I beg to move, That the Bill be now read a Second time.
Yesterday I set out the Government's proposals to restore confidence and stability in the banking system now, and I am pleased to report that during the course of yesterday other countries in Europe, and today the United States, have made announcements along similar lines, showing that countries all over the world are now acting in order to help to stabilise and rebuild the banking system, which is absolutely essential. Yesterday's announcement was significant and important, and it is also important that it is followed through throughout the world as we get through what is undoubtedly an extremely turbulent time.
Our proposal yesterday included comprehensive plans on both liquidity and capital, and I said yesterday that eight of our major banks and our major building society have signed up to that. I also said yesterday that HSBC had announced last Friday a transfer of £750 million of equity capital into its UK subsidiary, and I want to make it clear that it has already done that. I also said yesterday that we would take steps to strengthen the supervisory and regulatory system. That is not in this proposed legislation, but I am in no doubt that we need to learn lessons not only in this country but across the world in relation to improvements we may need to make in the regulatory system, and we will bring forward proposals after I have received recommendations from Lord Adair Turner, who chairs the Financial Services Authority.
No, the Bill does not address the question of offshore centres directly. As I shall describe, it provides wide-ranging powers to allow us to deal with a financial institution that gets into trouble. I do not want to go over the ground of Granite again, as it was debated extensively in February. The question of offshore financial centres is interesting, but the Bill does not directly address that.
As the Chancellor knows, I am a strong supporter of bank recapitalisation and of his statement yesterday. In that statement, he said the
"shareholdings will be managed on a fully commercial basis by an arm's length body".
Can he say a little more about what that arm's length body will be, and why he has decided not to use the FSA or the Bank of England for that purpose? Will he also explain what the
"precisely defined remit to act in the interests of taxpayers"—[ Hansard, 13 October 2008; Vol. 480, c. 540.]
is, if it is not to act on a fully commercial—
I shall certainly answer the hon. Gentleman's question, but as I have not yet even got on to clause 1, I think I had better take the hint that Madam Deputy Speaker has dropped to us. The hon. Gentleman asked a perfectly pertinent question, and I will shortly be setting out how we intend to manage that. We are not using the FSA because it is the regulator, and it would be compromised if it were also managing the Government's shareholdings. I think the hon. Gentleman is aware that the Government's shareholdings in the private sector—such as they are, as there are not that many now—are managed by the Shareholder Executive. Obviously, it is responsible to Government and it is a public sector body, but it distances Ministers from the day-to-day business of owning shares. As I made clear yesterday, I want the banks in which we have shareholdings to be managed on a commercial basis at arm's length from Government, because Ministers cannot possibly be making day-to-day decisions or anything like that. Fairly shortly, I will set out for the House precisely how we intend to do this, but that is not addressed in the Bill, which is essentially about dealing with failing banks. I will come back to that point, however; I can give that undertaking to the House.
I will give way to just about everybody who asks to intervene, but I would like to make— [Interruption.] Yes, "just about", as I reserve the right not to give way to some Members. I would like to make some progress, but I know that my hon. Friend wants to make an intervention and he will have the opportunity to do so.
Northern Rock has been mentioned, and I have undertaken to keep the House informed. To bring the House up to date, in its third quarter trading statement Northern Rock reported that its outstanding loan from the Government is down from the high point of £27 billion to £11.56 billion. I have said that that money is being repaid, and that remains the case.
May I also say by way of introduction that I really do welcome the commitment from those on the Opposition Front Benches to give the Bill a fair passage? Of course there needs to be proper scrutiny, and I wish to indicate that we are open to suggestions to improve and tighten up the Bill, subject to the usual caveat that we cannot allow endless amendments so that it becomes virtually unworkable. If there are suggestions, I am happy to work with Members of all parties just as we are working with those outside who have an interest.
The Banking (Special Provisions) Act 2008, which we passed in February, will lapse on
The point that I made was that it would have been good to have the present Bill a bit earlier, so that we would not have needed those emergency powers. However, that was my Second Reading speech on the previous Bill, so we will wait for today's speech.
On the specific point about the code of practice, which is absolutely crucial to the Bill—it is how the special resolution regime will actually operate, be triggered and so on—can the Chancellor assure us, in the spirit of our co-operation, that the Government will publish it as soon as possible so that we can debate in Committee how the bank failure regime will operate, which is at the heart of the Bill?
I can give the hon. Gentleman that undertaking. As I understand it, it has been agreed through the usual channels that the Bill will be taken in a slightly different order from that in which the clauses appear, so that when we reach the special resolution regime we will have the code of conduct. I understand that that has already been agreed, and I am quite sure that we can co-operate on that and other matters.
As the hon. Gentleman mentioned one part of his Second Reading speech on the previous Bill, I shall say that it would have been quite impossible to produce a 200-clause Bill this February. What I had to do earlier this year was ensure that we had powers to nationalise Northern Rock and—very presciently, as it turns out—to take additional powers. Otherwise, we would have been in real difficulties over the past few weeks.
On that point, it is probably worth clarifying that the genesis of this Bill was in the depositor protection consultation of last October, when powers were sought to deal with failing banks based on the economic crisis that started last summer. The Bill, 200 clauses though it is, will not be on the statute book until 2009, so it is not exactly decisive action in relation to that point.
I shall come to that in a moment, but I would just say that we took action in February. I remember Mr. Hammond asking articulately and forcefully at the time why we were going beyond the clauses necessary to acquire Northern Rock. I had to put it somewhat delicately because I knew a number of things that were not then in the public domain, but I said that there might be cases in which we would have to intervene.
If we had not had the special powers for which we argued in February, I could not have dealt with the Bradford & Bingley situation, which arose during the parliamentary recess. We would have had to recall the House, which would have exacerbated an already difficult situation. Nor could we have dealt with the collapse of the Icelandic banks Kaupthing and Heritable if we had not had those powers. We do not have to imagine what life would be like without the current Bill, because we have seen in the past few months what can happen, and what can happen very quickly. I am glad that we got the special powers, and I am sorry that the Opposition voted against them. It was essential to have them, otherwise we would have been in real difficulty.
The hon. Gentleman may well want to check his recollection. We would not have taken those powers if we had not anticipated that there might be difficulties. Indeed, I remember a right hon. Gentleman—he is not in his place, so I shall not name him—specifically asking me why I was mentioning building societies. Building societies were included in that Bill because we thought there might be occasions when we had to do something to help them. That piece of legislation was essential because it looked ahead to what, I think, all of us could have contemplated might happen in the ensuing few months. As I say, I am glad that eventually we got parliamentary approval for the Bill. The only point I am making, for those who doubted whether that Bill was necessary, is that events have proved that it was very necessary. It is also very necessary for us to pass this Bill.
Without the powers that the Government had from a number of directions they would not have been able to come forward with a proposed merger between HBOS and Lloyds TSB. My right hon. Friend will be aware that people were commenting this morning, in Scotland, in particular, that, given last week's announcements, the merger should not go ahead. What does he say to people who take that point of view?
My hon. Friend will recall that the decision to merge was taken by the boards of HBOS and Lloyds TSB; it was their commercial judgment that was important. It was the judgment of ourselves, the Financial Services Authority and the Bank of England that it was also in the interests of greater financial stability that the merger should go through. Indeed, that is why we amended the provisions on the competition law. As I said at the time, that was one example of where financial stability trumped competition concerns, and that remains our view.
I understood and supported at the time the idea that the competition laws had to be removed, because there was a serious risk of the collapse of one or other—or both—of the banks. That is no longer the case; the Government are now in a position to take a substantial stake in those banks if they remain separate, and they undoubtedly will do so if the banks merge. What is the point of setting aside competition law now? Why do the Government want to take a stake in a large bank that will have a dominant market share that would not have been permitted if the banks had carried on, financially solvent?
As the right hon. and learned Gentleman knows, we are proposing—I set this out yesterday—to take a stake in the merged bank. The decision to go ahead with the merger was primarily taken by the two boards; they considered it again at the weekend. It is still my view that the merger would not just be beneficial for them—that is their decision primarily; in the interests of financial stability, the two banks together would be stronger than the separate organisations. That remains our position, but, primarily, the decision to merge was taken by the two banks because they thought that to do so was in their best interests.
I want to get on to the Bill. First, I remind the House of the basic supervisory architecture that has been in place for the past 10 years and remains so. In addition to its prior existing functions, the Bank of England has, since the Bank of England Act 1998, also been responsible for monetary policy. It has a responsibility for ensuring financial stability, but that is not a statutory responsibility, and that is one of the things that the Bill seeks to change. The FSA brought together eight or nine different regulators. That was the right thing to do, and I do not think that anyone would argue for going back to the situation before then. Interestingly, the United States is seeking to follow that model, with legislation being proposed there to do the same thing. The Bank of England, the FSA and, of course, the Treasury—because of the wider public interest and financial interest—will remain essentially as they are. The one change that we propose is to give the Bank of England a statutory duty in relation to financial stability, and that is very important.
If that minor change is all that is needed, perhaps the Chancellor could explain to the British people how on earth we have come to this pass. The FSA has been responsible for the authorising of individual practitioners in the banking business and allowed the ramping up of capital ratios, so that we have reached this dreadful state of affairs. Has the Chancellor got no explanation of how that happened under the regulation of the FSA, and no alternative approach to doing something about it apart from this minor tinkering?
Perhaps I should have stuck to my guns and gone through the Bill. We are not just proposing that one change: we are proposing many changes. However, the point I was making was that the basic architecture of the Bank of England having responsibility for monetary policy and an overall responsibility for financial stability, and the FSA regulating and supervising each individual institution, is right. We consulted on that point, and the vast majority of people said that that basic architecture was right. Of course, the FSA has to learn the lessons of what happened with Northern Rock and other institutions. As I said earlier, of course improvements need to be made to the supervisory regime, but no one is arguing that we should go back to the past, when the Bank of England regulated some aspects of the banking system but not others and we had eight or nine different regulators for everything else.
No, I shall make some progress; otherwise it will not be fair to those who wish to speak in the debate.
The Bill will build on that framework, and I shall outline the broad scheme that it follows. Part 1 provides for a permanent special resolution regime that is at the heart of what is proposed. As hon. Members are aware, it will allow us to accelerate the transfer of a bank to another private sector bank or to transfer some or all of a bank's business to a publicly controlled bridge bank, on the way to a private sector sale. It will also modify the insolvency procedure and allow us to take a bank into temporary public ownership, should that be necessary. Part 1 also includes measures to strengthen the Bank of England, which I have touched on and to which I shall return, including a role in overseeing the inter-bank payment system because of its possible systemic importance.
Part 4 of the Bill will improve protection for depositors through the Financial Services Compensation Scheme, and it includes other measures to build confidence. I shall return to those points later, but I wish first to deal with the provisions in part 7 to strengthen the Bank of England. These will have a new statutory objective of financial stability. They will provide the Bank with statutory immunity as a monetary authority in pursuit of its financial stability objectives. The provisions will also establish a financial stability committee as a sub-committee of the court. That is important. The Monetary Policy Committee, which of course determines interest rates independently of the Government, has been a great success and other countries have followed our lead. We also need to bring in outside expertise to advise the Governor on financial stability. The court, which is at present too large at 19, will be reduced to 12 members.
The committee of court members will bring in expertise from the City and elsewhere to advise the Governor, and that will be important. It will ensure that the Governor has at his disposal a wider range of advice. Its deliberations will be made public, although probably not immediately in many cases for obvious reasons. In situations such as we have seen in the past few weeks, it would not be wise to provide a daily, weekly or even monthly commentary on what has been discussed, but the Bank will consider how the deliberations of the committee can be publicised when it is right to do so.
Clause 229 of the Bill, as I said earlier, will allow the Bank of England to provide liquidity assistance to building societies on the same basis as banks. In that difficult area, I wish to draw the House's attention to further provisions on the disclosure of Bank of England assistance. The matter arose throughout last year, especially when we were dealing with Northern Rock in the autumn. The Bank must publish its balance sheet weekly at the moment, but that proved quite difficult in the autumn. Of course, the Bank published that information, but I am concerned that when we are trying to help an institution to get through a difficult period, the very fact that we are helping that institution can actually be quite damaging to it, as we found with Northern Rock. The Bill seeks to make changes to the situation.
I want to emphasise that we need to find a mechanism that allows the fact that there has been assistance to be dealt with transparently, whether in general terms or when matters with particular institutions are fully resolved. The Bank is reflecting on the matter, but I want to draw the House's attention to it as it came up in the Treasury Committee time and again. It was a live issue 12 months ago and it could potentially become an issue again at some stage in the future. It is important that we get that right.
As I said, part 5 of the Bill formalises the Bank of England's role in the oversight of the payment systems. That is important. The FSA regulates the recognised clearing houses, but the Bank of England will have a role in the oversight of the system as a whole.
Let me turn to the special resolution regime, which is key to much of what we are trying to achieve.
The Chancellor referred to the provision of information about what is going on in the banking system, but I can find nowhere in the Bill any statutory requirement to report to Parliament and the House on the conduct of banking, bearing in mind the substantial amounts of public money that are being invested in the schemes the Chancellor is outlining. Will he reflect carefully during the passage of the Bill on whether there should be a requirement for a statutory report about the conduct of our banking system to be laid before the House, perhaps every six months, so that the House can, if necessary, debate it?
I am sure that that point will be raised in Committee. The conduct of banking strikes me as a very wide subject—perhaps the subject of a book rather than a report. I am sure that the right hon. Gentleman, who is clearly making a bid to his Whip to get on to the Committee, might want to raise that point—
The right hon. Gentleman shakes his head.
Let me turn to the special resolution regime. The Bill establishes a permanent special resolution regime that provides the authorities with options to deal with banks that get into difficulties and to protect depositors. By sheer coincidence, the provisions can be found in clause 4. We can protect and enhance the stability of the financial systems and public confidence, and we can protect depositors and public funds, and the Bill provides for an accelerated transfer to the private sector and sets up a bridge bank if such a provision is necessary. As I said earlier, the Bill provides powers to modify the insolvency procedure and allows for temporary public ownership.
In most cases, when a bank gets into difficulty the problems can be resolved either through regulatory interventions or voluntary action. The special resolution regime provides a clear regime for failing banks that removes control of the banks from management. It provides overriding powers over shareholders and directors.
The authorities will have clear and distinct roles. The FSA will lead in deciding that a bank is failing, as set out in clause 7. The Bank of England will lead in the operation of the special resolution regime, a provision that is set out in clause 8, but Ministers will retain control of decisions on public finances, as set out in clauses 66 to 70. The Financial Services Compensation Scheme will continue to deliver the payment of compensation.
