I have now considered with the Governor of the Bank of England the events leading up to the rescue operation conducted by the bank on 1 October. It is clear that the case raises important issues about our present procedures of banking supervision, and the legislative framework within which it is conducted.
The Governor and I have therefore agreed to a full review of the present supervisory arrangements, and to consider whether any early changes in present supervisory procedures are needed. Issues to which particular attention will be given are the relationship between auditors and supervisors, staff experience and training, the handling of concentrations of risk and the assessment of quality of assets, notification and collection of statistics, and the adequacy and deployment of staff resources in the banking supervision department of the Bank of England. The review will also consider whether a more effective framework is required than that provided by the Banking Act 1979. I shall be placing a copy of the full terms of reference of the review in the House Library.
I shall, of course, inform the House as early as possible of the results of the review, including any legislative changes that I consider necessary.
The most significant fact about the statement is that the Government felt the sudden necessity, after 10 weeks, to go on record about the Johnson Matthey affair. No doubt the Chancellor believes that his message will be blandly reassuring, but the nature of the statement, and the fact that the right hon. Gentleman needed to make it today, will, I suspect, intensify rather than allay fears.
The City of London has been anxious about the matter for the past two months. Can the Chancellor tell us why it took that period of time before he was able to make a statement, in the House or elsewhere, about the changes that he regards as necessary? Has the delay been in part the product of the widely reported disagreements between the Bank of England and the Treasury about how the matter was disposed of? Can the Chancellor tell us whether he personally supports the view that the Bank should have virtually nationalised Johnson Matthey at 9.30 pm one Sunday evening? As well as telling us his view on the general principle underlying that disturbing pattern of events, will the right hon. Gentleman answer four questions, even in advance of the review which he has promised and which we shall no doubt debate?
First, will the review include a thoroughgoing examination of the Banking Act 1979 specifically to deal with the problems of early warning and whether the bank and the Government get sufficient warning in time about incipient collapse; whether the Act provides sufficient supervision in its quasi-voluntary form, or whether some sterner regulation is necessary?
Secondly, may we be told the relationship to the affair of Price Waterhouse and Co., and whether the Chancellor thinks that this firm of accountants is spreading its activities too widely across the entire economy of the United Kingdom?
Thirdly, may we be told about a second firm of accountants — Arthur Young McClelland Moores and Co.—the auditors, which gave the company a clean bill of health as recently as the middle of June last year? We hear that that firm of accountants is likely to be investigated by the standards body of its profession. Is that true?
Fourthly, the Governor of the Bank of England is on record as saying that institutions should stand or fall according to their own performance. Does that rule apply to companies within the City of London, or does it apply only to manufacturing industries, which are allowed to fall by the Government, thereby causing large-scale unemployment?
The right hon. Gentleman asked whether there would be a thoroughgoing examination of the Labour Government's Banking Act 1979. As I have said, in so far as the provisions of that Act are relevant—and many of them are—they will be very much at the heart of the inquiry. I do not want to prejudge the results of the inquiry, but it may well be that it will be necessary to introduce certain amendments to the Banking Act. However, we shall have to await the results of the inquiry.
Price Waterhouse has little, if anything, to do with the case. As the right hon. Gentleman said, the auditors are Arthur Young McClelland Moores and Co. As I said in my statement, the relationship with the auditors and, indeed, the general relationship between auditors of banks and the supervisory authority, are extremely germane and will be at the centre of the inquiry. As to whether firms stand or fall by their results, the shareholders of Johnson Matthey, the parent company, of which Johnson Matthey Bankers is a wholly-owned subsidiary, have lost three quarters of their money — some £¼ billion — and the entire top management, from the chairman downwards, have been obliged to resign. That, I think, answers the right hon. Gentleman's question.
It comes rich from the right hon. Gentleman to ask why it has taken me so long to come to a considered judgment on the best way of investigating banking supervision, because until I announced that I would make a statement today he had not asked one question about this matter.
The House, particularly the Treasury and Civil Service Committee, will need to consider carefully what my right hon. Friend has said, in the light of the document to which he referred. Has he any views on the likely timing of the inquiry? When it is completed, will it be presented to the House as a Green Paper or in some other way?
