TOPICAL DEBATE Financial Stability

Part of Business of the House – in the House of Commons at 1:31 pm on 9 October 2008.

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Photo of Diane Abbott Diane Abbott Labour, Hackney North and Stoke Newington 1:31, 9 October 2008

Obviously, the whole House welcomes the financial rescue package, but it is not the end, or even the beginning of the end, of stabilising our financial and business worries. It is the beginning of the process. The House and Select Committee system will have to continue to question Ministers on many issues, some of which have been raised this afternoon.

There is a lot of talk about individual bankers and their greed, and a lot of talk about toxic assets, as if they were meteorites that came from outer space and landed in the vaults of the financial institutions. I will not talk about individual greed, although it is attractive to do so, because the real issues are structural and institutional and relate to the regulatory system.

In the 1990s I served on the Treasury Committee, and we conducted a major inquiry into the collapse of Barings bank. The reason why Barings collapsed was not that Nick Leeson was greedy or even a criminal, but first because he was trading in derivatives, which no one in the management of the bank understood. They were quite happy for such trading to go on, however, as long as they could trouser their bonuses. Barings folded because of trading instruments that people did not understand and failure of management controls. In that instance, Nick Leeson was not just a trader but covering the back office. The lessons of the collapse of Barings—that management should understand what they are trading and making their profits in, and the lesson about management controls—have not been sufficiently learned.

On the question of regulation, although my right hon. Friend the Prime Minister did many wonderful things as Chancellor of the Exchequer, the tripartite system of regulation, with the FSA, the Bank and the Treasury attempting to regulate the banks, has not been a success. One does not have to be an economist or an investment banker to know that if three sets of people try to do something, it will not be done effectively. It is time to revisit bank regulation; it should not be more complicated or onerous, but more effective.

I remember taking evidence from the Bank of England regarding the collapse of Barings and then BCCIBank of Credit and Commerce International. We rather mocked the Bank for its notion of regulation, which was, "We're all good chaps in the City of London. We have you in for a nice chat, you reassure us and we send you away again." Banking regulation has moved on slightly from that approach, but perhaps not as far as we would like. There is a case for more scrutiny, and to reopen the issue of audits. Many of the banks that are now collapsing have been audited in the past 12 months. The auditors did not reflect any problems with underlying asset values in their audit. When we ask auditors about that, they say that they go on what they are told—if they are told that the asset is worth a certain amount, that is what they put in the audit. If the audit process just allows the big five audit companies to make a lot of money by going through a process, but gives no real information to the public or politicians as to the underlying health of the company, there is something wrong. Such audits are not aiding transparency, regulation or public understanding.

This view will be extremely unpopular, but I am the only person in the Chamber, and one of the few Members still in Parliament, who voted against independence for the Bank of England in 1997. I voted against it because of just this eventuality. The history of the Bank in past financial crises, going all the way back to the 1930s, is that when it is asked to choose between bearing down on inflation, and the growth and health of the real economy, it has always chosen to bear down on inflation. That is the danger of an independent Bank of England, about which I spoke 10 years ago. An independent Bank of England that chases inflation above all is marvellous when the going is good. When the going is bad, however, we will see why some of us would not vote for such independence.