The FSA will decide whether or not a bank is failing. It will have to consult the Bank and the Treasury before deciding that the conditions have been met. The Bill provides that the Bank of England can decide whether there is a systemic risk and that the Treasury can recommend to the Bank that action might be taken if it has been providing financial support for banks. The Bank then has two options: it can decide to transfer a bank to a third party or can transfer the bank's assets into what is known as a bridge bank, which is owned, established and controlled by the Bank of England, pending reconstruction. Thereafter, the bank can either be transferred in whole or in part to a private sector bidder as appropriate.
What the Bill does is provide a mechanism that is not there at the moment. That mechanism will allow us to take a bank that is in difficulties out of the hands of its present management and, if it cannot be sold to a third party, either put it into a bridge bank or, if necessary, take it into public ownership.
I am grateful to the Chancellor for giving way. One area of disagreement has been about who pulls the trigger on the special resolution regime. As he knows, we think that the Bank of England should have that power, and so too does the Governor of the Bank of England. Did the Governor not in effect demonstrate that he had the de facto power to do that when he prevented Bradford & Bingley from accessing the special liquidity scheme and therefore forced the rest of the tripartite committee to deal with a bank rescue situation? No doubt there was consultation, but he nevertheless had that power. If the Bank of England has that de facto power, would it not be better to put it formally in the Bill, so that it can be properly considered by Parliament?
I had rather thought that the hon. Gentleman was now not insisting on that point, but he mentioned Bradford & Bingley. There comes a point with the special liquidity scheme when the Governor of the Bank of England has to form a judgment as to whether it is prudent to keep providing an institution with funds if he thinks that it will not get through.
The hon. Gentleman will recall that Bradford & Bingley had difficulties in the summer and autumn. It became obvious—not just to the Bank of England but to us at the Treasury and to the FSA—that the question was whether it would fail on the weekend that it did fail or whether it could struggle through the following week. I took the view, as did the Governor and Lord Turner, that we should not take the risk of trying to run the bank through the week. The hon. Gentleman will know that it is much more difficult to resolve a problem when markets are open, but in any event the FSA came to the view on that particular Saturday—I forget the precise date in September—that Bradford & Bingley no longer met its threshold conditions.
There was never any disagreement between us. I think that there was an inevitability about the fact that Bradford & Bingley was getting into difficulties, but what we did was triggered by the FSA saying on that Saturday morning that it had looked at the matter and decided that the bank no longer met its threshold conditions and that it therefore could not take any deposits from the following Monday. That is why we had to take the action that we took.
What happened with Bradford & Bingley again demonstrates the use of the legislation that we have now, through the special provisions, and which we want to replicate in this Bill. It was possible at least to separate out the bank's branches which, as the hon. Gentleman will know, were sold to Abbey Santander. That safeguarded the interests of savers although, for reasons that I think that most people will understand, it was not possible to find a buyer for the remaining part of the bank.
I thank the Chancellor for giving way, and my question has to do with the special resolution regime. He has said already that the US may follow the Government's lead on recapitalisation, but why has he set his mind against the idea of taking bad debts off the balance sheets, as America's troubled assets relief programme attempts to do? Will the special resolution regime still allow that capability to be used as a public policy tool if it is judged to be appropriate in the future?
The Americans have decided on an approach that is suited to the present position of American institutions. The special liquidity scheme does something similar, with the difference that, instead of the taxpayer taking on what might be called the toxic assets, in our system the risk stays with the banks. The scheme has worked quite well, and I announced last week that I had authorised support worth £200 billion.
I think that the scheme is working, but I refer the hon. Gentleman to the point raised by the shadow Chancellor. In practice—and unfortunately we have had some practice over the past few months—there was no dispute among the three people who had to make the decisions in relation to Bradford & Bingley. It was quite obvious what we had to do, but the model that we have is based on the regulator—the FSA—finally saying that a bank has failed its threshold conditions. Only it can decide that, and that is right, although the Bill makes it clear that there has to be consultation.
There are three options for dealing with a failed bank. We can transfer it to a private sector purchaser or, so that we can decide how best to proceed, to a publicly controlled bridge bank. Also, if necessary, there is temporary ownership as a backstop. There are also powers in part 1—clauses 42 and 11—to allow for partial transfers, as in the case of Bradford and Bingley. That gives the necessary flexibility.
When these difficult judgments are being made, it appears recently that the regulators want a higher tier one capital ratio, and that lies behind the recent capital raising. Is it the ambition to do it all by raising more money, or will some of it be done by reducing the amount of borrowing?
As I said yesterday, certainly in relation to RBS, HBOS and Lloyds, capitalisation was by the Government investing capital in those banks. The other banks have decided to proceed in a variety of ways, as I set out.
Clause 65 of the Bill gives us powers to disapply various pieces of legislation. I want to make it clear that that will be done only in pursuit of the powers necessary to make the Bill work—for example, in relation to the competition regime or to modify insolvency legislation. I dare say that the clause, like other parts of the Bill, will be discussed in Committee, and if there are improvements that we can make, we will do that.
Briefly, part 3 deals with the administration procedure in case it is necessary to provide services from one part of a bank to another part that has been transferred to another party. Part 2 also means that any liquidator who is appointed will have to work with the Financial Services Compensation Scheme to ensure prompt payouts to depositors.
Part 4 deals with the FSCS. Clause 156 deals with the issue of pre-funding. My view is that in an ideal world the schemes would be pre-funded because when a claim is made against them, the chances are that it will not be the only claim by the only institution. To have funds available already would clearly be sensible. However, for us to attempt to pre-fund the FSCS in the current climate would exacerbate an already difficult situation. I made that clear in connection with what we did with Bradford & Bingley, and I hope that the House will support me on that.
There is also provision in the Bill in relation to Scottish bank notes. We had extensive discussions with the issuers of Scottish notes and Northern Irish notes. We want to bring the law in Scotland into line with the law in the rest of the United Kingdom so that, put simply, the holder of a Scottish bank note can expect to obtain the full face value of the note in the event of the bank getting into difficulty. That was not the case before; it is now the case. That is why we are making this change. It has the agreement of the Scottish and Northern Irish banks, and I hope that the House will approve it.
There is concern about what the new definition of "authorised bank" in the Bill would imply for future mergers of Scottish banks and whether the legislation would allow the same quota of notes to be issued by a newly merged bank.
If there is any difficulty with that, I will happily look at it, but it is our intention that the notes will still be issued by the banks. If any difficulty is caused as a result of any changes, of course we will look at it.
The final part of the Bill to which I want to draw the attention of the House is clause 214, which provides powers to the Treasury to use public funds to protect depositors. We need to make some changes; the clause would help us to deal with the situation that we have with the Icelandic banks. I can tell the House that negotiations with the Icelandic authorities are continuing, and I hope that we will have something more to say about that in the not-too-distant future.
The Bill is, of necessity, lengthy, but it will provide us with the options that we need on a permanent basis to deal with the situation that we have seen over the past year or so. It is sensible and prudent to have the Bill on the statute book on a permanent basis. I repeat what I have said on many occasions. We will continue to have the special powers at our disposal until February next year. I hope that we will have the Bill enacted to take over from then. We will continue to do whatever it takes to ensure the stability of the financial system. That is absolutely imperative, and I commend the Bill to the House.
Yesterday, of course, we discussed the massive bail-out needed to deal with the near-collapse of the banking system. Today, we will debate how to prevent such a near-collapse from happening again, and how to make sure that such a bail-out is never again required. Let us be clear: when a house is on fire, it is right that all hands go to the pump, which is why we offered our constructive support. However, when the smoke has cleared and we see the debris around us, we are entitled to ask who built the house, who let it catch fire, and how we rebuild it so that it never catches fire again.
The Bill goes some way towards making the changes to our banking laws that are needed to give the Government the power that they need to deal with a bank failure. That is why we support it, and why I made an offer of support to help get the legislation through by the time that the Northern Rock powers expire. However, we believe that the Bill could go further, and I shall go on to explain why.
Giving the Government the power to deal with a banking crisis is one thing, but preventing such a crisis is quite another. The legislation is mainly about dealing with a bank once it has failed. I would have liked to see more far-reaching changes to the management of overall debt levels in the economy, and a strengthening of the Bank of England's role in that process. However, as I say, the measures in the Bill are welcome, as far as they go. Indeed, we on the Conservative Benches proposed quite a few of them.
As I have previously reminded the House, the hon. Gentleman is on record as saying that no Government could have foreseen the sub-prime mortgage tsunami that has hit the system. If that is right, and if he sticks by what he previously said, I am not sure what point he is now making. We were hit by circumstances that we could not have foreseen, and are dealing with them.
If the hon. Gentleman does not think that a regulatory system has failed when one ends up having to nationalise half the banks in the country, he may not have been paying attention to recent events. I was going to make this point later, but I will make it now—
Let me answer the point that the hon. Gentleman raised in his intervention. The Prime Minister talks about international co-operation between regulatory systems. Of course, no one is against that, but an international system will not regulate the sale of sub-prime mortgages in Alabama; we will have to rely on the US regulatory system to do that. Nor will an international system prevent the sale of mortgages in this country to people who cannot afford it when house prices turn down. That was part of the problem with Bradford & Bingley, as was the closure of the wholesale markets. Of course we want greater co-operation, but surely the regulatory system that we are hoping to design—not just by means of the Bill, but perhaps through future legislation—would help us to deal with the situation that has developed over the past year and prevent it from happening again. If the hon. Gentleman does not want to prevent it from happening again, that is rather bizarre.
Does my hon. Friend not agree that it was crazy for the Financial Services Authority and the Bank of England to allow Northern Rock to offer mortgages in excess of 100 per cent. of the value of a property, and sometimes worth up to 125 per cent. of that value? Also, was it not crazy to allow self-certification of income? People could just pick a number, and the banks and building societies would accept it.
I certainly think that we need to learn the lesson that one cannot build an economy on unsustainable levels of personal debt. The Opposition made that point—and, more to the point, so did the Bank of England on various occasions. The International Monetary Fund also said that there were concerns about levels of indebtedness and so on. My hon. Friend's point is therefore well made.
Yes, I did endorse it, from this Dispatch Box. After all, not only must the Government decide how to deal with the crisis, but the Opposition must decide how to respond to it. The decision that I took, and the judgment that my right hon. Friend the Leader of the Opposition made, was that in this time of banking and financial crisis, and faced with the near-collapse of the entire system, we would give our support to the measures that the Government were bringing forward. Indeed—this is a point that some Labour MPs have put to me—I actually talked about recapitalisation before the Chancellor did. We made our suggestions and, as I say, we are very happy to support the specific measures— [Interruption.] The Chief Secretary to the Treasury should appreciate the fact that the Opposition in this country, unlike Oppositions in other countries, have done their best to support the Government in decisions where the Government are rightly taking on public opinion, which might question why very large sums of public money need to go into propping up banks. We have gone on television and radio and tried to explain as well as she has why that is the case.
On the specific measures in the Bill, we proposed quite a few of them ourselves. Last December we urged the Government to give the Bank of England new powers to put failing banks into a special resolution regime. I shall come on to that. For a considerable time we have been urging that the Government raise the level of deposit protection for savers, and I am pleased that that has now been done. We would like to see the system of payments speeded up, and I know that the FSA is considering that. All of us would welcome a faster pay-out system, as it would help build consumer confidence.
With reference to the Bank of England, I would go further than the Government on some of the appointments. I shall come to that later. I am glad that there are clauses in the Bill that take us in the right direction. That is why we have no problem backing Second Reading. Even with the commitment to ensure the Bill's passage by February, plenty of time is still left for debate and proper scrutiny, and to learn the lessons of what went so disastrously wrong with the regulatory system created by the Government a decade ago.
One thing is clear: we need that system to change. We cannot end up having to do a multi-billion pound bail-out again. When one looks at the work that has been done—for example, some of the internal reports by the FSA, and some of the work by the Treasury Committee, which I commend for its two excellent reports on the subject—it is clear that the FSA comprehensively failed to see the problems in our banking system develop, the Bank of England, by its own admission, took its eye off the ball in respect of financial supervision, and the Treasury encouraged an economy to grow on the back of unsustainable debt.
The Bill's regulatory impact assessment, usually a fairly dull document when produced by Government Departments, is remarkably candid about the shortcomings of the regulatory system created by the previous Chancellor of the Exchequer. Page 7 states:
"The problems faced by Northern Rock plc in 2007 demonstrated...that the then existing arrangements for dealing with banks in distress did not adequately uphold" consumer confidence,
"thus exacerbating the threat of financial instability."
That is the Treasury's own assessment of the regulatory regime that the Treasury created. In its own words, its arrangements made things worse, not better—they exacerbated the threat of financial instability. That view is shared by the Treasury Committee in its reports. Its various reports point to the systematic failure of the FSA in its duty as a regulator and the fact that the Bank of England was left
"in a no-man's-land" by the changes.
The public will draw their own conclusions about who was responsible for the mess. I dare say that the man who oversaw the creation of the regulatory regime will come in for some blame. However, the question before us today is how we put matters right for the future. Let us start with what we would like to see from an ideal regulatory regime and use those principles to judge what is in the Bill and what the Government might propose after Lord Turner's report.
First, a regulatory regime should protect us from the kind of systemic risk that we have seen in the past month. Secondly, it should ensure that we can identify problems in individual institutions long in advance, such as unstable business models or risky bonus schemes, and deal with them in a way that prevents contagion to the rest of the system. Thirdly, a regulatory system should give the authorities the full powers that they need to step in and deal with banks if neither of the first two conditions is successfully met. We have discovered that if nationalisation is the only lever that we can pull, pretty soon we end up owning half the mortgage business in the country.
Fourthly, a regulatory regime should protect the consumer from being treated unfairly or being mis-sold products. In all this, we should not lose sight of consumer protection. Fifthly and last of all—this will be the most difficult balance for us to get right in the coming months—a regulatory system should be proportionate and fair. At the end of this, we do not want the City of London simply to go to New York. We must remember that financial services are still, for all the press that they attract at the moment, our largest and most important industry, and they employ people not just in the City of London, but in Edinburgh, Leeds, Bristol, Birmingham, Cardiff and Manchester, and in every single constituency in this country.
Has my hon. Friend made any estimate of the chronic deficiency in money coming into the Treasury coffers that will result from these banks and other financial institutions now either breaking even or making a loss, and the number of people who will lose their jobs throughout the country, including in cities where major insurance companies are located? There will be a huge loss of Treasury revenue. Has he estimated how big that loss will be?
My hon. Friend raises an interesting point that the House will have to deal with in the next year, which is that we have basically created a revenue regime that assumes successful and profitable financial services. We rely heavily on corporation tax receipts from the City and we rely on income tax receipts from wealthy individuals, and as well as coming into this economic downturn with a structural budget deficit because tax revenues were not matching spending, we face another kind of structural deficit, which is that the way that we have collected taxes means that the revenue streams that we have depended on and that the Treasury has put in its long-term forecasts, will, I suspect, not be there. That will be the case not simply through this current economic downturn, when tax receipts fall and spending rises, as always happens in an economic downturn, but for the foreseeable future. The cash cow of the City will not be there and that will pose some difficult questions for the Chancellor of the Exchequer and perhaps those who come after him. That is something that we could debate on another occasion, but my hon. Friend makes a good point.
