Sandwich, E.
Scott of Needham Market, B.
Selsdon, L.
Sharp of Guildford, B.
Shutt of Greetland, L. [Teller]
Smith of Clifton, L.
Stern, B.
Teverson, L.
Thomas of Gresford, L.
Thomas of Walliswood, B.
Thomas of Winchester, B.
Tordoff, L.
Wallace of Saltaire, L.
Walmsley, B.
Walpole, L.
Winchester, Bp.


Acton, L.
Adams of Craigielea, B.
Adonis, L.
Ahmed, L.
Anderson of Swansea, L.
Andrews, B.
Archer of Sandwell, L.
Ashley of Stoke, L.
Ashton of Upholland, B. [Lord President.]
Bassam of Brighton, L.
Billingham, B.
Bilston, L.
Borrie, L.

11 Oct 2007 : Column 377

Boyd of Duncansby, L.
Bradley, L.
Brooke of Alverthorpe, L.
Brookman, L.
Campbell-Savours, L.
Carter of Coles, L.
Chandos, V.
Christopher, L.
Clarke of Hampstead, L.
Clinton-Davis, L.
Cohen of Pimlico, B.
Corbett of Castle Vale, L.
Crawley, B. [Teller]
Darzi of Denham, L.
David, B.
Davies of Oldham, L.
Donoughue, L.
Drayson, L.
Dubs, L.
Eatwell, L.
Elder, L.
Elystan-Morgan, L.
Evans of Parkside, L.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Gale, B.
Gavron, L.
Golding, B.
Gould of Brookwood, L.
Gould of Potternewton, B.
Graham of Edmonton, L.
Grocott, L. [Teller]
Harris of Haringey, L.
Harrison, L.
Haskel, L.
Haworth, L.
Henig, B.
Hilton of Eggardon, B.
Howarth of Newport, L.
Howells of St. Davids, B.
Howie of Troon, L.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Janner of Braunstone, L.
Jay of Paddington, B.
Jordan, L.
King of West Bromwich, L.
Lipsey, L.
Macdonald of Tradeston, L.
McIntosh of Hudnall, B.
McKenzie of Luton, L.
Massey of Darwen, B.
Monson, L.
Morgan of Drefelin, B.
Morgan of Huyton, B.
Morris of Manchester, L.
Moser, L.
Ouseley, L.
Parekh, L.
Ponsonby of Shulbrede, L.
Quin, B.
Ramsay of Cartvale, B.
Rendell of Babergh, B.
Richard, L.
Robertson of Port Ellen, L.
Rooker, L.
Rosser, L.
Rowlands, L.
Royall of Blaisdon, B.
Sawyer, L.
Sewel, L.
Simon, V.
Smith of Finsbury, L.
Smith of Gilmorehill, B.
Snape, L.
Soley, L.
Stone of Blackheath, L.
Strabolgi, L.
Symons of Vernham Dean, B.
Temple-Morris, L.
Thornton, B.
Tomlinson, L.
Triesman, L.
Truscott, L.
Tunnicliffe, L.
Uddin, B.
Watson of Invergowrie, L.
Wedderburn of Charlton, L.
West of Spithead, L.
Whitty, L.
Williams of Elvel, L.
Williamson of Horton, L.
Woolmer of Leeds, L.

Resolved in the negative, and amendment disagreed to accordingly.

1.33 pm

Lord Bassam of Brighton: My Lords, I beg to move that further consideration on Report be now adjourned. In moving the Motion, I suggest that the Report stage begin again after the Statement and the Question for Short Debate.

Moved accordingly, and, on Question, Motion agreed to.

Financial Markets

1.34 pm

Lord Davies of Oldham: My Lords, I shall now repeat a Statement made in the other place by the Chancellor of the Exchequer. The Statement is as follows:

“Mr Speaker, with permission, I would like to make a Statement on Northern Rock plc.