Given that this is a highly complex matter, it is difficult at this stage to say how long the inquiry will take, but it will be completed as soon as possible. As to how the results are reported to the House, I shall have to determine that in the light of the inquiry, which will go into matters of very great commercial confidentiality, including relationships between banks and their clients. I cannot yet say how I shall report to the House, but, as I said in my statement, I shall report the results of the inquiry, together with whatever action I think it proper to take.
Does the Chancellor accept that his remarks are unsatisfactory? There is now a contingent liability on public funds of £75 million. This matter began with no liability on public funds, it went to £10 million, and many of us are wondering whether the figure will go above £75 million. Will the Chancellor reassure us on that point? Will he confirm that public money is involved, because if the public liability is taken up there will be a loss of dividends from the banking department to the Treasury?
Secondly, will the Chancellor reveal the extent of his own involvement? He told me in a letter that this was entirely the decision of the Governor of the Bank of England. The Governor told me that he had been consulted at all stages. I understand that Sir Peter Middleton was heavily involved in the early stages of the rescue. The Chancellor insisted that no public money should be involved. These are serious matters and very disturbing events in the City of London. To have a public inquiry or the kind of assurance from him for which his right hon. Friend the Member for Worthing (Mr. Higgins) has asked —that there should be revealed to this House the basis of this internal investigation—is the minimum that is needed. Above all, the Chancellor, who is very complacent about this affair, has a duty to say to the House whether any more public money is at risk other than the £75 million.
Far from being complacent, I have shown myself to be very concerned about what appeared to me to be possible weaknesses in the system of banking supervision in this country, which goes far beyond the issue which has brought the matter to light; namely, the collapse of Johnson Matthey Bankers Ltd. That is why I thought it right to have in inquiry into the adequacy of banking supervision in this country: both the way in which the existing system is operated, and whether it statutory framework needs to be improved. As to whether there should be an internal inquiry, or a public inquiry, because of the nature of the matter it is right that it should be an internal inquiry, which will involve not only the Bank of England but the Treasury and an independent consultant.
As for when I knew about it, the Governor notified me of the action which he intended to take shortly before the rescue was announced. As for the funds, my approval was neither sought nor required. Perhaps I might refer the right hon. Gentleman to an occasion when he was a Minister in a previous Labour Government. In the case of Slater Walker, my predecessor but one, the right hon. Gentleman's former colleague, the right hon. Member for Leeds, East (Mr. Healey), said when he was asked about it, inevitably by the hon. Member for Bolsover (Mr. Skinner):
I was aware of the general approach adopted by the Bank of England to the problems of the Slater Walker Group".
The right hon. Gentleman continued:
My specific approval of the standby loan facility and guarantee was neither sought nor required."—[Official Report, 13 October 1976; Vol. 917, c. 142–43.]
That is the relationship between the Bank of England and the Treasury and between the Governor and the Chancellor of the Exchequer. As for the resources which are at risk, these are not voted funds. They are the own resources of the Bank of England.
Does my right hon. Friend agree that, with the ever-growing internationalisation of financial markets and the development of 24-hour markets, the supervisory role of all central banks is becoming increasingly more difficult to perform, and that, although it is important to try to achieve the most efficient legislative and codification arrangements possible, in the last resort these matters, which often have to be handled very quickly and in a situation of some crisis, depend for their successful resolution upon having men of great judgment and experience running the central banks and that whatever we do we should be careful not to reduce the role of the Bank of England to that of the Treasury's poodle?
I agree with everything that my hon. Friend has said, but there is no question of the Bank of England being a Treasury poodle. At issue here is the adequacy of our banking supervisory arrangements, for which the Treasury clearly has responsibility. The Banking Act 1979, which is the statutory framework within which it is conducted, is an Act of Parliament for which there is Treasury responsibility. Therefore, it is necessary for the Treasury as well as the Bank of England to be involved in this inquiry.
I, too, welcome the review which the Chancellor of the Exchequer has announced, but will he be more forthcoming about the liability of the Bank of England? This is an important matter. We are committing public money to the rescue of a bank, although similar amounts of public money are not being given to many worthy individuals or companies whose businesses have collapsed during the past five years. If there is to be sauce for the one, there must be sauce for the other. The right hon. Gentleman must tell us about the amounts of money involved, because those same amounts could have saved many jobs in many worthwhile industries all over the country.