I want now to go through some of the details of the legislation, as the Chancellor did, and to deal with the central measure, the special resolution regime. I positively welcome the fact that the Government are giving themselves powers, or what they call tools, other than nationalisation or part-nationalisation, to deal with a bank failure. There are the new powers to create a bridge bank or facilitate a private sector purchase, which again the Government rightly say is the one solution most likely to maintain financial stability, provide continuity of banking services and protect public funds. Of course, there are also the important powers—extraordinarily, the current law did not allow us to do this—to put a bank into insolvency. It is correct that those matters should be addressed in this legislation.
It is important for the House to understand that, when we are discussing the special resolution regime, we are talking about extraordinary powers to seize private property and to dismiss privately entered into contracts and loans, potentially wiping out the savings and investments of millions of small shareholders who have ordinary shares in banks, many of whom are the employees of those banks, working in the bank branches and the call centres. We can only contemplate the use of such powers because of the central role that banks and financial institutions play in our economy, and that justifies not just the bail-out yesterday, paid for by the taxpayer, but the extraordinary powers that the Bill grants.
However, much rests on the circumstances in which the new powers would be exercised, and in particular there is an interesting debate to be had over the power to set aside the claims of creditors. We should remember that in all the different actions that the Chancellor has taken—Northern Rock and Bradford & Bingley, and the action that he took yesterday—to my knowledge, he has never set aside the legal claims of the majority of the creditors. In what circumstances would he in future wipe out the creditors? What would the threat be that would force him to do that? The very fact that the threat is on the face of the Bill is something that, for example, the banking industry is concerned about. In commenting on the Bill, the British Bankers Association puts it like this:
"without appropriate safeguards, interference in creditor rights would undermine the competitiveness of UK financial services firms and inflict serious damage on the role of London as an international financial centre."
As I say, there must always be a balance between the interests of the taxpayer, protecting the stability of the system, and maintaining the competitiveness of the City of London, but if there is concern about the powers—they were not used in the extraordinary circumstances of recent weeks—it might be good to hear from the Government about the kind of scenario in which they might be used, and that might be set out in the code of conduct, which I am glad that the Chancellor promised we would be able to have sight of at some point in Committee before we discussed the particular issues around the special resolution regime.
My hon. Friend is making some very sensible observations on what a regulatory structure should do. However, should such a structure not also act at a much earlier stage, before a bank is greatly overstretched and in trouble? It should say privately to such a bank, "We expect you to rein in your lending, raise more capital, cut your dividend or cut your costs because we think that your balance sheet is getting too bloated."
My right hon. Friend is absolutely right; that is a key part of prevention. In a short while, I shall propose extra powers that I think the Bank of England should have, and a new relationship between the Bank and the Financial Services Authority which would help ensure that what he suggests is done on a more systematic basis.
The previous intervention was very apposite because it referred to the private process of briefing those in the financial sector on their behaviour. The importance of privacy in these matters was drawn to my attention when I looked at the article on bank capitalisation by the shadow Chancellor's colleague, Mr. Tyrie; it appeared rapidly to have succeeded a meeting that the shadow Chancellor held with the Governor of the Bank of England on confidential terms. Can the shadow Chancellor assure us that he did not brief the hon. Member for Chichester for the basis of that article following that meeting?
The hon. Gentleman is slightly confusing the attack point that he wants to make; he is roping in my hon. Friend Mr. Tyrie, and that has not been the main line that No. 10 has taken—this does not apply to the Treasury, to be fair—in briefing against me for the past week while we have been trying to offer some cross-party support for what the Prime Minister has been doing. [Interruption.] Let me make it absolutely clear to the hon. Gentleman: I did not, and neither did my colleagues on the Front Bench, take any private briefing from the Bank of England and repeat it on any television programme or in any newspaper article. The issue of recapitalisation, or the possibility of it, had been discussed openly in the press for some time; Martin Wolf had written a fairly convincing piece about it in the Financial Times the previous week. More to the point, Dominique Strauss-Kahn, the head of the International Monetary Fund, had said, also in the Financial Times, that recapitalisation was the approach that European Governments should be considering, rather than the TARP—troubled assets relief programme—approach put forward by the United States.
I know that the Prime Minister now casts himself in the roles of Churchill and Roosevelt in dealing with this crisis, but the idea that somehow recapitalisation was not being discussed across the world is somewhat bizarre. By the way, I met all the different members of the tripartite committee that week; the idea that I took a private briefing and repeated it is simply not true. I give the hon. Gentleman and the House that assurance—not, I suspect, that that will stop the Prime Minister's boot boys from doing their job.
Before I move on, I want to touch on one point about the special resolution regime: the trigger. As the Chancellor said when I intervened on him, I do not intend to insist on this point, but I draw the House's attention to who exactly pulls the trigger. No one doubts that the FSA should pull it, but there is some disagreement about whether the Bank of England should also have access to the trigger. The Governor of the Bank of England told the Treasury Committee that he felt that he should have that power. We were convinced by his arguments to the Committee. We have spoken to regulators and central bank governors in other countries and we know that they can see an argument for a central bank having such a trigger. All I say to the Chancellor is that although we will not insist on the point—we will not try to get the House of Lords to insert it into the Bill—we reserve the right to return to the issue later. Although between its first report in January and its second report in September, the Treasury Committee amended its view on whether the Bank of England should have the explicit trigger, it said that the Bank should have explicit powers in primary legislation to recommend the pulling of the trigger to the FSA; such a provision, however, is not in the Bill.
Moving on to part 4 of the Bill, I welcome the increase in the deposit protection limit to £50,000, and we are glad that the Government have agreed to it. It would be interesting to hear whether there are any further proposals on that, given that some Governments around the world are still increasing their deposit protection limits and issuing general guarantees. The key thing is that people have rapid access to their money, and it will be interesting to know when the FSA will introduce its proposals.
Although it is not directly relevant to the Bill, with your indulgence, Madam Deputy Speaker, I ask the Chancellor—or whoever from the Treasury will reply in this debate—to tell us how he intends to deal with Equitable Life, which is another compensation issue that arose from a failure of regulation. We have the parliamentary ombudsman's report and we are awaiting the Government's reply. Most people would regard it as somewhat bizarre that the Government can compensate people—quite rightly—for losses in foreign banks because of regulatory failures in Iceland, but cannot compensate people for losses caused by regulatory failures in the UK in relation to Equitable Life. It would be interesting to know when the Government propose to deal with that.
I shall touch briefly on clause 156 and pre-funded compensation schemes. I know that the Government are giving themselves the power to have a pre-funded scheme, but the Chancellor knows, as he acknowledged, that the industry is nervous about that. The Association of British Insurers says that it would impose a heavy cost on the financial services industry that is undesirable given the current economic weakness. In what circumstances would the Chancellor consider introducing a pre-funded scheme? Would there be some test about how strong the industry had become? Such a test is not likely to be passed for a considerable period.
On the new structures and procedures for the Bank of England, more than two years ago, we proposed that appointments to the Monetary Policy Committee should be more transparent and made in the way that other Government appointments are. I am glad that there has been some movement in that direction, but we could do more to entrench the independence of the Bank. Recent events have shown that there is no shortage of politicians who are willing to jump up when times get difficult and call for the Bank's independence to be suspended—indeed, Dr. Cable was one of them—but it would be more serious if the Chancellor or Prime Minister of the day was tempted to use the power to reappoint the Governor for political purposes. Whether it was intentional or not—we have our own views on that—we have been through the reappointment of Eddie George and Mervyn King, and in both cases the decision became somewhat charged. Our proposal is that, rather like the European Central Bank and other central banks, we should move the Governor to a single, non-renewable term so that there is no question of independence being challenged by a reappointment.
Do I gather that the shadow Chancellor would not support in an emergency some temporary adjustment to the remit of the Bank of England to allow it to set aside the strength of its commitment to inflation targets, and to allow the interest rate to be set to deal more with the crisis in the economy?
I absolutely would not allow the Bank of England's remit to be changed in a crisis. There is no point having an independent central bank if at the moment we get any kind of trouble we suspend the remit or change the target. No independent central bank in the world would last if that were the case. The target set by the Government includes not just an inflation target but a responsibility on financial stability, and as last week's decision by the Governor demonstrated, he is perfectly capable of taking into consideration broader issues of financial stability as well as his inflation target remit. Frankly, it would not be sensible to suspend the independence of the Bank. The very concept of suspending independence is almost a contradiction in terms. It would not be independent.
The shadow Chancellor keeps using the term "independence of the Bank of England", but surely it is within the gift of the Chancellor to set the inflation target, therefore putting in abeyance or adjusting the inflation target, which still leaves the Bank independent to make a decision on the facts as it sees them.
Again, I come back to the point that if the Chancellor of the Exchequer changes the target in the middle of a crisis, and basically mandates the Bank to pursue another course, we cannot properly call it an independent central bank. While the hon. Member for Twickenham has said some sensible things in the past year, I do not think that that was one of them. I am sure he is reconsidering his position, or is at least glad that his course of action was not pursued and that the Governor was able, within his existing remit, to act in the way that the hon. Gentleman wanted. By the way, I do not think that it is particular sensible either for politicians speaking from the Front Bench to call on the Bank to cut or increase interest rates. Indeed, I make it a practice not to comment on them.
Finally, let me turn from the structure of the Bank of England to something that is not in the Bill but should be—this addresses a point that my right hon. Friend Mr. Redwood made to me: the central issue of how we prevent problems from arising, as well as how we deal with them once they have arisen. We should use this opportunity to make some more far-reaching changes to our system for regulating banks and controlling debt levels in the economy. We have learnt the hard way that we cannot build an economy on excessive debt. We have also discovered that no one has the power in our system to call time when debt levels become unsustainable.
The Bank of England used to have that power, but unfortunately the previous Chancellor took it away in 1998. Most people can see now that that was a mistake, for the result was that, despite the warnings from the IMF and the Bank of England itself that growing levels of debt in the economy were not sustainable, nothing was done to stop them. That needs to change. We need to give the Bank of England the power to call time on excessive debt. The Bill does not do that. For all its references to the Bank's role in financial stability, it contains no formal system for the Bank to implement its concerns about market-wide risk. That is a surprising omission, given the events of last week.
The hon. Gentleman makes a plea about intervention, but could he share with the House his views on how that intervention would happen without its becoming an act of the nanny state?
Of all the weeks to make that argument, I am not sure that this is the best one. However, I was coming on to exactly how that intervention should be made. We should create a new statutory requirement on the FSA to take into account the Bank's assessment of market-wide risk when setting capital and liquidity requirements on individual banks. We would call that a debt responsibility mechanism. The Bank of England would be required on the basis of legislation to write a regular open letter to the FSA setting out its assessment of market-wide risk and levels of debt in the economy. The FSA would then be required to outline how it would respond to those recommendations from the Bank.
That would force the Bank of England to maintain an active role in macro-prudential supervision and would force the FSA to consider an institution's risk not just in isolation or at a certain point in time, but in terms of the market context and through the economic cycle. That means that the regulator would have the power to take pre-emptive action to control the overall lending of banks in the system when there was a danger of an asset boom.
We have to address the problem—in the end, the solution offered by Alan Greenspan, the honorary economic adviser to the Prime Minister, did not sufficiently address it—of how we deal with asset price booms. We have got independent central banks to deal with retail price inflation, but how do we deal with asset price booms? After the events of the past month, the Greenspan approach, from the man who opened the new Treasury building, which is just to let the bubble burst and pick up the pieces afterwards, is clearly not one that we should allow to be taken again. Tackling that point will be a big issue for debate, not just in democratic Parliaments, but in central banks.
Is not the fact that no one was responsible for dealing with asset price inflation fundamental to the crisis that we have faced? The easing of credit during the dotcom boom and the previous Asian financial crisis meant that we stoked up the problems that have had such severe consequences. It is only by imposing those additional responsibilities on the authorities that such crises can be prevented in future.
The hon. Gentleman is right. We should seek to apply capital adequacy requirements in a counter-cyclical way. In an open and global market, that is obviously best done in co-ordination with other central banks and through the Basel arrangements, if they can be reformed. We suggested that as long ago as March, and it is good that that line of thought is also being pursued by the European Central Bank and the Federal Reserve.
Yesterday, the Prime Minister appeared to acknowledge, apparently for the first time, that that Conservative idea might have some merit. He said that in future banks
"have got to lay aside more for the possibility that there will be contractions".
Perhaps that is the Prime Minister's way of admitting that he did not actually abolish boom and bust, and that one needs to fix the roof while the sun is shining—
I am sorry that the right hon. Gentleman does not like the phrase, but it was in the Prime Minister's conference speech, so if we are not allowed to repeat it in the Chamber of the House of Commons, we have come to a pretty pass. It is a shame that the Government have not used the Bill to enact the kind of future-looking changes to the regulatory system that would ensure that that happened.
We will give the Bill our support and help its passage because we support the measures in it, not least because we proposed some of them, but we will also remind people of the 10 years of economic policy and regulatory mistakes that brought us to the point at which the banking system in this country was on the verge of collapse and the taxpayer had to bail it out. We will offer people the kind of far-reaching changes that will not only enable us to deal with banks that have failed, but help us to prevent those failures in the first place, by ensuring that we never again build an economy on unsustainable debt.
Thank you, Madam Deputy Speaker, for giving me the opportunity to contribute to the debate. I welcome the introduction of the Bill, and the cross-party approach to the measures to deal with the banking crisis. The Treasury Committee has led the way in forging a cross-party approach to the issues relating to banking that have arisen since the run on Northern Rock in September 2007. We have produced two reports on the legislative changes that we identified as arising from the experience of Northern Rock. One, "The run on the Rock", was published in January this year. The other, entitled "Banking Reform", was published in September.
There are clear signs in the Bill that our reports have helped to shape it, as it stands, although I suggest that there are still areas for improvement during its parliamentary stages. I want to look at four main areas today. The first is the immediate context, and how that affects our approach to the Bill. The second is the special resolution regime and the bank insolvency provisions. The third is depositor protection, and the fourth is the governance of the Bank of England.
On the immediate context and how it affects our approach to the Bill, it hardly needs to be said that a great deal has changed since we published our report in mid-September. However, recent events have reinforced the point that we made in both our reports that banks are special institutions with a special role in the economy.