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“As I said in my Written Statement on Monday, Northern Rock got into difficulty following the problems triggered in the US mortgage market which have gone on to affect the financial markets in countries all around the world. In early August, when the markets realised the extent of the problems in the US sub-prime market, they also began to have doubts about the value of other asset-backed securities. Uncertainty over which institutions were exposed and to what extent meant institutions lent to each other at much higher rates, and in some cases stopped lending to each other altogether. The result was a large reduction of money in the market generally and an increase in the cost of borrowing, not just for those with exposure to sub-prime mortgages, but for all institutions. “These developments have had a global impact affecting major US mortgage lenders, a major French bank and banks in Germany. The availability of credit has increased the past few weeks, so we can be more confident, but we cannot be certain when the current instability will end. Britain entered the global turbulence with a stable economy and a strong banking sector that has experienced rapid growth with well-capitalised balance sheets. British institutions have less direct exposure to sub-prime assets, and our sub-prime market share, at 5 per cent, is much lower than that of the US. “However, Northern Rock, because of its business model, faced particular problems: it has a large share of Britain’s mortgages, but they are primarily financed through the wholesale markets, including a significant proportion from securitisation. This meant that Northern Rock was particularly vulnerable to the virtual closing of this market over the summer. “On 14 August, the Financial Services Authority told the Bank and the Treasury about its concerns on Northern Rock and its vulnerability in the current market circumstances. During August it became increasingly clear that Northern Rock was having difficulty getting access to the financing it needed and that the cost of doing so was increasing. The general situation and Northern Rock’s position in particular were monitored on a daily basis. On 5 September, the Bank announced £4 billion of extra support to provide increased liquidity to the wider market. As Northern Rock’s position deteriorated, it became clear that specific support was likely to be needed for it. “On 13 September, the Governor and the chairman of the FSA recommended that I authorise the Bank to provide special liquidity support, and I agreed because I believed that that was justified. There are clear principles governing such support that are set out in the memorandum of understanding between the Treasury, the Bank and the FSA which was first signed in 1997: such support should be undertaken only where there is a genuine threat to the stability of the financial system and in order to avoid a serious disturbance in the wider economy. That was the case here. The provision of this support was announced on 14 September.

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“Although the FSA had assured the public that Northern Rock was solvent and that if depositors wanted to get their money out they could do so, it became clear that further assurance was needed. So on 17 September, again on the advice and with the agreement of the FSA and the Bank of England, I announced that during the current instability in the financial markets, and should it prove necessary, I would put in place arrangements that would guarantee all the existing deposits in Northern Rock. This undertaking was explained and extended on 20 and 21 September.“The Treasury, the Bank and the FSA continue to work intensively with Northern Rock with a view to helping it resolve the situation. Any future solution must lie with the company. The Government have provided appropriate help, and we will continue to do so. As I reported to the House on Tuesday, I have extended the Government’s guarantee arrangements to all new retail deposits, for which Northern Rock will pay a fee, while the Bank has provided an additional loan facility which replaced that of the lender of last resort. I have today written to the chairmen of the Treasury Select Committee and the Public Accounts Committee setting out more details, and I am publishing this letter and placing a copy in the Library of the House.“There are clearly lessons to be learnt from what happened to Northern Rock and the wider instability across the world. The responsibility to minimise risks and prevent problems happening in a particular bank lies first and foremost with the directors acting on behalf of its shareholders; that is their clear duty. It is the job of the financial authorities to set the policy and regulatory framework in which institutions and markets work. Let me remind the House of the responsibilities here. As the House knows, the Bank of England has complete independence in monetary policy. Its second core purpose is financial stability, a role that it discharges on a daily basis. The FSA, also independent, is responsible for the supervision of individual firms such as Northern Rock. And because of the importance of the financial system for the stability of the economy as a whole, and the potential impact on the Exchequer in ensuring that stability, the Government are rightly also involved. The Treasury is responsible for the overall legislative framework, and I am accountable to Parliament.“I believe that it is right that the Bank and the FSA should continue with those responsibilities. This is a model that others around the world are now following. However, we do need to review how the framework has operated and put in place whatever practical improvements are needed. As the FSA has said, it is reviewing for itself its own lessons. I look forward to its conclusions early next year.“We need to make more reforms to prevent problems happening internationally and in Britain. First, when the Financial Stability Forum reports at the G7 to Finance Ministers in Washington next week, I will urge faster rapid implementation of

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international agreements on solvency, accelerated work on international standards for regulating liquidity, more transparent information on credit ratings, and action to improve the transparency of off balance-sheet vehicles.“Secondly, I will propose an IMF and FSF early warning system to strengthen financial sector surveillance, identify risks to stability and coordinated regulatory responses to them. Thirdly, I can report European agreement this week to strengthen arrangements for ensuring financial stability in Europe and increased cross-border management.“It is important that regulators focus on liquidity as well as solvency. Here at home, the FSA will shortly set out proposals for a review of the UK liquidity regime. As the Governor has said, all central banks face problems in providing support to banks in difficulty in a world where markets rightly expect high levels of disclosure and transparency. So I can confirm that if it proves necessary to clarify in Europe the legal and practical issues surrounding the way in which such support is provided and disclosed to protect financial stability, we will work with other European countries to provide that certainty. We will now review whether rules about the swift takeovers of banks need to be changed. “However, when problems do occur, we need to have a system in place that is clear and reassures depositors. We will introduce legislation in the next Session to establish a new regime. Together with the FSA and the Bank, I am proposing in a discussion document published today the principles for this new regime. This new regime would mean depositors are insulated from a bank that has failed, greater compensation for them and certainty that their compensation can be paid out quickly.“As a first stage, the FSA has decided that the Financial Services Compensation Scheme is now covering 100 per cent of deposits up to £35,000. However, I have made it clear that that is just an initial step towards a more comprehensive change. We will work closely with the banking industry, consumer groups and others to agree this new regime. I hope that there will be cross-party consensus on it. “We must all—internationally and domestically—consider what lessons there are to learn from the summer's events, and if needed I will take action. The changes we make will strengthen our reputation as the world's leading international financial centre and be founded on our commitment to maintain a strong and stable economy. I commend this Statement to the House”.

