Economic Crisis
Opposition Day — [20th Allotted Day]
6:13 pm
Susan Kramer (Cabinet Office; Richmond Park, Liberal Democrat)
It is always an honour to follow Kelvin Hopkins. We are getting a blend of the 18th and 21st centuries in speeches tonight, and that is always a pleasure. I want to pick up some of the issues that have been raised and perhaps to take them a little further. I was very interested in the speech made by John Reid about the inter-bank market. He proposed that the central banks create an exchange that takes account of party risk for banks on either side of the inter-bank market. I just want to point out possible fundamental flaws in that approach. That is not to say that we should not explore it; however, it might not be the palliative that it appears to be at first glance.
As hon. Members will know, there are already exchanges within financial markets—an example is the futures market—that take different kinds of counterparty risk. However, they do it by having margin pools. In other words, they require parties to pay ahead of their due dates, if that is the easiest way to describe it, in order to limit their exposure to the counterparties on either side. If an exchange takes the full credit risk of the counterparty for the banks on both sides of a transaction, the encouragement given to banks to make an irresponsible decision is quite extraordinary, because the transaction is protected by the exchange that stands in the middle. That is almost like saying that the package put together by the British and other Governments to come to the rescue of banks should not only be placed on a permanent footing but should be of a size and proportion that would, in effect, cover the whole banking market. That is a degree of exposure that we cannot possibly underwrite and undertake.
For all of us, there is a sense of great failure in the fact that banking institutions have failed to assess the risk of the transactions with which they have been involved. Rather than relieve them of responsibility of ever having to assess that risk, we ought to require them to assess it. That is the direction in which we have to go; we should not basically say that central banks, and essentially Governments, will stand in the middle and take that counterparty risk.