The Treasury Committee returned last week from a visit to Japan, a country whose Government massively, if belatedly, recapitalised its banks in response to the crisis that it faced in the 1990s. During our visit, it became obvious to us that the role of the banks in the economy was equivalent to the circulation of blood in the body. If the blood stops flowing, there is a thrombosis, and that is what we have seen in the banking system in this country. The recent massive transfusion of capital into the British banking system demonstrates that the Government have learned many of the lessons that were emphasised to us during our visit to Japan, most notably the need for swift and decisive action and, secondly, the need to attach conditions to recapitalisation relating to lending and the running of banks, making it clear that the days of business as usual for bankers are over.
The capacity of the Government, together with the Bank of England and the Financial Services Authority, to act effectively in the current crisis does not mean that new legislation is any less necessary. In fact, one of the key lessons that we learned in Japan was the difficulty of returning to what were described as "normal conditions" in the banking sector. The new legislation will serve as a crucial pillar of the public sector approach to banking in what we eventually consider to be normal times.
The second item on which I want to focus is the special resolution regime and the bank insolvency provisions. The Bill provides a welcome return for the Bank of England to the heart of financial stability—something that the Treasury Committee has been calling for since we produced our report, "The run on the Rock". In that January report, we argued that the authorities should design bridge-bank and third-party transfer arrangements for struggling banks in order to provide alternatives to the nationalisations that we saw with Northern Rock and others more recently. I welcome the fact that the Government have accepted our recommendation and devised a special resolution regime.
The Bill confirms that the Financial Services Authority should pull the trigger, placing a financial institution into that special resolution regime. Our September report on banking reform agreed with that position, recognising that there should be a clear line of responsibility, but we also recognised the need for the Bank of England to have a check on the process, with specific legislative provision to enable the Bank formally to recommend that the FSA place an institution into the special resolution regime. That came out of our experience with Northern Rock, when we decided that there should be no hiding place for the Bank of England, the FSA or the tripartite authority. Records should be made public immediately or later on. We suggested that such a check would focus minds in the Bank and the FSA, ensuring that every i was dotted and every t crossed in the regulatory process.
I accept that now is not the time to let further banks fail in the sense of their becoming insolvent. Any such bank failure would currently represent a systemic risk to the financial system, further undermining the already fragile confidence in the banking system. However, in the longer term it is important to have a specific insolvency regime for banks, and the Bill provides for that.
We have not specifically done so, but if the right hon. Gentleman is asking for my opinion, I should tell him that I do not think that there should be a limit at the moment. I go back to my point that the banking system is the blood circulating around the economy, which is what makes it so important in securing financial stability. Once that stability is established, we can look at other issues later.
The Treasury Committee also considered depositor protection and we concluded in our January report that such protection afforded by the Financial Services Compensation Scheme was a mess: it was complicated, confusing and did little to instil confidence among savers. We took a fairly relaxed view about the level of the compensation limit and we saw little reason to increase it from £35,000 to £50,000. We believed that more than 80 per cent. of deposits were saved, although not deposits by value. The goalposts have moved considerably since then with other countries unilaterally increasing their protection—in some cases, to 100 per cent. of deposits, as we saw with the Republic of Ireland. It is therefore sensible for the FSA to move into line with our peers in order to prevent the danger of drainage of deposits from UK banks.
Even more important to our Committee was the speed of payout. The Financial Services Compensation Scheme website refers to recipients of compensation having potentially to wait months for access to their funds. That is simply not good enough, so we urge the Government to stand firm on the tough, seven-day deadline for processing compensation. In fact, the real test of the FSCS will be whether it can deal with the fallout from the Icelandic banks in a speedy manner.
An important precursor to speedy payout is that the relevant data are to hand. On our visit to Japan, we saw that banks were required to have frequently updated depositor information available in a common format for the use of the deposit protection institution. I know that the banks here are reluctant to do the same; they say that it will be preposterously costly, but at least one bank is able to provide such information in the UK—the Abbey bank. In its submission to the Treasury Committee, it told us that it was already doing it. If Abbey can do it, why cannot other banks do the same? That is absolutely necessary if the public are to have the confidence in the banking system that they need. The Government need to ensure that similar arrangements are in place across all banks in the UK.
Other concerns that we raised about the FSCS were the complexities of protection by bank, rather than brand, and the coverage of deposits held in foreign-owned banks. The recent confusion over Icesave deposit protection underlines the point. For deposit protection to be of use, it must be simple and well understood.
Our Committee continues to see merit in a pre-funded compensation scheme whereby banks contribute more in boom times than in bust times. When Mr. Fallon and I visited Washington last December, we were told by the American Institute of Banking that that was a necessity. It is important, therefore, to make preparations now for the introduction of a pre-funding scheme in readiness for the next financial crisis, although we hope that it will not happen. However, I accept that now would not be the most opportune time for the banks to start contributing to such a scheme: pre-funding would be a medium to long-term innovation, to commence only once banks were better capitalised.
Much of the Committee's report last month focused on the governance of the Bank of England. It is disappointing to note that there is little sign, as the Bill stands, that account is being taken of our recommendations—although, in fairness to the Government, I must add that they have been faced with a tight timetable. I hope that the Minister who replies today will be able to indicate that they will give careful consideration to our proposals.
Let me highlight two important concerns about the Bill. First, its proposals relating to the financial stability committee are unsatisfactory. The committee is to have a non-executive majority and a largely advisory and monitoring role, but is to be chaired by the Governor. In our report, we argued that the FSC should be established as an executive body, completely distinct from the court and with a status comparable to that of the Monetary Policy Committee.
Secondly, we are not convinced that the general financial stability objective currently proposed for the Bank of England is properly calibrated to its actual functions. As we said in our recent 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. There is no indication that a new statutory objective for the Bank of England would be accompanied by matching objectives for the Financial Services Authority and the Treasury. 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."
We proposed two functional objectives rather than one general objective. That is one respect among many in which I hope that a good and well-timed Bill will become even better as it passes through the House.
At the beginning of his speech, the Chancellor said that he would work constructively with others. As he knows, ours is a cross-party Committee. We worked for 12 months on proposals on which we have agreed, and I think that they are worthy of further consideration. We need a strengthening of the Bank of England, and an enhancement of the status of the financial stability committee to make it commensurate with that of the Monetary Policy Committee. We need to ensure that the tripartite authority does not become a sleepy backwater in normal circumstances; it must be constantly alert, and financial stability must be one of its key aims. We must also develop robust protection for depositors, because if that is not achieved, public confidence in the banking system will be undermined.
I bring those constructive comments—developed over 12 months on a cross-party basis—to the Chancellor's attention for further consideration in Committee, and I wish the Bill well.
Today's debate is a little surreal. Although we are still in the middle of an enormous crisis, the Bill deals only with certain parts of it, albeit in a sensible and helpful way. I think we have exhausted "burning house" analogies, so let me produce another analogy: we are still experiencing the shock of a major tsunami wave. Bodies are still being fished from the waters and people are still being rescued, yet here we are debating how to set up a tsunami detection scheme and rebuild developments.
That sense of reality was captured, to an extent, in the closing paragraph of the House of Commons note, in which someone beavering away in the House's research department wrote, rather sadly, "It is a measure of the pace of events that reaction to the Bill's publication has been virtually drowned by other events." It merited not a single mention in any of the serious newspapers. We are dealing with something which, although important, is in a sense not directly connected with the massive events that have been unfolding.
Many of the important issues that are tied up with the banking rescue scheme and all that swills around it are not touched on, directly or indirectly. The Bill clearly not does affect the principle of the lender-of-last-resort facility, although, as the Chancellor pointed out, it extends that principle to building societies. The key provisions of the rescue in terms of inter-bank lending guarantees are enormously important, but I understand that they are not directly affected by the Bill either. It does not deal with the way in which nationalised banks will operate, with the issue of the shadow banking system—which is the source of many of our difficulties—and how it should be regulated in future, or with the issues of competition policy and the role of the clearing system, raised several years ago in the Cruickshank report.
Although I do not dispute the importance of the Bill's provisions, they deal only partially with the problems that we are experiencing. Arguably the most important, or second most important, part of the Bill relates to deposit protection, but over the last few weeks the deposit protection system has been overwhelmed and, in practice, it has become largely irrelevant to the restoring of confidence and stability.
I had intended to discuss what are tricky and important issues in a non-partisan way, but I was provoked by Mr. Osborne. I do not propose to respond to his comments on the Bank of England, although I am perfectly happy to defend my position, and will continue to do so for as long as the crisis continues. I also acknowledge that he made some sensible comments, with many of which I agreed, particularly his comments about Equitable Life. However, it is a bit childish for those who aspire to be Chancellor merely to rewrite history in such a blatant way.
I was especially fascinated by the hon. Gentleman's account of how the Conservatives warned the Labour Government for years about the problems of personal debt. We are living through what I suppose is the economic equivalent of the Iraq war. I am sure that dossiers will be produced recording who said what when—and Conservative warnings about the emerging household debt problem are very thin on the ground.
I remember having exchanges on the subject with the then Chancellor, now the Prime Minister, back in 2003-04. It became quite a hot issue, although I do not recall the Conservatives contributing to the debate in any way. What they did do, although the shadow Chancellor may have forgotten, was set up a commission to examine debt problems, led by someone called—I think—Lord Griffiths. Its report, which I read, made it clear that there was no such thing as a general household debt problem. There was a debt problem relating to a relatively small number of high and low-income individuals with credit cards, and its recommendations were confined to that very narrow issue. There were no policy prescriptions relating to what was an emerging problem.
At the risk of being immodest, I recall that, at the same time, my colleagues and I produced a 10-point debt plan, which dealt with the problem exhaustively and in some detail. It has clearly been raided for ideas, particularly in what the shadow Chancellor has called Conservative ideas about how to improve regulation of the banking system. He mentioned two quite distinct ideas, which merged into one somehow, that it was important for future Governments to take on board. One related to asset prices. The Chancellor may recall exchanges between Members on our Benches and his, back in 2003-04, about the genuinely tricky problems of dealing with those prices, and the possibility of incorporating house prices in the Bank of England's remit in measuring inflation. Again, I do not recall the Conservatives making any contribution whatever to the debate until today; the issue simply disappeared.
More importantly, there is the very good idea—which I am delighted the Conservatives have taken up, despite the fact that they have called it a Conservative idea—of counter-cyclical management of the capital adequacy of banks. That idea has been in circulation for some time; it has been well written up by Persaud and Charles Goodhart and others. If the hon. Member for Tatton re-reads my 2004 debt plan, he will see it all described in there, four years before it became a Conservative idea. I think we might now have had enough of putting all this on the record.
On this plan, is there not a balance to be struck, which has not so far been explained? The hon. Gentleman can make populist points while we are in the middle of this situation, but is not this counter-cyclical idea potentially deflationary, in which case it would have the opposite effect from producing a strong and stable economy, which is what we have had over the last 10 years?
The hon. Gentleman is missing the point; the whole point is that it is designed to restrain rapid lending in a boom period and that that relaxes when the cycle turns in the opposite direction. [Interruption.] No, it is not. Technically, this is well understood; the Governor and people in the Financial Services Authority fully understand how it could work. It has been applied in other countries, and I think there is a fair degree of consensus about implementing it.
Let me move on to the substance of the issue and some of the ideas behind it. Before plunging into the technical arguments about banks, a useful starting point would be to acknowledge the fact that banks are inherently rather unstable, and that they always have been. This proposed legislation is the latest in 300 years of attempted legislation to tackle a big problem: how one preserves stability in a system of banking institutions where there will always be significantly less cash and liquidity than needed to meet the claims banks ultimately face. For that reason, banks have always faced runs or the danger of runs, and principles have been established over the years as to how to deal with that. Indeed, it was a British commentator, Bagehot, who came up with the idea—which I think the British authorities forgot last summer—that the first thing to do in a bank run is to pump in as much liquidity as is required at a commercial rate of interest against good collateral, in order to stop it happening.
The other subject the old-stagers always used to argue about in terms of banking was the problem to do with moral hazard. We have heard a great deal about that over the last year, and a constituent recently asked me what moral hazard was. I rooted around for a good definition, and I found what I think is a particularly good one from somebody called Herbert Spencer, who was, I think, a rather famous Darwinian. He said:
"The ultimate result of shielding people from the effects of folly is to populate the world with fools."
In a non-technical way, that summarises what moral hazard is all about. Over the last year, the phrase has been used in a technical sense by the Governor of the Bank of England and others, but I think Spencer's comment serves to remind us that if one goes too far in the direction of protecting banks or depositors, they will inevitably invest in risky activities, knowing perfectly well that ultimately somebody else—ultimately the taxpayer—will bail them out.
Despite the problems of moral hazard, there has been an acceptance in recent decades that protection must go beyond the simple Bagehot rule of pumping liquidity into the banks, and hence we have had in the post-war period—and in the pre-war period in the United States—systems of deposit protection, which have, among other things, assisted people, particularly when small banking institutions have gone down. There is quite a long history of that. When I was looking up the history of our own scheme, I found that there have been occasions when credit unions, for example, have fallen and the deposit protection scheme has been very useful in those cases.
However, it is obvious that in our recent events that scheme simply did not work, or was not adequate and was simply overwhelmed. In the Northern Rock and Bradford & Bingley cases, for example, the upper limit had to be abandoned, and people were given indefinite protection. It became very clear at the beginning of last week when panic was spreading throughout Europe that the one thing people understood was that their deposits were safe in British banks because, at the end of the day, if the banks collapsed, they would be nationalised and people would therefore be protected. Not many people were worried terribly much about the precise details of the deposit protection scheme.
The hon. Gentleman mentions banks going to the wall and failing, but does he recall that Nick Leeson spent some years in jail? The big question that a lot of the public are asking is whether the current crop of bankers will get off scot-free. I would like to hear the hon. Gentleman's opinion on that.
When people start picking through the entrails of this crisis, it will undoubtedly emerge that there was fraud as well as misjudgment and irresponsibility. I hope that our Serious Fraud Office was not so badly traumatised by its experience of dealing with the Saudi royals that it is not still sufficiently motivated to go after serious fraudsters.
Since we have a deposit protection scheme, it is important that it is properly constructed and credible, and various points have been made about the proposed scheme, which I hope the Chancellor will take on board. For example, there is a problem that has not been resolved to do with people who are temporarily worried about the £50,000 limit—or who were worried about the £35,000 limit—because they are buying homes. I think a Conservative Member mentioned in Prime Minister's questions last week a constituent in Devon who was concerned about that problem, and it is a legitimate issue. How, under the proposed deposit protection scheme, will people be protected who have temporarily very large balances? That is a tricky problem to manage, but it is important.
There is also the separate issue of whether people should be protected on the basis of the brands of the banks that they invest in, as opposed to the institution. I suspect that not many people are aware that Cheltenham & Gloucester is part of Lloyds. We must not just assume that, when calculating whether they should worry about deposit protection, everybody knows which subsidiary of which bank belongs to which brand.
