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The next few months will show whether my fears on continued liquidity shortages are grounded. It may be—and I am sure we all hope that this will be the case—that things will return to some kind of normality. Things may ease after the year end, once banks have got through reporting their year-end balance sheets. However, if we are to provide the confidence necessary to fix the liquidity problem in the future against the new background of financial instruments with which we are confronted, we may have to face the need to underwrite all deposits, including wholesale deposits, at regulated banks. If the Government underwrite all deposits, we will need to change the definition of banks in the way I have suggested so that the powers created in this Bill do not have to be used over and over again every time we have a future credit cycle. For that reason, while I do not oppose the Bill, I hope that it can be part of a wider debate which addresses some of the more fundamental questions I have raised. In the mean time, I should like to raise three specific questions on the Bill as it stands.
First, I note that in the appropriately numbered Clause 4, setting out the objectives that will guide a special resolution, subsection (9) states that all the objectives are to be balanced in each case. I wonder whether that is sufficient, or whether subsection (8), which requires action not to interfere with property rights in contravention of the Human Rights Act, must not ultimately take precedence; or, to put it another way, that any action taken must be compatible with the fair treatment of property rights to which the Minister signed up yesterday in the discussion on statutory instruments.
Secondly, in the same list of objectives I notice that there is no mention of the desirability of maintaining open, competitive markets. I should welcome assurance from the Minister that the Government's support for competition, and the benefits of innovation, productivity and consumer value that competition brings, will not be diminished in the current economic conditions. I should like the Government to consider whether that objective should properly be reflected in Clause 4.
While the Bill, as I understand it, does not explicitly deal with arrangements for the government holding company, UKFI, as the noble Lord, Lord Newby, mentioned, I assume that the provisions apply to partial nationalisation as well as full nationalisation. Where the Government are only a partial owner of a bank, can the Minister explain whether government
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5.56 pm
Lord Bilimoria: My Lords, in February this year, as time was finally called on Northern Rock, we were presented with a Hobson's choice. After months of dithering we were rushed into passing the temporary Banking (Special Provisions) Bill, which went through both Houses of Parliament in just over three days.
Today, this House has the opportunity to examine how Britain's banks became so poorly regulated and supervised, and to propose measures which we hope will restore respect, trust and confidence in our banking system. My noble friend Lord Smith of Kelvin emphasised the word “confidence” in his superb maiden speech, and he spoke with the authority of an experienced banker and a fellow chartered accountant.
When I first started my business, I was introduced to a well known businessman who told me something which I will never forget. He said, “Young man, empires are built on trust”. What we have today results from the complete breakdown of trust—the breakdown of trust in the global banking system and on the high street.
I have said it before, and I shall say it again: business is at the heart of Britain's economy, but business cannot function without a robust, reliable banking system. It is the fuel that powers the economic engine. The British banking system—both commercial and investment—was once the pride of the world.
I am not being nostalgic when I say that the Bank of England was the most respected central bank in the world. It was instrumental in helping this country evolve from being one of the world's greatest trading nations to London becoming the world's greatest financial centre. Historically, the City of London, with the Bank of England at its heart, was built on trust, and on the assurance of “my word is my bond”. Sadly, the reforms that took place in 1998, with the best of intentions, unwittingly weakened the role of the Bank of England and undermined its once proud reputation.
Before those reforms the Bank of England had been a bastion of our capital and financial markets. For centuries it served as a shining example to central banks around the world with its tough, fair and effective regulation and supervision of Britain's banks. With a close eye on the markets, the Governor of the Bank of England could draw on a reservoir of executive power and, with a telephone call, summon the chief executives of any bank around the discussion table. I have heard stories of bank chairmen and chief executives, after being summoned by the Governor of the Bank of England, sitting there, if necessary, until the early hours of the morning, to resolve a problem or crisis. The governor was respected. In contrast, we now have a governor who more often than not fights with his hands tied behind his back.
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Where did it all go wrong? The situation we are in today—people have tried to analyse it—is a direct result of a prolonged period of low interest rates that have encouraged countless households and businesses to take on staggering levels of debt. Where they led, the Government followed, and our national debt is so colossal that it may be paid off only by our children and our children's children.