My Lords, that concludes the Statement.

1.43 pm

Baroness Noakes: My Lords, I thank the Minister for repeating the Statement that the Chancellor made in another place. I know that the Minister has no say in the content of any Statements that he has to repeat. He has my sympathy, for this Statement showed no understanding that the Government in general and the Chancellor, and his predecessor in particular, have something to answer for.

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I never thought that I would witness a run on a bank. I thought runs on banks existed in history books or, as the director-general of the CBI so succinctly put it, in banana republics. The Government therefore do have something to answer for. This was the first test of the tripartite arrangements that were put in place when the Government placed banking supervision in the hands of the FSA. The tripartite system failed, but the Statement gives no account of the causes of failure. Why do the Government think it failed and what should be done differently in future?

It has been reported that the tripartite arrangements were subjected to a dummy run for avian flu but not for a full-blown financial markets crisis. Is that true? If so, it is pretty incredible, and can the Minister explain that? If it is not true, the dummy run should certainly have surfaced the legal problems outlined by the Governor of the Bank of England to the Treasury Select Committee in another place. What testing has actually been carried out? Has that testing revealed the legal deficiencies? If it did reveal the legal problems, why was nothing done about them?

We also need to know who is supposed to be in charge when a crisis arises. The Governor of the Bank of England failed to answer that question when it was put to him by the Treasury Select Committee, and the FSA was no more forthcoming when it gave evidence earlier this week. Who does the Minister think was in charge? Whoever was in charge failed—that is a fact—so who was it?

Are the Government satisfied with the role played by the Bank of England? Do the Government agree with the Bank’s view on moral hazard preventing action the week before it U-turned and provided £10 billion? Do the Government believe that the role of Sir John Gieve, the deputy governor with responsibility for financial stability and the link man with the FSA, was effective?

When the Government drafted the Bank of England Act 1998 they specified in some detail the Bank’s monetary policy role, but the Act is silent on the Bank’s other activities, including its financial stability role. Do the Government think that there is sufficient clarity about the Bank’s financial stability functions?

Are the Government satisfied with the role of the FSA? Was the FSA close enough to the detail of Northern Rock’s business model and financial risk profile? If so, why did it relax Northern Rock's capital requirements in June? Are the Government confident that the FSA can analyse and spot problems early enough?

Will the Minister also explain the Government's policy towards failing retail banks, particularly the announcement on 9 October that results in the taxpayer giving an open-ended guarantee for all Northern Rock’s depositors? On 20 September the Treasury clarified the original 17 September guarantee and said that an extension to new accounts would be unfair to other banks and building societies. Do the Government now consider that the 9 October extension to all deposits is fair to other banks? Will the Minister quantify the contingent liability that taxpayers now have to stand behind?

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The Chancellor has today announced consultation on protecting depositors. It might as well be entitled How the Treasury can use 21 Pages to Say Not Very Much. Do the Government have no proposals, no ideas and no clear sense of the way forward? Are the Government not going to provide any leadership in this area? The document does not deal with an issue which arises from how the Government handled the Northern Rock case—that the public will assume that if anything less than 100 per cent protection is written into the new financial services compensation scheme, the Government will step in to protect depositors, as they have for Northern Rock’s depositors. That is a problem entirely of the Government's making. Do the Government believe that they can in future escape being seen as the de facto underwriter of all retail deposits in our banking system, and if so how?

I have many other questions, but I shall finish with just one. I asked the Minister yesterday during Oral Questions about the Governor of the Bank’s view that the market abuse directive had prevented a covert support operation for Northern Rock. The Minister did not answer then, so I am going to have another go. The Minister will be aware that the Commission has hotly denied that the directive was the source of the problem, so did the Governor get it wrong or did the Government goldplate the market abuse directive when they implemented it and thereby create a barrier to dealing with banking crises in the time-honoured way? What are the Government going to do about the problem?