There is another important issue that did not surface much in public debate—perhaps because people were not aware of it at the time—which is that the compensation scheme applies to net, rather than gross, exposure. People who have substantial deposits as well as substantial borrowings do not enjoy as much protection as they might assume. Therefore, there are certain aspects of deposit protection that need to be clarified if proper consumer protection is to exist.
Much of what the Conservative spokesman and the Chancellor spoke about related to the special resolution regime, and I do not have a great deal to add on that.
Perhaps my recollection is not accurate on this, in which case I am happy to be corrected, but did the hon. Gentleman's party leader call for a general guarantee of all retail deposits a week or two ago, and is that still Liberal Democrat policy?
Our view is that the sensible way to deal with such a panic would be by a common statement from the leaders of the European countries that went rather along the lines of the Merkel statement. That may be the only way in practice to stop generalised panic. It did not happen, and it was not needed, but that would be the kind of recourse that Governments would have to undertake.
The hon. Gentleman said the statement was not needed and there was not panic, but people were moving money all over the place. They were putting money into Irish banks after the Irish gave a whole deposit guarantee. I cannot believe he is suggesting that it was not necessary. My view is that had the Government given such a deposit guarantee earlier, there might not have been as large a devaluation of the banks as there has been over the past two weeks.
There was a great deal of anxiety, but there was not an enormous exodus by British retail depositors from the banking system. It reflects very well on the common sense of the British people that they were not tempted to move all their money out to Ireland. Not a great deal happened; there were, of course, great problems in the wholesale market as we know, but in the retail market, although some individuals may have moved their money to Ireland, not many did. The reason for that basic common sense is that people understood that they were fully protected. They were fully protected not only by the deposit protection scheme, but by the certain knowledge that if banks went down, the Government would take them over and protect their deposits. However, had the position escalated and there had been a serious run on retail deposits, the British Government would have been forced to give stronger reassurances of the kind that I have just described.
We are living in extraordinary times now, but looking forward or backwards a little, is not the problem with total protection or the 100 per cent. guarantee of deposits up to £50,000 that it draws in the depositor's mind no account of risk at all? That is why people invested in Icesave and Northern Rock. They risked their life savings for an extra 0.5 per cent. a year. To go back to the point about moral hazard, surely there must be some consequence for them if that goes wrong. It is unfair to the well run, more conservative banks that the same guarantee is afforded to people who are prepared to take a risk.
The hon. Gentleman is right. In normal times it would have been extraordinary and inexplicable to protect the Icelandic investments without limit. The only reason why the Government did that was the general worry about the banking system and the systemic risk involved. He is quite right about the basic academic principles, but these are indeed extraordinary times and the response was extraordinary.
The shadow Chancellor was right to make the point that while we are discussing special resolutions, special regimes and the like, we need to think ahead to the regulatory system for banking that will evolve in due course. At the moment, it is clear that banking cannot just return to the habits of the pre-crisis period. If somebody has had a massive heart attack and a triple bypass, they cannot just go back to their former lifestyle; they have to adapt. Part of the adaptation will take the form of stricter capital adequacy rules of the kind that we have discussed.
In the meantime, half of British banking is now nationalised and may well be for some years. A whole series of policy questions has been thrown up, such as how a semi-nationalised banking system should operate and how to ensure fair competition between institutions. We had that debate when discussing Northern Rock. That was a manageable situation, but now that half the banking system is nationalised, there are severe difficulties. Questions will arise such as how far nationalised banks should get involved in social policy. The issue of repossession will loom large this winter, and we will have to say that it must be dealt with on a non-discriminatory basis, through the court system, not by requiring certain banks to offer different principles simply because they happen to be publicly owned.
A big issue arising from the points that we raised with the Chancellor yesterday is the commitment to maintaining credit at 2007 levels. I got the sense that he was backing away from that slightly, but if it means anything, it might well mean the Government being directly or indirectly involved in the business of trying to manipulate house prices through mortgage lending. That would potentially be a very dangerous departure. Consequent on this debate, we must have a proper discussion about how a semi-nationalised banking system will operate before it reverts to a more commercial basis with a regulatory system operated through the FSA.
Are not the Government coming at the dilemma from a position that they have already declared? Their policy on social exclusion led them to put pressure on the banks and building societies to lend to people across the country who were not credit-worthy, and to lend them more than they could afford. The Government have form on this issue. Does the hon. Gentleman agree that they will have to prove to us that they are not going to use their position on the boards of banks to pressurise them into pursuing the folly that has led us to the position that we are in?
The hon. Gentleman raises an important but different point about the social exclusion agenda and whether it is right to require banks to operate in that way. As I understand the policy that he describes, it applied to all banks, not to some rather than others.
Among the institutions that will be looking nervously at how the nationalised banks operate are the mutuals such as the Nationwide, which can never be accused of being greedy bankers. They do not have shareholders, they have been moderate and they have built up a market share responsibly, but they will now have to compete with state institutions. The ground rules under which the system operates will become extremely important. Like the Chancellor, I anticipate the important discussion about bank regulation that we will need to have. Rather earlier, we will probably need to return to consider how nationalised banks will function in this hybrid system.
I welcome the Bill, of course, but I express the normal caution about consensual legislation. As we all appear to agree on the principles, there is a danger of inadequate debate and an inadequate focus on the alternative views about how to approach banking reform.
Unusually, I will therefore say that I have already volunteered to my Whip that I am prepared to sit on the Public Bill Committee. However, that Committee might need to be run somewhat unusually. The clause stand part process, whereby we discuss the general arguments in each clause, may have to be approached rather more permissively than usual. I also hope that we will have a full opportunity to hear from people outside the Committee and reflect carefully on what we hear. I expect that the various lobbying groups of interested parties will want to play a full part in the process leading to the production of the final Act, and I hope that we will have the opportunity of a rather more creative process than the normal, rather dumb Committee format through which I have sat with pain at various times in the past 11 years.
I wish first to focus on the stage before special resolutions in the regime that is being established in the Bill. Mr. Redwood raised the important question of what we should do to prevent banks from getting to the point of facing the extreme measures in the Bill. First, we need a much clearer definition of the FSA's function in that process. There was a useful discussion in the Treasury Committee about the concept of green, amber and red lights. A red light would mean when a bank was in special resolution and an amber light would be when there was anxiety about certain aspects of ongoing business that needed to be focused on and remedied. We need a clearer understanding of how that heightened supervision process will work.
Secondly, we need a clear focus on the communication channels between the FSA and a bank. The FSA will need to highlight to the bank issues of potential instability that are found in the heightened supervision process. Thirdly, there must obviously be explicit expectations of corporate action and how a company will remedy something that the FSA has identified as inadequate.
Fourthly, there is the area of danger that detained the Select Committee. What role should there be, if any, for public communication about the process that a bank is going through? That is an extraordinarily awkward matter. There is a public duty to give investors and depositors at least some information that could be material to their decision whether to continue their association with a company, but there is also the obvious desire not to make that company's circumstances a great deal worse through the public disclosure of difficulties. It would be helpful to have a much sharper focus on the step that immediately precedes special resolutions.
We need clarity of accountability about the trigger. The Bill places the job in the hands of the FSA, but with an obligation to communicate with the other elements of the tripartite authority in that process. I agree with the view that one body must take the decision; I do not like placing accountability in the hands of committees very much. One body ought to be clearly accountable for pulling the trigger on special resolution, but in the accompanying papers that I hope will be produced to allow the Public Bill Committee to consider the Bill in depth we need to design some idea of exactly how the trigger may operate and how the communication channels will be kept open.
We must bear in mind the Bank's absolute responsibility for financial stability, which is defined in the Bill—that is welcome—and the risk of regulatory forbearance. Those of us who read the FSA's internal audit report on Northern Rock would certainly hesitate to give a full-hearted endorsement of the FSA's powers in this matter. The risk of regulatory forbearance at least means that other people should be allowed to say something. He has now left the Chamber, but my right hon. Friend John McFall, the Chair of the Treasury Committee, made valuable points about that.
I do not want to repeat what my right hon. Friend said about the financial stability committee's function, but I share the view that the Bill presents a confusing picture of exactly what the committee will be supposed to do. Critically, will it be an Executive body, as the Monetary Policy Committee effectively is—the MPC has the power to raise and lower interest rates in our country—or is it a non-Executive body that is in place to advise the Governor in some respect? If so, how appropriate is it that the Governor will chair it? That issue needs to be developed, so that we have a clear understanding of how decisions will be made in that body and what it is responsible for. Without wishing to complain about individuals, all on the Treasury Committee had doubts about whether the court, in its current form and with its current membership, provides the appropriate group of people to populate the financial stability committee. Therefore, welcome suggestions have been made for radical reform of the court's numbers and, implicitly, its membership.
My view is that the committee requires a membership that is external to the UK, because it would be inappropriate for key players in the UK marketplace to be members of the financial stability committee. We can usefully gain from experience elsewhere. The Bank has its own committee, one of whose members is an ex-governor of a Swedish bank, who is almost certainly providing insights into the Scandinavian banking crisis of about 20 years ago. Having an external reference point is a useful model. I find, as others do, the Chancellor's reference to the comparison with the MPC inappropriate, given that the models are obviously, as I have said, completely different.
Finally, let me turn to the role of the Financial Services Compensation Scheme. I have said in this Chamber that I share some anxiety at politicians freeloading into taxpayer guarantees of depositors. I share the concern raised in an intervention on Dr. Cable about the moral hazard issues involved. We need to educate our citizens about their risks and responsibilities in making deposits. One thing that came through to me loud and clear in the discussion of the Northern Rock crisis was that few people had the faintest idea what level of guarantee the FSCS applied to deposits anyway. There should be a clear obligation that when one makes a deposit in a financial institution, one is crystal clear about both the level of guarantee provided by the FSCS and the terms under which it may operate. Thus, any discussion about late payments and how quickly one would get one's money back should a circumstances arise should also be explicit.
Secondly, if the coverage falls outside the FSCS in some way—for example, if one chooses to invest in an Icelandic bank through a British outlet—it should be crystal clear to the depositor what risk they are undertaking, so that they are well informed. I found shameful the absence of any proper information that banks were obliged to give to depositors as to the remaining risk, which we hope is very low, that lies with them when they agree to make a deposit. There should also be clear guidelines on the speed at which a deposit is paid back to the depositor. All of us on the Treasury Committee found unpersuasive the banking industry's arguments as to the difficulties that it would have in resolving some of the issues associated with data—for example, the number of accounts that people might hold and the conflicts between them. A clear target should be set.
I shall conclude by making three brief remarks. First, unlike in the case of the urgent actions that we have taken recently, we must ensure that the actions that we take in our legislation and regulation give the correct motivations for beneficial actions; that is the moral hazard argument. I remain a firm adherent to that, convenient though it may be for politicians to resile from it. We cannot seek to protect our citizens utterly from every aspect of their decision making—we sometimes give the impression that we can do so, and that is an extraordinarily dangerous impression to give. The design of the supervision before a special resolution regime must be focused on that goal, but so must the reform of the regulatory framework that we shall discuss in due course.
Secondly, we must prepare ourselves for a new world of much greater caution, less innovation, lower lending and lower levels of growth. Sometimes those who have heralded their prescience about the problems we face have perhaps not grasped the purchase that we had from the risks that we had taken; there was a period of extraordinary above-average growth across virtually the whole world. In these new circumstances, we must prepare ourselves for much sterner times. Innovations will be tested much more robustly before being accepted and we may well find it harder to employ all our citizens. I am delighted with the actions that the Government have taken, but I am certainly not of the view that with one leap we are free from the difficulties we face—much lies ahead of us.
Thirdly, we must carefully consider the design of the boundaries between the state and the financial sector, given this new role of active ownership to which we have committed ourselves. Obvious issues of competition must be addressed, and there are difficulties in defining what the state, which has unusual advantages in the marketplace, should be permitted to do. We are working those out by the seat of our pants. We have to work harder on the definitions, because we will have this role for some years to come. We need robust ideas, in principle, of how those definitions should work, and they should then be designed, in practice, with the sector. I share the view that the industry is crucial to the future of our country. We risk designing away one of the critical lifebloods of the UK economy—that would be an easy reaction. The Bill does not do that, but I have heard siren voices from elsewhere that would certainly achieve it. We should seek to avoid that risk.
I refer the House to my entry in the Register of Members' Interests. As people are inclined to make mischief in that area, I should probably also mention that I am a shareholder in most of the banks that have been mentioned in the course of the debate, although I am happy to say that the modesty of my shareholdings is such that they threaten neither my financial stability nor that of the banking system. It does mean that my interests are aligned with those of the taxpayer who has made a deal to take a substantial stake in various banks.
En passant, I notice that on the first day's trading the taxpayer lost £2 billion on the value of that investment. Given that I have heard, in various speeches in the past day or two, the cheery assumption that the taxpayer is bound to make a profit when withdrawing from the deal—so we should not be concerned by the staggering impact that the borrowing will have on the public finances—we should all note that shareholdings are capable of going down as well as up. It is completely uncertain as to whether we will eventually take any profit.
The Bill is obviously necessary in the current circumstances, and I shall support it in the unlikely event that anyone chooses to vote against it. The current powers that the Government have will lapse in February if we do not make progress from the Banking (Special Provisions) Act 2008, and those powers are needed to enable the Government to intervene in the manner in which they have. It is not a perfect Bill, as it does not address some of the problems with the regulatory system in this country. Once we get past the worst of the present crisis, the most important need will be to contemplate how we avoid getting into a similar crisis for many years ahead. I anticipate that a new Government will have to return to the subject and readdress, in particular, the position of the so-called tripartite regulatory arrangement and the relationship between the Treasury, the Bank and the FSA.
The Bill has been a long time coming. Like most of the Government's actions in the present financial crisis, it should have come sooner. The Government started consulting on this a long time ago. Such a Bill was obviously necessary at the time of Northern Rock, but only now—when the crisis is enormously worse than it was then—do the Government come forward with it, and most of the provisions still have to be left to a code of practice. I intend to ask questions about how the Bill is supposed to operate, and the Government should be in a position to answer them—although they do not seem able to do so. That is, of course, of a piece with their whole approach to the financial crisis and the background to it. The Government have been astonishingly complacent and negligent in taking no action whatever until the crisis began to hit us. Ministers, especially the Prime Minister and—as far as one can see—the Chancellor when he first took office, were more oblivious than most other people to the likely threats to the financial system, and hence the economy.
We are committed to a bipartisan approach to the Bill, but I shall be very irritated if Ministers criticise us every time that we are critical of anything that they say. I agree with my hon. Friend Mr. Osborne that we must return in time to the extraordinary negligence that led to Britain being one of the worst placed countries in the developed world when the tsunami—as Dr. Cable described it—actually hit us.
Does the right hon. and learned Gentleman seriously expect the House to believe that if the Government had made proposals two or three years ago to put £50 billion into buying shares in banks and to provide £400 billion of support for the banking sector, the Conservatives would have happily supported the proposal?