As the noble Lord, Lord Saatchi, who is not in his place, said, in this period the banks overgeared by miles. As the noble Lord, Lord Blackwell, said, for every pound of capital on the balance sheet, the banks were, on average, balancing between £33 and £35 of risk. As the noble Lord, Lord Peston, explained, banks have always had, and will always have, significantly less cash and liquidity than the claims they ultimately face, but that ratio was grossly exorbitant and utterly reckless. Gone were the days of the prudent banking practices of having strong deposits on which to base, and on which to lend, and on having healthy margins.
We need to go back to basics. This Bill has to identify who will regulate and supervise our banks after this downturn: the FSA, the Treasury or the Bank of England. I regret the day that we stripped the Bank of England of its power. In 1998, we all applauded the Government's decision to create the independent Monetary Policy Committee. As a committee, immune from government interference but for its composition, this group of nine individuals could act proactively and reactively to try to ensure economic stability. With a healthy target of 2 per cent inflation, the MPC proved a resounding success for almost a decade. It seemed to function so smoothly, but while the Government had strengthened the Bank of England's power to regulate the economy, at the very same time, they had dismantled the Bank's ability to regulate and supervise the nation's banks.
The tripartite system has undermined the Bank of England in its crucial role as supervisor of the banking system. It did not make sense, and it still does not make sense, to have the FSA responsible for banking supervision. It lacks the accountability, transparency and, most of all, capability to supervise our banks. The direct line from the banks to the governor was shattered. The lines of responsibility, accountability and authority all became blurred.
The Northern Rock fiasco exploited this situation to the fullest. We know that as far back as 2006 the FSA classified Northern Rock as a,
Despite that, the FSA did not plan an impact assessment of Northern Rock—wait for this—until January 2009. That is a full three-year delay. It has been said time and again that the FSA was asleep on the job. Worse still, at the end of June last year, when Northern Rock finally admitted that it had serious problems, instead of taking decisive action, the FSA relaxed the technical requirements on the bank, allowing it to free more assets. That was sheer incompetence.
Where was the Bank of England as this drama unfolded? The first warning the governor received from the FSA regarding the potential impact of the credit squeeze on Northern Rock was through a telephone conversation as late as August 2007. The Bank of
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I am pleased that the Bill attempts to institute new powers to deal with failing banks through the special resolution regime and the insolvency and administration procedures. However, the Bank of England, not the FSA, needs the explicit statutory power to bring a firm subject under the new special resolution regime. As the proposed system stands, we are still hostage to the FSA's questionable ability to diagnose failing banks and over-reliant on the opaque lines of communication among the tripartite bodies.
Nevertheless, I am delighted by the proposal to place on a statutory footing the Bank of England's central objective to ensure financial stability, and I welcome the proposal for a financial stability committee. However, I am surprised to hear that it will take the form of a sub-committee of the Court of the Bank of England. The reason the Monetary Policy Committee worked so well was because it was independent. The financial stability committee needs the executive authority, independence and power properly to support the Bank in its objective of achieving financial stability. Reasserting the Bank of England's primacy would capitalise on its specialised knowledge and would more effectively integrate the financial stability and institutional stability objectives of the tripartite system more than any amount of tinkering.
There are a number of issues that the Bill fails to address. As the noble Lord, Lord Saatchi, said, much of the responsibility for the sub-prime crisis lies with the credit rating agencies that continued to award AAA ratings for parcels of repackaged sub-prime mortgages that in all truth neither they nor the banks understood. Those ratings were misguidedly based on past mortgage failure rates of under 5 per cent rather than on an assessment of the true quality of the underlying assets. The Bill has to address the relationship between credit rating agencies and the banks. Who is commissioning these agencies, and who is paying the fees? There are huge conflicts of interest here.
Furthermore, there is the issue of the Treasury. What faith can we have in its supportive role to provide direction for the FSA or the Bank when time and again its economic forecasting has proved so incorrect? For example, in April this year, the Treasury was forecasting economic growth of between 1.75 per cent and 2.25 per cent for 2008 before picking up to between 2.25 per cent and 2.75 per cent for 2009, and that was forecast after the sub-prime crisis had begun to unfold in the previous year and after the collapse of Northern Rock. Now we realise that in the third quarter of this year, within a few months of the Treasury's forecast, the economy is actually contracting. How could it get it so wrong in just a few months? This behaviour brings into question the Treasury’s credibility.