1.50 pm

Lord Newby: My Lords, for many people, the saga at Northern Rock is particularly sad. Going back, Northern Rock has had a very fine tradition as a respected regional mutual institution, one of the financial institutions of the north-east. It has been a major employer and continues to be so, and it has had an impressive record as a funder of charitable activities in the region. In many ways, it was looked up to as one of the more successful businesses in that part of the country. Yet we have seen laid bare during the past month the most extraordinary activities, both on the part of Northern Rock and in the way that it has been dealt with by some of the authorities.

I find it slightly sad that the Government seem to think of this, or wish to portray it, as a matter of international financial market instability—that is the name of the Statement on the annunciator screens now. It is actually a Statement about Northern Rock which, in my view, has two principal components. The first relates to the business model of Northern Rock. The truth is that during the first six months of this year, Northern Rock doubled its mortgage lending and has done so on the basis of extraordinarily aggressive practices and marketing. That is the most reckless way for any bank to behave. It was a disaster waiting to happen, and it has.

Can the Minister confirm that the Bank of England has already lent £11 billion and guaranteed another £23 billion? Does he accept that Northern Rock is still today following the practices that have helped get it into such difficulties? Within this week,

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one of my colleagues rang Northern Rock to ask about taking out a mortgage and was told that he could borrow up to 127 per cent of the value of the property at five times his income—30 per cent of that would be unsecured. That was not just happening six months ago; it is what was happening this week. Does the Minister believe, given the history of Northern Rock over recent months, that that is a prudent way for the bank to continue its operations? What is his view of the status of the management of the bank? For most normal mortals, it seems extraordinary that the people who have got Northern Rock into this tremendous mess are still there. That relates not just to some of the executive members. One wonders, for example, about the chairman of the risk committee, one Sir Derek Wanless. What is his view of the risks that the bank took at the time and what is his view now? I hope that the Treasury Select Committee will ask him to explain his advice to the bank in that capacity over recent months. Surely the chief executive and his staff must have played a major part in the fiasco that we have witnessed. I for one find it surprising that they are still in their positions.

Moving on from the bank itself, we come to the FSA, which has the principal responsibility for policing the bank's activities. Can the Minister confirm that the FSA as a matter of course has reviewed the market strategy and the business strategy of banks such as Northern Rock as a general principle once every three years, and that until a couple of months ago the next review of Northern Rock was not planned until 2009? Does he consider, in rapidly moving financial markets where you have banks and building societies pursuing aggressive growth models, that a three-year gap between the FSA even formally looking at something is an adequate way forward?

There has been much discussion about the respective roles of the Treasury, the Bank of England and the FSA in recent weeks, and some suggestions that the basic structure is wrong and that supervision for banking might somehow return to the Bank of England. Does the Minister agree that the main lesson to be drawn from the Northern Rock saga is not that the Bank of England should necessarily resume the functions of the FSA, but that the FSA should not be asleep on the job? It needs to have a major review of how it deals with the banks.

Finally, on the international aspects of all this—because there are clearly some international aspects—I reiterate the point made by the noble Baroness, Lady Noakes, about the market abuse directive. Can the Government explain whether, in their view, European legislation has played a major part in making this whole exercise more difficult and, if so, will they do something about it? I have a suspicion and a sense that the old-fashioned way of dealing with things in the City, which was a covert way, is no longer fit for purpose. I was interested that the Governor of the Bank of England thought that by covertly getting the chaps together they might be able to sort it out without anyone knowing. Do the Government share that view and, if not, what do they plan to do about it?

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Like other noble Lords, I have barely seen the consultative document. It strikes me as slightly surprising that so much attention is being paid to various international matters when what is required is a more satisfactory and robust method of dealing with things in the UK and the major responsibilities that lie domestically. We require a combination of two principal things. First, we need senior management in important financial institutions who themselves behave prudently within a board structure that acts to ensure that they do. Secondly, if there is any indication that a bank or any other financial institution may not be behaving like that, can the Minister assure us that he will put pressure on the FSA to adopt a much more robust and rigorous view of its central purpose?

1.57 pm

Lord Davies of Oldham: My Lords, I am grateful to both noble Lords who have contributed to this short debate and asked pertinent questions, but I want to rebut what I think underpins both contributions—that somehow the Government are being complacent about the issue and feel that there is no need to answer for the difficulties that have obtained through August and September with regard to Northern Rock. I hope that it will be recognised that the moment that he was able to do so—in the first week of the resumption of Parliament—the Chancellor has made a Statement to the House: both the Written Statement and the Oral Statement today, which I have had the pleasure of repeating. It will be recognised that within that Statement are constructive proposals on how we learn lessons from the problems that have clearly emerged during those months and necessary action for the future.

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