Two or three years ago, the Government declined all invitations to deal with the out-of-control credit bubble that was obviously affecting the country, not to mention the out-of-control housing bubble that was inevitably going to end in grief. The hon. Member for Twickenham talked of us rewriting history, and I do not want to dwell on that for too long, but we all need to establish our credit in this area. I have dug out one of my several references to the problem. In the debate on the 2006 Budget, I said that GDP growth was sustained
"on a sea of household debt, and public debt and borrowing".
I pointed out that that
"was not sustainable, and what is not sustainable always stops".—[ Hansard, 28 March 2006; Vol. 444, c. 722.]
I said that on many occasions, and more distinguished people than me said it in the House and outside, but the Government treated those predictions with disdain.
On other occasions, we will tackle the Government and especially the then Chancellor on their total negligence on dismissing the alarm calls about the mounting level of debt and the unsustainability of the growth—what was left of it—of our economy two or three years ago, and about the threats to the banking system. As we all recall, he actually took credit for it. Far from trying to restrain boom and bust—a phrase that he took from me in the first place—he led the public to believe that the top of an uncontrollable boom was the result of the remarkable economic policy over which he was presiding, and that it was spreading wealth as never before through a country that somehow had become free of the economic cycle.
Not only were the Government complacent, but the regulatory system completely failed. Some of the more excitable left-wing members of the Labour party now like to say that this issue reignites the old argument between laissez-faire capitalism and the role of the state and Government intervention. That argument has been dead not only since the birth of new Labour, but ever since the second world war. There are very few advocates of laissez-faire capitalism in this country and very few advocates of a command economy. Everybody has always accepted that the free market requires a proper system of regulation to protect stakeholders and to avoid the obvious dangers of potential financial crises of the kind that we have had on occasion ever since the Dutch tulip bubble and, more recently, after the 1929 crash.
Not only were the Government inactive during the credit bubble of recent years, the regulatory system was ineffective. The then Chancellor made a fatal error in 1997 when changing the regulatory system and moving to the tripartite arrangement that has plainly failed. The Bill acknowledges that in a way, because it proposes strengthening the powers of the Bank, and shuffling the arrangement of responsibilities between the partners. However, the Bill does not convince me.
The most obvious problem is that tripartite arrangements give rise to confusion and differences in information between the parties, and there is always the possibility of dissension—always denied thereafter—between the three institutions. The failure of the tripartite structure became clearest at the time of the Northern Rock debacle. A very good report by the Treasury Committee showed how useless the FSA had been as the lead regulator. It did nothing. There was no mystery about Northern Rock: it had a strange business model in which it relied on the money markets to give extremely generous loans. It is fashionable for Ministers to claim that the problem stemmed from the US, with the so-called sub-prime crisis causing a tsunami to fall on these fair shores where nothing of the kind was happening. We may not have called them sub-prime mortgages, but they were being granted here. There were mortgages for more than 100 per cent., lent on self-certified income at rates of six times income. Reckless banking practices included the abuse of the securitisation of such debts, by bundling them into instruments to be sold on to others so that they were taken off the balance sheet to avoid the regulatory arrangements. Such practices were all raging in this country and it was first the duty of the Government to prompt its chosen regulator, the FSA, to look into that and to consider the sustainability of the model and the likely effects if it continued.
Not only was the then Chancellor, the present Prime Minister, totally dismissive of such fears—he constantly made speeches about the lighter regulatory touch that was helping to make the City of London a financial centre in the world—but so was the FSA. As far as I can see, the FSA never even raised the telephone to Northern Rock when the first hints of the credit crunch began to enter the money markets as they started to get sticky in the beginning of 2007.
Of course. The primary responsibility lies with the banks—I agree with that—but we do not leave the fate of the nation entirely in the hands of the banks, for good and obvious reasons. We therefore have a regulator and regulations with which the banks are meant to conform. They had a silent regulator who saw nothing wrong with what was happening and the Government presided above them, taking credit for the boom conditions that were breaking out.
In my day, regulation was carried out wholly by the Bank of England. I do not think that we will ever go back to that, but it worked rather well. We had one bank that went bust—Barings—and I think that might have been why the present Prime Minister decided to change the regulatory arrangements. I have never quite worked out why he wanted to change them, but there is no protection against a deliberate fraud when the management of the bank are ignorant of what is being done in Singapore by a fraudulent employee.
The Bank intimately knew the banking system and took its regulatory processes extremely seriously. The only explanation that I have heard from the then Chancellor's friends is that he thought that he would make the Bank too powerful if he made it independent on monetary policy while allowing it to keep its regulatory duties. I do not understand that, but he set up the new arrangement and so far, plainly, it has not worked.
The Bill tries to address that problem and that is welcome, so far as it goes. At last, a statutory footing is at least given to the Bank of England's responsibility for financial stability. That is a very vague phrase and giving the role a statutory form does not alter present practice, although it gives a vague overall responsibility to the Bank, which is also given statutory immunity when it exercises that responsibility. That is all well and good, but the Bill also gives the Bank a responsibility to execute the new regime—the special resolution regime—in which alternative paths can be followed to step in when a bank fails to ensure that it does not threaten the system and is kept trading. That is going on now.
Although the Bank is given a role in the regime, whether the regime is triggered is dependent on the opinion of the FSA. The Chancellor has said that the system works quite well and that the system set up in the 1998 legislation has led to a clear division of responsibilities between the various players. I do not believe that it has. I have not been intimate to the discussions but along with 60 million others I can see with the evidence of my eyes that the system has not worked at all. I can see that when I read the newspapers and could have seen it in my bank balance had I happened to have had an at-risk deposit with an Icelandic bank—I have not been so unfortunate.
To go back to the example of Northern Rock, it was quite obvious at the time that the three parties to the tripartite arrangement did not agree. They were shovelling blame on to each other at various times and had totally different approaches to what exactly to do in the short term. I said this at the time, so I shall not repeat it too much, but in the middle of it all the Government did not have the first idea of what to do. Now, they are taking the credit for taking the lead in solving the global crisis—that is, in how to deal with the insolvent banks.
I am sorry, but I do not have the time.
Other features of the Bill prompt the question of whether things are really moving. The Bank can now access the information that it needs for its role from the banking system, but it has to get all that information from the FSA—the FSA is given the power to share information with the Bank, and it is astonishing that it has not had that power for the past 10 years. We are putting in place a potential shambles, with which a new Government will have to deal.
I have no time to cover any other major points, but I want to conclude with one of them. We are dealing with the part-nationalisation of banks and we are in the extraordinary situation where we are about to take into public ownership a substantial part of the banking system. Ministers should therefore explain on what basis the Government will conduct their relationship with part-nationalised banks. My hon. Friend Mr. Tyrie raised that point earlier.
Yesterday, we heard vague remarks about an arm's length arrangement for managing the shareholding and appointing the directors. There are serious worries about how we will work with nationalised banks, and that is why the taxpayer lost £2 billion in the markets yesterday. The only banks that went down on the markets were those that had been given the privilege of a Government investment. Why? The Government have not really explained why they have made such a move.
The Government will appoint directors, which they did not seem to be thinking of doing last week when they first outlined their proposals. They will take ordinary shares, not just non-voting preference shares, as we were first told. There are also astonishing apparent targets for levels of mortgage lending and small business borrowing, which are quite inappropriate and will distort the markets if they are imposed. There is the whole question of why Lloyds TSB is still taking over HBOS, which would never have been permitted under the previous competition rules. Apparently, now that the bank is publicly owned it does not matter that it will have a dominant market share that two private banks would not have been allowed to amalgamate to obtain.
Will the Government have a view on jobs in Scotland when the banks are rationalising their arrangements? Will the Government have a view on a bit of pork-barrel lending in the run-up to the election? They have to satisfy us that that is not true, but they cannot tell us what the mechanisms will be to prevent such activity.
There are serious problems with the Bill. We are supporting it on an all-party basis because there is a pistol pointed at the nation's head and these powers are required. The Government will need to answer more questions, including questions about their record, before we are happy.
To listen to the distinguished former Chancellor, Mr. Clarke, one would never realise that the debate springs from the failures of market forces and uninhibited competition in this sphere worldwide. The results of the failure are that fanatical advocates of free markets and people who usually denounce public spending and Government intervention have come cap in hand to the Government to ask to be bailed out by the British taxpayer. In other words, some bankers have become the new scroungers and we should recognise them for what they are.
I welcome the Bill, which is a second instalment in the attempts to deal with the crisis. The first was the Banking (Special Provisions) Bill, which I remind the House that the Tories opposed. Mr. Osborne, urging us to oppose that Bill, commended the views of the British Bankers Association, which wanted the powers to exist not for a year but simply for a month. Had we taken that short-sighted advice, the Government would have been unable to take the measures to sustain the banking industry and consequently the British economy that they have taken—in taking such measures, the Government have set an example to other countries round the world.
We need further instalments beyond the Banking Bill, because it deals with a limited sphere. The people of this country always seek security: in their homes, for their jobs and for their pensions. In recent times, they have seen all of those imperilled by grasping, greedy, arrogant and stupid bankers.
No, as I need to get on. The actions of banks, finance houses and the related organisations that prop them up were made possible by the Tory deregulation initiated by Reagan and Thatcher. A lack of transparency that is a probable product of that deregulation has compounded the difficulties by in effect promoting the obscurity of dealings in the financial sphere. Above all, deregulation has promoted a system based on debt.
I am grateful to the right hon. Gentleman. The directors of Northern Rock said in the company's 2007 report and accounts that they needed to reduce capital and increase lending to get in line with regulatory requirements. How does he account for that? What does it tell us about the regulations?
It says that the directors were as daft as brushes, but we knew that already, before the right hon. Gentleman asked his question.
We have also seen, as a result of deregulation, the development of hedge funds, the increased involvement of private equity and the further promotion of tax havens so that rich people can get out of paying tax. If there is to be a new Bretton Woods agreement, I hope that it will clamp down on the minor tax havens around the world that have allowed rich people to rob everyone else.
The banks have carried out what they portrayed as sophisticated financial transactions. Time and again, their representatives went on television and radio and gave the impression that what they were doing was too complex for the average viewer or listener to comprehend its wonders. They were constantly announcing new products—ever more obscure and nearly always involving debt piled on debt. Those products were all dependent on inter-bank transactions so complex that several members of the boards of directors of the companies involved now say that they did not understand what was going on. Apparently the only thing that they understood was the whacking great cheque that came in at the end of each year to thank them for not understanding what their banks were doing. They apparently could not distinguish between assets and liabilities, and a banker who cannot do that has not got to first base in banking.
We have also had things like off-balance sheet transactions, and so on. There has been a feeling recently that the problem really had to do with mortgages extended to a few badly off individuals, but in fact most of it springs from what might be described as the wholesale, rather than the retail, end of the business, and from transactions between one bank and another.
I had better move on from talking just about the banks, because then we have the auditors. There are supposed to be auditors, but what were they doing? What were the auditors of Northern Rock, Bradford & Bingley and the Royal Bank of Scotland doing? They were clearly not doing their job, but they were paid a fortune for not spotting that there was anything wrong. We need a regulatory system that will do something about that. Anyone who has been damaged by the auditors' failure should get ready to mount a class action and sue them. The auditors ought not to be allowed to fail, to let people down and cause them to lose money.
Then there are the rating agencies. Until about six months ago, a chap from Standard & Poor would come on television and radio and lay down the law to the rest of us about the wonders and risks of this, that and the other. Now we discover that the rating agencies were giving AAA ratings to pieces of paper that were not worthless—they were worse than worthless. That is what the rating agencies were doing, so we need new and tough regulation. I believe that the regulations need to be laid down by law that is passed by this House. I do not think we can leave the determination of the regulations to the regulators. Their job should be to enforce rules, not make them up.
As we all know, the major problem at the moment is that the banks do not trust one another. The deliberate obscurity of their accounts means that some cannot fathom even the extent of their own exposure, let alone that of other banks. If the banks cannot trust one another, there is no reason why the British people should trust them.
Some of us have talked in the past about tougher regulation of the City of London, but we have been told, "Oh, you mustn't over-regulate, it would inhibit innovation." Well, we can see where innovation has got us, but the Spanish banking industry, which is not immune to the world's problems and which has what might be described as a little local difficulty over its own housing situation, did not get involved in US sub-prime mortgages. That is because the Spanish banking laws—what might be described as the new Spanish customs—prevented them from doing so. In fact, Spanish banks were subject to the sort of counter-cyclical regime described by Dr. Cable, and that was because there were regulations in place. No one can say that those regulations stifled initiative: if they had, the useless people running British banks and building societies would not have seen them taken over by Banco Santander. That bank was not restricted by any of the regulations, even though the Tories normally used to call them "stifling" when some of us advocated them.
If regulations had stifled some of the enterprise that we have seen, I frankly believe that that would have been all to the good. Some of that enterprise—and its "new products"—has been the cause of all the problems that we now face, and is the sort of enterprise that we ought to stifle.
I come now to pay and bonuses. Even without the bonuses, the pay of some fat cats in the banking industry is at ludicrous levels. Barts hospital is in the City of London. If we asked people in this country in an opinion poll who should be paid more, a cardiac or cancer surgeon at Barts hospital or someone running a bank, I think that the ones doing the operations would probably get the nod.
As for bonuses, why did those overpaid people need them? Most people do their jobs to the best of their ability for a rate of pay. Why do bankers need bonuses in order to put their backs into their work? Surgeons and teachers do not get bonuses. Firefighters, police and research scientists work properly without bonuses, so what is wrong with the bankers? They are obviously so ethically degenerate that they cannot work without getting a bonus. Most of them are a deplorable lot of people, so why should they get a bonus at all?
They certainly should not get bonuses that are based on short-term targets and handed over long before the real consequences of their decisions become known. I want to put a suggestion to my hon. Friend the Economic Secretary, who is on the Front Bench at the moment, and to the Chancellor. It is that any bank receiving public money should be treated as part of the public sector, with public sector pay and conditions applying. On a bad day, I think that bankers' pay should be determined by the Low Pay Commission.
We all know now the long-term consequences of the scandalous and ridiculous activity in the banking industry. The failures of the banking industry start off by causing a run on share prices. Then the hysterics in stock exchanges around the world drag prices down even further for fear of a recession which everyone agrees has been caused by the banking failures in the first place.
Of course, the share price falls—I take the Financial Times as evidence for this—have been worst among those firms and industries most popular with hedge funds and least where there has been no hedge fund involvement. As various parts of the finance industry try to sort out their debts and assets, the private equity buy-outs based on heavy borrowing are becoming yet more heavily affected. That is what happens when deregulated, free-market, profiteering people get us into a mess.