I have learnt through building a business that you have constantly to turn threats and obstacles into opportunities. With the Bill, we have the opportunity
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As I said in February, and I say again, the eyes of the world—and I mean not just the Germans—are on us. At stake is more than the reputation of a Government or the future of any single bank. At stake is our position as one of the leading financial centres of the world; at stake is the reputation of the United Kingdom; and at stake is the very essence and stability of our entire economy.
6.08 pm
Viscount Eccles: My Lords, at this stage in a Second Reading debate, when the debate has been about a loss of confidence, why it occurred, who has lost it and how in some principled and large way it might be restored, it may be difficult to return to detailed consideration of the Bill itself. It is really a housekeeping Bill, and has nothing much to do with the global banking or economic crisis. I turn first to the thought that prevention is better than cure. The Minister said that among the Bill’s objectives, which are set out in the regulatory impact assessment, is reducing the likelihood of individual banks facing difficulties. I cannot find anything much in the Bill that will achieve that, and, although I listened carefully, the Minister did not say much that would have the effect of reducing the chances of individual banks facing difficulties.
The second objective is reducing the impact if, nevertheless, a bank gets into difficulties. I cannot really see that there is much effect on the impact of a failing bank. There are arrangements for what to do about it, but as to the impact, it would have to wait to see what sort of a bank it was. The third objective is providing effective compensation arrangements in which consumers have confidence. I do not think that consumers want compensation; it is a very second best. Indeed, if they have insurance policies, they can get compensation through a claim, but they are always aware that the chances are that the premiums will rise. I do not think that that is what people want; I think that people want continuity. The fourth objective is strengthening the Bank of England and ensuring effective, co-ordinated actions by the authorities. We would all have assumed right from the beginning that effective tripartite co-ordination was a given and did not have to be spelt out as a purpose of the new Bill.
I find myself much in agreement with those noble Lords who have said that events have overtaken the Bill. Is the Bill really relevant in any significant way? It might have been relevant a year ago or more, at the start of the problems with Northern Rock, because
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There has been a great deal of consultation about the Bill, but my impression is that as the consultation continues—we have another November consultation, for which I think the closing date is 9 January—there is less and less enthusiasm for the Bill in the industry as events unfold. What is the point of debating the difference between a Bank of England bridge bank and a Treasury temporary public ownership bank in present circumstances? What meaning can we give to “temporary”? Taking the example of Northern Rock, we simply do not know. Taking the example of Bradford & Bingley, it seems that there will be nothing left at the end anyway, because the publicly-owned part of the bank is working off its book and there will not be anything to go back into the private sector at the end. In these circumstances, will there be another Northern Rock or Bradford & Bingley? The answer to that is no, there will not, given the bank recapitalisation.
That takes me to the sunset clause in the Banking (Special Provisions) Act. I should be grateful if the Minister could add some greater substance to the claim that 20 February would create a serious public interest problem. What would that public interest problem be? Does he have any information that would lead us to think that there was not a way of dealing with a problem in a bank that did not need this Bill?
The second thing about the Bill is that a better title, between “Banking (No. 2)” and “[HL]”, would be to add “Two’s company and three’s a crowd”. Here, I join the noble Lord, Lord Bilimoria, in saying that we cannot really get into this in this Bill. It has got too far down the road. All that we are being asked to do is tinker at the edges, giving a bit more responsibility to the Bank of England and, by implication, a little bit less to the FSA. The FSA is, frankly, a muddle. Its Act of Parliament makes it a muddle. Its objectives are market confidence, public awareness and the protection of consumers. They are pretty unattainable. They do not sound like the sort of things that, if I were the chief executive of the FSA, I would cheerfully say that I could do.