So far, the Bank of England has paid only £1 from the banking department's own resources. It is true that, beyond that, there is an indemnity, jointly between private sector banks and others and the Bank of England of £75 million each. It is far too soon to say how much of that indemnity will be required.
In making the comparisons which the right hon. Gentleman sought to make, he knows as well as I do, because he is a former Financial Secretary to the Treasury, that in every country in the world the central bank has a responsibility, as a lender of last resort, for the banking system. It has to decide in each case whether it is right for it to use that authority as a lender of last resort and, if so, in what way. It was the clear view of the Governor that there was a threat to the London gold market, which is a very important market for this country. That was a factor of which he had to take full cognisance.
My right hon. Friend's announcement that the relationship between the auditors and the supervisory authority is to be the subject of a review is welcome, but can he tell us whether he has recommended to the Bank of England or others that the auditors in this case should be sued?
I have made no such recommendation, but, leaving aside the question of litigation, when a company becomes insolvent as rapidly as Johnson Matthey Bankers did, questions arise about the role of the company's auditors. The auditors signed off the company's accounts without qualification on 18 June of this year. Of course, beyond the particular case—the House might do well to concentrate on this—there is the question of the role of banks' auditors and the relationship between the auditors and the supervisory authority.
The House will be grateful to the Chancellor for mentioning, after 17 minutes, the London gold bullion market and for saying that it was involved in the considerations of the Governor of the Bank of England. Was not the lifeboat of the Bank of England launched to help speculators in the gold market rather than those who put their money into real wealth creation in industry in this country?
That is not true. The case was one of a particular bank which got into serious trouble. As far as I am aware, it was a one-off case. The matter was complicated by the fact that the bank was wholly owned by a leading member of the bullion market.
Bearing in mind the fact that Johnson Matthey had such a pivotal position in the London bullion market, does my right hon. Friend agree that the Bank of England would have been right to try to rescue Johnson Matthey if it could have achieved, as its initial press release said it had achieved, a rescue in which there was no liability of public funds? Will my right hon. Friend address his mind to what has gone wrong between the original press statement of no liabilities and the present situation where we hear that there could be £75 million of liability of public funds? Where are the guilty men?
I seem to have heard that last phrase somewhere before. My hon. Friend asks what has gone wrong. I think that what has gone wrong is that there is prima facie evidence of a weakness in the way that the banking supervisory system operates. That is precisely why I have set the review in motion.
Does my right hon. Friend accept that most of us believe that he has acted entirely properly and with some circumspection before launching the inquiry? Does he agree that if we are to have full confidence in the inquiry, bearing in mind the responsibilities and supervisory role of the Bank of England, noble Lords in the upper House, who have great experience in these matters and who are Privy Councillors, should be included in the inquiry team? If that is done, all hon. Members can have confidence in the inquiry and the report that results from it.
Was the Chancellor surprised at the collapse of Johnson Matthey in the buoyant enterprise society in which he keeps telling us we live, and at the disinclination of private interests to rescue the bank, which would have been an alternative to having recourse to the Bank of England and public funds?
It is wrong to say that the private sector was unwilling to come forward. It provided a substantial sum. In addition to the initial sum that was invested, especially by Charter Consolidated, the private sector has invested 50–50 with the Bank of England in the £150 million indemnity.
Is my right hon. Friend not aware that public anxiety on these occasions is always about the phrase "internal inquiry"? To avoid good old-fashioned City magic circle-ism in this extremely disturbing story, will he assure us that the inquiry will be fully publicised, properly set up and will include eminent people, who may come from the upper House, as my hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) suggested?
I am sure that my hon. Friend, who earns his living in the City, as well as in Parliament, will understand that matters of high commercial confidentiality are involved, such as the relationship between the bank and its clients. It would not, therefore, be appropriate for this to be a public inquiry. I have made my concern clear to the House by having a full review of the workings of the existing system and of whether the system should be improved. I shall report my conclusions fully to the House. If legislative changes are required, the House will have the fullest opportunity to debate them.
Does the Chancellor accept that his weasel words cannot disguise the extraordinary fact that the Government, who believe in the magic of the market, nationalised for £1 an uneconomic bank late one Sunday evening? Does he agree that that shows that the Government have one law for uneconomic banks and another law for uneconomic pits and factories?