It seems to me that there is every possibility that we will go into a recession, so I ask everyone to look forward to how we should deal with it. We can do no better than look at the works of that great economist John Maynard Keynes, who started getting things right in 1920. It took the politicians about 15 years before they got a grip of what he was saying and started doing something about it. He advocated investment, which increased employment by means which at the same time increased our stock of useful wealth. He pointed out that, if a recession is coming, that is the last time in a cycle one should try to reduce spending because if we all stopped spending, we would all be out of work. If we want to keep people in work, we should encourage people to spend.
In his great general theory, Keynes pointed out that the Egyptians built pyramids, and that created work, and medieval Europe built cathedrals, and that created work. As he said, we appear to
"have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the 'financial' burdens of posterity by building them houses to live in."
The Government need to bear it in mind that, whatever people from the City crawling back out of their holes say once they have got the money, we need to keep money going into the system. If we have to borrow to do it, we should borrow, to make sure that we do not go into recession and that people stay in work. It is no good messing around and taking four or five years to realise that we have to keep the economy up. The way to keep the economy up is by spending money; it is the only way to do it.
I remind the House of my interests stipulated in the register.
It is rather exhilarating to hear the authentic voice of old Labour ringing out once again from Frank Dobson. In welcoming the Bill, which strengthens banking, I want to pick up one point that the right hon. Gentleman made. As my right hon. and learned Friend Mr. Clarke said, there has never been a free market in banking. None of the deregulatory measures taken in the past 10 or 20 years has given us an unregulated banking system. To suggest, as not only the right hon. Member for Holborn and St. Pancras but others have done, that somehow Ronald Reagan or Margaret Thatcher so deregulated the banking system that they brought us to this crisis is nonsense. On the contrary, banking is the essential prerequisite of all our markets. It is the clean water in the financial system. Of course, we have an interest in ensuring that it continues to be something on which we can rely. We have to have banks that we can trust; we have to have banks that can trust each other. Over the past year we have clearly had neither.
One does not have to be Michael Heseltine to understand that if banks are not working, the authorities have to intervene. I support the intervention that there has been. Indeed, if banks have been significantly illiquid over the past year, if they have been seriously under-capitalised, the regulator—the Financial Services Authority—ought to have intervened much earlier. That of course is the fault of the supervisory system set up by the Government of the right hon. Member for Holborn and St. Pancras back in 1997. It separated the responsibilities disastrously, and fatally left no one in overall charge.
I fear that some of the measures taken by the Government last Wednesday and yesterday may not go far enough. The package is necessary, but it may not yet be sufficient. It does not, for example, deal with some of the toxicity that remains in the system. We may yet have to deal with it. I want to focus in the context of the Bill on the measures taken to recapitalise the system.
The decision taken to inject taxpayer equity has some real dangers. When government plays God with the markets, there is a serious risk, as my hon. Friend Mr. Maples said, of creating inequity. It is extremely important not to repeat the mistakes of the United States authorities in deciding to rescue Bear Stearns and not to rescue Lehman's. If we are going to rescue banks with public money, we need to do so on the basis of some clearly established principles.
At the moment, we have reached the position in which, of our 10 UK banks with significant numbers of retail customers, we have rescued five, with four different solutions. That is regrettable. It leaves the market completely uncertain as to what will happen when the next bank needs to be rescued; it may be rescued on different terms yet again. It makes it more difficult, I suspect, to raise capital and equity for other businesses. It leaves us with a very real prospect that those banks that are fully public now will be pressed into the service of extending borrowing on a non-commercial basis to other industries that are in difficulty and, crucially, it reduces competition and choice.
I was struck by the impact assessment published with the Bill. The only section that does not contain the required commentary on competition is the one on page 26 that deals with temporary public ownership. As others have said before me tonight, there is simply no competition policy. Yet competition is important. It has given us a huge range of savings products, borrowing products and mortgages over the past few years. It is easy with hindsight to scoff at the innovation of the City, but that innovation helped to bring asset ownership and wealth accumulation to a much wider section of the population than ever enjoyed them before.
The right hon. Member for Holborn and St. Pancras has to be careful about his partisan remarks about Reagan and Thatcher. It was Democrat congressmen in the United States who berated Fannie Mae and Freddie Mac for not doing enough to lend in the sub-prime market, and who encouraged more such lending through the Community Reinvestment Act. Here, too, we heard a chorus from the Labour Benches that we ought to be doing more for social inclusion, and that the banks should be lending more and more, irrespective of credit history and family background to encourage more people into home ownership. They did so—probably the right hon. Gentleman would welcome that—but, fatally, without satisfactory supervision and a sufficient regulatory structure and without providing the commensurate financial education to enable people to distinguish between products that were high, medium and low-risk.
I want to mention briefly three aspects of the Bill. The special resolution procedure is important. Clearly, it is a nuclear power. We hope that it will never have to be used again. The problem with what the Government have proposed in several different drafts and finally in the Bill, as the Select Committee has pointed out, is the peripheral role that is still given to the Governor of the Bank of England. That is wrong. I understand why my hon. Friends on the Front Bench have suspended hostilities on that point in the national interest, but I do not see how we can ever again mount an effective rescue operation unless we restore the Governor of the Bank of England's authority and right to give advice, and ensure that the Bank has the working knowledge of the money markets that it used to have. That is absolutely essential, and I hope that we will be able to return to such a situation.
The measure on depositor protection is long overdue. I do not see why measures to improve depositor protection could not have been introduced immediately after we returned from the summer recess last year, after the crisis in Northern Rock. I am suspicious of the argument that it would take 14 or seven days to return people's deposits, that some vast new computer machinery would be needed, and that such measures would all be too difficult for the banks. When the Treasury Committee was in Tokyo last week, we were told by a representative from the deposit guarantee fund there that if a bank closes on a Friday, all individual accounts are frozen, and people can go in on Monday morning and recover their deposits, up to the prescribed limit. I urge the Government to look again at the banks' rather feeble argument that that would take weeks or months to sort out. On the contrary, we need a much faster and much more transparent scheme. I would like to see notices placed in all bank branches reassuring people of the amount of protection to which they are entitled, and how they can claim it, as happens in the United States.
Finally, there is the issue of pre and post-funding. I have to say that I disagree somewhat with my right hon. and hon. Friends on the Front Bench on this subject. It is important to bind all the banks into the compensation scheme. Of course it is wholly the wrong time to approach banks and ask them to cough up, although it will never be exactly the right time to do so. However, the principle is important. There is no harm at all in putting the relevant provisions in the legislation, and getting banks used to the idea. The British Bankers Association has produced a particularly feeble submission on the subject. It is four pages long, and I cannot find the word "sorry" in it anywhere. The BBA says, "Well, the strong banks shouldn't have to bail out the weak." Strong banks should have to bail out the weak; that is what happens in other sectors. It is important that all banks make their contribution, but I fully understand why they cannot do so at the moment.
The Bill should be supported tonight, and I think that it will help. However, it will not repair the damage that has been done to our economy, our constituents and the City of London by irresponsible lending, imprudent borrowing and wholly incompetent regulation. The Government are right to legislate, but they cannot wholly escape their responsibility.
When the Chancellor took an intervention from me at the start of this debate, he was kind enough to remind the House that I am an Edinburgh MP, as he is. I make no apologies for the fact that my starting point in this speech, as in the speech that I made during the discussions held last week, is the interests of the many thousands of my constituents who are directly employed by some of the banks affected, and the many thousands more in Edinburgh and the surrounding areas who are indirectly affected because of the nature of their employment. The other Edinburgh MPs and I probably represent a greater concentration of people affected by the situation than MPs representing any other area in the country. Obviously, we are all extremely concerned about future employment in our city, as well as in the country as a whole.
It is worth emphasising that the picture is not all bad by any means, even in the financial services sector, whether in Edinburgh or elsewhere. In Edinburgh, there are many thousands working in insurance, or working for banks other than those concerned and for other businesses in the financial sector. The strengths that led companies to establish headquarters in Edinburgh and elsewhere in Scotland are still there, and can be built on in future strategies to retain existing jobs and attract new employment.
Nevertheless, there are undoubtedly a lot of worried people in Edinburgh and elsewhere, including my constituents, and it is important that we do what we can to provide them with reassurance based on an understanding and belief that we are going in the right direction. Clearly, I support the Bill and the measures that were taken last week, and one of the advantages of both is that they provide an opportunity to address problems on a longer-term basis. They remove the risk of a sudden fire sale of one of the major banks based in Edinburgh; obviously, that could quickly have a serious effect on jobs in that city. Of course, people still have understandable concerns about where they will be financially in a few months' or years' time—about what their job prospects will be, and about what that will mean for their standard of living. That is clearly an issue of concern to me, and to all Members across the country who are in a similar situation.
I want to highlight an issue that I mentioned in debate last week. Unfortunately, my right hon. Friend the Financial Secretary to the Treasury was unable to respond to my question on the subject when he replied to that debate. When conditions are set, and when negotiations take place between the Government, the regulators and the banks that will receive assistance, what kind of consideration will be given to those who work in the industry, whether in Edinburgh, Halifax or the City of London? Not everyone employed in the City of London is a fat cat, and those people need to be remembered, too.
I want to reassure hon. Members on either side of the Chamber who might think that I am suggesting detailed regulation of the employment practices of the banks in which the Government have taken a major share. I am not suggesting that; it would clearly be ridiculous and have a number of damaging consequences, not least for the banks. If, however, we are to take account of the need to provide continuing finance for the mortgage market and for small businesses—I support that—it is fair to take account, too, of the interests of those who work in the industry. The Government should recognise that, and try to raise the issue in discussions in the coming days, weeks and months.
I accept that that raises the wider issue of how the Government will respond to pressure to intervene in more and more ways in how the banks in which they have a major stake operate. I do not, at this stage, want to suggest the kind of relationship that should exist, but the question highlights the fact that it is important to address the issue—not now, but sooner rather than later—of exactly what this period of partial nationalisation means for the way in which the banking sector will operate. I am thinking particularly of the banks in which the Government will have a major stake. The Government will come under all kinds of pressure to respond to particular actions taken by those banks.
The Government would do themselves a lot of good if they set the ground rules fairly early on. We would then know what might happen during the period—a lengthy period, I suspect—in which the Government have a substantial stake in the banking industry. Like my right hon. Friend the Chancellor, I certainly hope that there will not be a high level of involvement for as long a time as some people might suggest, but it will certainly be a substantial involvement for some time to come.
That highlights the need to address, not now but fairly soon, the more general question of the strategy for the UK's entire banking sector. What are we going to do under the new state of affairs? Where do we see things going in the years ahead? A number of hon. Members have already highlighted the questions that are raised by the prospect of banking activity being concentrated in ever fewer banks. The issue of consumer interest has been raised, and the reduction in competition. Again, in Scotland, at least in the short to medium term, the vast majority of banking provision is likely to be in the hands of banks on which the state has a major impact. That will apply in other parts of the country, too.
What about the issue of stability in future? What happens if, some years hence, there are fewer but larger banks, and there is a threat to one of them? How do we react to that situation? These are real issues that need to be addressed and thought about so that a strategy can be worked through.
What is the role of the mutual sector? There is concern that what is happening now may lead to pressures and further diminution of the mutual sector. This is the time to promote the sector and encourage it to grow and expand. Why, for example, does it seem to be assumed that Northern Rock will gradually be run down and sold off in its entirety? Why not use that as a basis for re-establishing Northern Rock as a mutual—a building society—solidly based in north-east England, with the remit to provide an opportunity for people to save and buy houses on a sensible basis?
The same could be said of Scotland. I do not believe that those who suggest that the HBOS-Lloyds TSB merger should not go ahead are doing the interests of Scotland any good at all. Even the speculation over the past day or so about that arrangement highlights what would probably happen if that deal were to fall by the wayside. There would be severe consequences for HBOS if the deal were to collapse, so it is important that it should go ahead.
In the long term, what are the possibilities of creating some separate Scottish institution to deal with the building society end of business, so to speak? Perhaps TSB could be resurrected as a separate mutual from parts of businesses that were brought together under HBOS-Lloyds TSB, with similar arrangements for other parts of the country. Such thinking may seem radical, but after the past few days all options, solutions and new directions should be on the agenda. Challenges can also be opportunities, and there are certainly plenty of opportunities, and plenty of challenges, to do some new thinking and to come up with solutions that may not have been conceivable a few weeks ago but which we can now discuss as a means of addressing some of the wider economic needs of the country, as well as the short-term emergency situation in which the Government have rightly intervened.
Finally, I shall say a few words about international agreements, the talk about a new Bretton Woods, and new international arrangements to stabilise financial markets across the world. That is essential. I recognise and welcome the steps taken by the Prime Minister and the Chancellor. It is sad that we have not had even grudging acknowledgement of that from those on the Opposition Front Benches. Instead, we have heard attempts to do down what has been achieved. The fact that at last over the past few days the world has moved to stabilise the situation, we hope, is in no small part due to the leadership shown by the UK Government and by the Prime Minister and the Chancellor in particular.
Let us not forget other international agreements, discussions and arrangements that are not going forward so quickly or so apparently successfully—the agreements on international debt relief and on international aid, on which the United Kingdom has taken the lead and has been complying with its commitments, whereas other countries have been falling behind in carrying out what they said they would do in agreements made over the past few years.
Let us not allow the interests and concerns of some of the poorest in the world to be forgotten in the discussions and debates about the international financial system. Those are the people who would lose more than any of us from the type of collapse that we hope has been prevented. They are the people who could lose out because of a failure to meet the commitments entered into a few years ago. Let us make sure that those international agreements are also kept on the agenda, as well as the arrangements and agreements needed to stabilise the financial sector.
Mark Lazarowicz makes some interesting points about international institutions. We have the Bank for International Settlements and the IMF. I hope that whatever additional role is needed can be found through them, rather than by inventing new institutions. It is a matter not of institutions but of political will to solve these problems. That is what we have seen in Europe. The political will was not there two weeks ago, but it has been there this week and people have done things. It was not the lack of another ECOFIN or European Central Bank that led to the delay. It is a matter of political will and those institutions should be built on.
I have supported the package of recapitalisation and liquidity measures that the Government have taken. Perhaps they could have got away with doing a little less if they had done it a little sooner, but that is easy to say now. They have done the right thing, but I would be grateful if the Minister would comment on one aspect.
I raised with the Chancellor yesterday the fact that the Government are saying, on the one hand that, despite their shareholding, they will let the banks be run on an arm's length commercial basis and, on the other, that the banks must immediately restore mortgage and small business lending to 2007 levels. That is contradictory and potentially dangerous. It was the 2007 levels of mortgage and small business lending that got us into this trouble in the first place. That was the peak in broad money supply growth. It was growing at 13 per cent. a year in 2007. Perhaps I am the only monetarist left in this place, although I expect my right hon. Friend Mr. Redwood is one, too. There may still be a few of us who think that there is some connection between money supply and inflation, as was shown by the figures in 2007. To go back to that seems dangerous.