As to public awareness, how could I make the public aware of all the investment possibilities that there are, having listened to my noble friend Lord Saatchi? The FSA does not understand them, so how on earth can it make the public aware of them? At the same time, all the way through, it must have regard to proportionality, innovation—it certainly has not hindered
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There are two tests in the Bill, and we have frequently heard about one of them today. First, there is the financial stability test. We have also heard from the House of Commons Treasury Select Committee, which said in its report:
“There is no consensus about what financial stability means, how it should be measured and how the balance should be struck between the pursuit of a financial stability objective and other public policy objectives ... Above all, the Bank of England, while being endowed with certain financial stability functions and powers, is not being granted a coherent set of instruments in order to influence financial stability”.
Financial stability is a totally subjective judgment at the moment. There are no objective criteria. It is almost as if the Treasury is being left in a position where it can say from time to time, “We recognise it when we see it”.
The second test is threshold conditions. Here, I cite the Bradford & Bingley example. Threshold conditions apply to deposit-takers. It has been asked in this House what the FSA’s determination was that threshold conditions were not being met, and we have been told that there is no way in which that could be made public.
Schedule 6 to the 2000 Act is vague to the point of unhelpfulness. Paragraph 4 of Schedule 6 states:
“The resources of the person concerned must, in the opinion of the Authority, be adequate in relation to the regulated activities that he seeks to carry on, or carries on”.
Paragraph 5 of Schedule 6 states:
“The person concerned must satisfy the Authority that he is a fit and proper person having regard to all the circumstances”.
Although there is a little more in both paragraphs 4 and 5, it does not add much to the motherhood and pie statement of Schedule 6. There should be much more careful post-legislative scrutiny of the FSA, of the 2000 Act and of the effects of that legislation.
I end with a quotation, which I think will show how far we have come. It is about banking stewardship:
“One sign of your stewardship is the unquestioning trust reposed in you by your clients. People pay in to you across the counter their money, about which they very reasonably care a great deal, with absolute confidence—not only without questioning but without giving the basic principle of the system, or its mechanism, a single thought. They just know that all will be well with their money... If this were not so, the consequences, material and psychological, would be immediate and grave; but it is so”.
That is an address from 1955, made to Barclays Bank.
6.20 pm
Lord Smith of Clifton: My Lords, this is not a very satisfactory Bill for a variety of reasons, as many noble Lords have said. It bears all the hallmarks of a hasty, knee-jerk piece of legislation, motivated by a sense of the need to do something. In that way, it is similar to the Dangerous Dogs Act and will probably have as little practical effect as that did. The noble Lord, Lord Saatchi, among others, shares my scepticism. As my noble friend Lord Newby remarked, the opportunity has been missed for viewing the banking
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One problem with the Bill is that, in attempting to rationalise the regulation of the banking system, it merely tries, as many noble Lords have said, to formalise the existing interrelationships between the trio of regulators: the Treasury, the FSA and the Bank of England. The question is whether this will be any more effective than the more informal set of relationships that previously existed. The elaborate network of roles and processes outlined in the Bill is overcomplicated and verges on the Byzantine. Would they have prevented a Madoff crisis in the UK? I very much doubt it.
The collapse of Northern Rock and its subsequent nationalisation, and the later need to pile masses of public funds into the banking system more generally, were primarily caused by the incompetence and greed of directors and senior managers of the banks concerned, as the noble Lord, Lord Peston, has remarked. How far this amounted to fraudulent behaviour in certain cases is still to be determined. As the implications of the extent of the crisis sink in, there will undoubtedly be widespread public demand that any wrongdoing is revealed and the perpetrators punished. In this respect, the US authorities are proving a good deal more active than their UK counterparts. The shysters must be punished, as—somewhat belatedly—David Cameron agreed yesterday.
The other cause of the crisis was the failure of the trio of regulators to discern what was happening and to take appropriate and timely action. As the noble Lord, Lord Bilimoria, and many other noble Lords have said, both the Treasury and, in particular, the FSA were found wanting, while the Bank of England’s oversight powers had been removed a decade earlier. That is why the noble Lord, Lord Bilimoria, wants to see the Bank’s pre-1997 position restored, which I heartily endorse. Because of its earlier standing and reputation, the Bank should be recognised as the lead agent of regulation, rather than a mere partner in a triumvirate. That would help to restore confidence in the system, as the noble Lord, Lord Smith of Kelvin, stressed.
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