When the right hon. Gentleman speaks about a serious failure of supervision, does that not raise questions, which were hinted at by the hon. Member for East Lindsey (Mr. Tapsell), about the Governor of the Bank of England, whose qualifications were questioned by the Labour party and by many leading figures in the City when he was appointed?
I welcome the review. For the benefit of ignorant Opposition Members, will my right hon. Friend make it clear that the Johnson Matthey group employs a large number of people in manufacturing industry and that the prompt action of the Bank of England safeguarded their jobs?
Does the Chancellor agree that, in view of the seriousness of the matter, it is inadequate that there is no independent element in the review that he has announced? Does he further agree that it is incorrect that those who were partly responsible for the collapse should inquire into themselves? Does it not reflect badly upon the Bank of England that it has implemented inadequately the legislation that has been passed during the past four years?
I do not accept what the hon. Gentleman says. The inquiry will be a joint one between the Bank of England, which is the supervising authority, and the Treasury. The Treasury will be fully involved. An independent consultant experienced in banking will also be involved. That consultant has not yet been appointed.
If the Chancellor can give £75 million from public funds to bail out Johnson Matthey, do not his friends in the City think that with this Government it is Christmas all the year round? If he can provide such money out of public funds for them, why can he not waive VAT on the Band Aid record so that that money can be used to relieve the famine in Ethiopia?
I have given no money, and no taxpayers' money is involved in this. The hon. Gentleman mentioned an important factor. Because the Governor of the Bank of England decided to intervene in this case, under his authority and using the resources of the banking department of the Bank of England, it does not follow that he would do so in any other case, were one to arise.
Is it not true that an investigation of Johnson Matthey's accounts has shown that half of the loan portfolio was in risky ventures to which it should never have lent money? Is it not also true that that information was relayed to the Bank of England 12 months ago? May we therefore presume that that information was also relayed to the Chancellor about 12 months ago? Does the right hon. Gentleman deny that he knew 12 months in advance of the possibility that the bank would fail in the way that it has and that the Exchequer would be required to pick up the bill in the form of a £70 million indemnity?
First, the Exchequer has not picked up the bill. Secondly, of course I did not have the knowledge to which the hon. Gentleman referred. All these matters, including the loan book of Johnson Matthey bankers, will be germane to the general review into the adequacy of the present banking supervisory arrangements.
The Chancellor is clearly foolish to pretend that the £75 million, which may technically be a matter for the Bank of England, is not a charge on public funds. It is clearly money which, were it not used for this purpose, might be used for far more desirable purposes. The Chancellor makes a technical, and therefore false, distinction between the two.
Perhaps the Chancellor will clear up some of the added confusion that he has caused. He said that he did not understand my reference to Price Waterhouse and Co. I may be wrong, but I understand that it was the firm of accountants asked by the Government to consider the company's business. When did it become involved? Was it involved when the problem seemed much less serious that it does 10 weeks after the collapse?
Secondly, have any attempts been made to ensure that the risks that may be involved and any money that may be required will properly be debted to the parent company of Johnson Matthey, which I understand is not regarded by the Bank of England as being responsible for the potential debt?
Thirdly, and most importantly, may I ask the Chancellor again a question which he has so far not attempted to answer concerning his attitude to the affair. He said that he was told about the arrangement shortly before the public announcement. He was clearly not consulted, but was informed that it was happening. The House should know whether the Chancellor approves of the rescue in this case. If he approves of this rescue, there will be many more desirable rescues of which the House will expect him to approve.
On the last point, I have made clear, my approval was neither sought nor required. I was informed of the position shortly before the announcement was made in what has become the conventional way, and obviously there was no time for me to consider the full details of the matter then. Price Waterhouse and Co. was asked by the Bank of England to conduct a quick examination of Johnson Matthey's accounts at a late stage, but before the rescue, when the Bank of England had serious doubts about the state of Johnson Matthey's loan book.
I am sorry, but I have forgotten the right hon. Gentleman's third question.
I have already made it clear that the parent company has lost its entire investment in Johnson Matthey Bankers. The top management, from the chairman downwards, have been obliged to resign and the company now has a market capitalisation of £90 million, which is after some injection of cash from Charter Consolidated, having had a market capitalisation of £320 million before the rescue operation.