The housing market will have to adjust to the problem. That may be painful for some people, though it will be a wonderful opportunity for first-time buyers. For every winner, there is a loser, but the idea that, by taking the steps proposed, we can prop up the housing market at no cost in terms of inflation or future problems is a mistake.
Between 1997 and 2008 total personal borrowing trebled. It grew at 10 per cent. compound, about the same rate at which the money supply grew—those are very similar measures—and it all wound up in housing values. Housing prices tripled in that period as well. That released money for people to spend improving their standard of living and their consumption, but the Bank of England failed to control that. I shall return to the point, because one of the failures was in the Bank of England during that period. I urge the Government not to insist on returning to 2007 levels of lending in those areas. There may not even be enough borrowers to take up that lending.
In an intervention on Dr. Cable, I made a point about deposit protection. We are in an extraordinary situation in which there is a series of banks—six or seven of them, three of which have big Government shareholdings and the rest of which are too big to fail—in which the Government would have guaranteed the depositors in any circumstances, and another group in which the same level of protection is now afforded, at least up to £50,000. At one level, one could say that there is unfair competition because the group of big banks have a Government guarantee behind them, but I am worried about the moral hazard point.
I have been staggered by the number of constituents and friends who had money in Northern Rock or Icesave—banks which I am sure they had never heard of. I had not heard of Icesave until about a year ago. Perhaps that is my ignorance, but I suspect that those friends of mine who had money in Northern Rock had not heard of that 10 years ago. People were prepared to risk their life savings for half a per cent. That was a big mistake on their part. If we protect them from that, we will pay the price of more and more money going into institutions that are taking higher and higher risks. That is how they earn the extra money to pay the extra interest.
When these extraordinary times are over, depositors will have to bear part of the risk of their own choices. In the past, they would have got the first £2,000 back and 90 per cent. of the next £33,000. Obviously the £2,000 was to save the administrative hassle of having to knock a couple of hundred pounds or a hundred pounds off what people were paid back. However, at the £50,000 level, there must be some risk, and 10 per cent. seems not unreasonable. People may need to be educated about this. At present they take no risk at all. The risk has been passed on to the rest of us and, essentially, passed on to the taxpayer.
I have some sympathy with the hon. Gentleman's point of view, but is it not the case that if somebody had checked up on some of those products on the internet, they would have discovered that Standard & Poor gave them a triple A-plus rating. It is noticeable that Standard & Poor advised Northern Rock on the formulation of a particular product and then—surprise, surprise—gave it a triple A rating.
The right hon. Gentleman makes a fair point. The only point that I am making is that if in future the taxpayer or all of us collectively through a deposit insurance scheme are to pick up the costs, people cannot be left free of the consequences of choosing the more risky investment. Whether it is triple A or double A, most would recognise that depositing money with Lloyds bank—at least I hope so in my case—is a slightly safer bet than depositing it with Icesave. Perhaps I am about to get a rude shock.
No, I have made my point on that and I want to move on to bank regulation, which is really what the Bill is about and where the failures have been.
The fact that the Government have had to underwrite the system in the way that they have and put in unprecedented sums of public money will, I am sure, lead to much tougher regulation. I hope that that regulation will be really intelligent, but I suspect that the Americans will make this mistake too. We do not want to put London in a position where we drive financial services business away. It is still a big industry and not everyone has been at fault here. Not everyone has been a greedy spiv. There are plenty of people in the City doing very ordinary jobs as secretaries, receptionists and computer programmers, and they will lose their jobs too. We need to protect the industry by regulating it intelligently. I do not know whether the regulation should be light touch or heavy touch, but in our search for the solution to this crisis, we should not lay up such problems.
I want to identify a couple of mistakes. First, it was a mistake to downgrade the role of the Bank of England. That point has been made by Opposition Front-Bench spokesmen extremely well. It was operating in the markets the whole time. It was operating in the bond markets, the foreign currency markets and the money markets. It understands what is happening there in a way that I do not think the FSA ever has. Secondly, the FSA brought together a series of regulatory organisations with a preponderance of interest in the consumer. That is absolutely right; the retail consumer needs to be protected, but the culture of the FSA has been about protecting the retail consumer, depositor, investor or pension fund holder, and it has not concentrated sufficiently on, or understood sufficiently, the money markets in the way that the Bank of England does.
I was in favour at one time of going back to where we were and giving all this power back to the Bank of England, but the difficulty of that is that the counter-party risk in securities houses now is so great that it can bring down banks as well, so it probably does require the securities regulator, the FSA, to be involved. I hope that the new system will give the Bank of England not just an additional enhanced power, but the primary role in this. The problem with tripartite regulation is that everyone thinks that somebody else is doing it. That is pretty clearly what happened here. Everyone's eye was off the ball until a few months ago. It would probably be best if the Bank of England had the lead role in this.
Warren Buffett, who is my capitalist guru to put up against the interventionist guru of my right hon. Friend the shadow spokesman, said that bankers seem to have spent the last 10 years inventing a whole new series of ways of losing money, which was completely unnecessary because the old ways were working fine. We will have a credit crisis every so often. There is a credit cycle, but the important thing is that if the monetary and regulatory authorities get a grip on that and do not let the money supply get out of control and raise capital requirements as risks increase, we can ameliorate this and not end up with the crisis that we are in at the moment.
The next crisis will be different. Each one is different and the next one will be caused by something else. In trying to ensure that this one does not happen again, let us not take our eye off the more general ball of what is important, which is that banks maintain adequate capital and that the authorities do not allow the money supply to grow too fast.
Those points have been made by many who have spoken, but I want to make a couple of others. I have a list of culprits and first, in ascending order of culpability, I perhaps put myself and some of my colleagues, because I noticed too late that this was happening. I used to follow this subject the whole time and I like to think that if I had not moved off to worrying about foreign affairs more, I would have noticed what was happening. But the fact is that until the Northern Rock fiasco, I did not realise how bad this problem was likely to get, and I think that goes for some of us, though not others, particularly on the Treasury Committee, who have flagged up some of the dangers.
Secondly, for every reckless lender, there was a reckless borrower, and people must take some responsibility for their own actions, not just in deposits but in what they borrow and being confident that they can afford to do that. They were, of course, encouraged to do so by people who were a lot more sophisticated than they were, and some innocent borrowers are paying the price for that.
My third culprit in ascending order of culpability is the Bank of England for allowing broad money to grow so fast and reducing interest rates while it was doing so, and then being surprised that inflation on the retail prices index had risen to 5 per cent. I do not believe that it is all due to the oil price, because when the price of one commodity rises, people have less money to spend on something else. It may alter the index, but it does not alter inflation—if one, like me, is still a monetarist. Therefore, the Bank of England has some pretty serious questions to answer. The only role it really has at the moment is inflation and monetary policy, and its eye has been a bit off the ball there. It happened in the mid-1980s when we had an excuse, which was that the market had been deregulated at the point and the authorities thought that there was a one-off adjustment in people's willingness to carry debt, which there probably was, but it still resulted in inflation towards the end of the 1980s and partly caused the stock market crash of 1987. So the Bank has plenty of history to draw on here so that it does not make the same mistakes again.
My fourth culprit—now we are getting to the serious culprits—is the FSA. It has been asleep at the wheel or on the bridge, whatever metaphor one wants to use. It is extraordinary to me that the Government have not insisted on any resignations from the FSA over this. It is a total, comprehensive and abject failure of regulation that this crisis was allowed to get as bad as it did. I am not saying that people should have spotted three or four years ago that this would happen, but should they have done so one or two years ago? Very little, if anything at all, seems to have been done during that period by the regulators.
My fifth culprit—we are now getting to those who are seriously involved—is the banks themselves. What they have been up to is reckless and irresponsible, and bankers are supposed to be extraordinarily intelligent people, who are paid very large amounts of money to run our affairs. The Government seem to have had to insist upon the resignations of the three executives who announced their resignations yesterday. I notice that they did not do so voluntarily. I do not know whether anyone saw the pictures on television of the board of a Japanese insurance company that went bust about two weeks ago, but the board announced what had happened, took full blame, and bowed in sorrow, shame and apology. There seems to be no shame on the part of those who have been happy to be paid huge sums. The chairman of HBOS was paid £750,000 a year—and the same applies to the Royal Bank of Scotland—and the chief executives were paid £2 million and £4 million respectively. Is there no sense of honour any more?
I know that people do not resign very often, and perhaps that goes for politicians as much as bankers. They cannot have seen that they made the most horrendous mistakes and that they owe the rest of us an apology in at least resigning, and not being forced to go. However, one cannot just blame them because they have had supine boards of directors who clearly did not understand what was going on. The good and great names of the Scottish establishment are all over the Royal Bank of Scotland's board, and of the English establishment all over one or two of the others as well. Where were they, and where were the shareholders? Why were not the shareholders saying something about this? It is not just the fault of the executives; they were allowed to get away with this by their boards of directors and shareholders. However, they must bear the lion's share of the blame.
Usually one would not worry too much if a private sector company, even a big one, got into serious difficulties. The shareholders would lose some money and it would be restructured and recapitalised. The problem with banks is that they can suck the economy down with them too. That is why they have a special responsibility to the community that they serve, not just to look after their own affairs, but when they get things wrong there should be the understanding that they endanger the whole economy as well.
Now we come to the Government, and I am afraid that the bipartisan chorus of the last few weeks has been because the Government have had a huge crisis on their hands and have had to find a solution. I believe that in the circumstances they have found the right solution. We will see whether it works. I am not sure what else they could have done, except perhaps, as I said, do it a little sooner. The Chancellor of the Exchequer has been in office for 15 months. Northern Rock was more than a year ago, and that was a year in which far more could have been done to put right some of the faults in the system.
But the person who has been there for 11 years and who is really responsible for most of what has gone wrong is the Prime Minister. It was he who changed the regulatory system to put the FSA in charge with this tripartite arrangement and took the Bank of England very specifically out of it because he thought that it would be too powerful if it had monetary policy and bank oversight as well. He presided over the debt-fuelled boom of the past 11 years that has been criticised for several years. He is the person who let public spending rip in a way that fuelled that boom. He is the person who ran public sector fiscal deficits at the height of the boom at a point when we should have been running surpluses so that now the Government would have more room to adjust to the recession in the way that they usually would in a Keynesian sense. Now they have to do so by racking up even more borrowing on top of borrowing in good times. He is the person who, having given the Bank monetary independence and the FSA responsibility for bank regulation, failed to monitor what they were doing.
No, I want to finish my point.
The money supply was growing at 11, 12, 13 per cent. when the Prime Minister was Chancellor. I do not know whether he made any phone calls about it to the Governor of the Bank of England, but he certainly should have done. In the arguments over the Governor's reappointment, that is something that he should have been doing. He has watched the FSA, with the supine attitude that it seems to have had to practically everything that has happened on its watch—an authority that clearly did not have the expertise to regulate the banking system. It seems that everybody could see a crunch of some sort coming, except the former Chancellor.
No, I shall not give way; I want to finish my remarks.
The Prime Minister tends to seek refuge in the notion that the crisis is all the fault of the United States, but the United Kingdom banking system was and is his responsibility. Yesterday, he made an interesting speech to Reuters. Anyone reading it would think that it had been made by some visiting consultant who had been hired a couple of weeks ago to tell us what was wrong with the system. The speech was about all the things that are wrong and all the things that we should do to put them right. Why did he not recognise those things two or three years ago? Why has he not been doing those things?
We use the fire analogy a lot. The Prime Minister is like the watchman at the office building. He watches an increasing number of all sorts of people whom he has never seen before—some of them looking pretty dodgy—going in and out. Then he watches people taking petrol in, then somebody who takes matches in and when the building goes up in flames, he expects our gratitude for phoning the fire brigade. The Prime Minister was responsible for the system when it imploded and he expects our gratitude for having cobbled together a solution to it. When the banking element of this crisis is behind us and it emerges as what I believe will be an 18-month to two-year recession, people will remember that this Government presided over the ingredients of that recession.
It is a pleasure to follow Mr. Maples. I have heard him make similar speeches about how individuals should take responsibility to manage risk. He has given the same treatise about moral hazard before, and I know that he is not comfortable with the full, all-deposit guarantee. I understand his point when it is applied to normal circumstances, and I would agree with him in normal circumstances.
However, the economic climate is very unusual at the moment. Obviously, we welcome the increase in the deposit guarantee to £50,000, although we would have liked it to have gone much further. With the increase came the argument that the guarantee covered 98 per cent. of all depositors, which is absolutely true; the problem is that it goes nowhere near covering 98 per cent. of all deposits. That is why local authorities, charities and pension funds have huge exposure if they put part of their money into some of the banks and schemes.
Icesave was used as an example. I am aware of one organisation that put a substantial amount into one of the Icelandic banks. It did not simply look up the website and send a cheque. It checked not with one credit agency, but all three; it did all the due diligence that it could, and it still might get stung. When we get to the stage of considering regulation more generally, rather than the narrow but important element in the Bill, the Government should consider how the credit rating agencies work, and the agencies' transparency and fee structures. I do not mean to be over-critical, but something has gone seriously wrong when people depend on credit ratings that turn out to be wholly false.
I shall not range too widely; I want to stick to specific clauses in the Bill. Before I do, I should say that I agree with many hon. Members that we need to have the debate on the necessary changes in regulation soon and that I want to go into a little depth on the subject of my earlier intervention on the Chancellor. The Banking Bill flows from "Banking reform—protecting depositors: a discussion paper", published in October 2007; from the Chancellor's statement on
All those other documents were informed mainly by the Northern Rock crisis. This Bill follows in the wake of a new banking crisis and must set out the framework for dealing with failing banks generally—bank insolvency, bank administration, the Financial Services Compensation Scheme, inter-bank payments and other matters such as the Scottish and Northern Irish note issue, on which I shall touch briefly at the end. Other aspects of rebuilding confidence and stability in the banking system are variously the responsibility of the FSA, the Bank of England or the Treasury and may not require legislation; existing powers may be able to introduce such measures.
I am pleased that we are finally getting round to discussing the Bill, not least because the foreword to the July 2008 Treasury publication that I mentioned stated:
"The recent sustained period of disruption in global financial markets, starting in summer 2007, has had a widespread impact on firms and markets across the world".
It is right to put on the record that nine months ago, on
Since the Northern Rock debates—let alone the Northern Rock rescue plan, which happened some time later—three banks have been recapitalised, the takeover of Bradford & Bingley has been facilitated, there has been a massive expansion in liquidity provision and an increase in depositor protection, and the Government have stood behind inter-bank lending. Although I back those plans and expect them to work, it seems staggering that a key plank of the Government's programme—to have in place the full panoply of protection that we needed, including to deal with failing banks—is being introduced a year after we first discussed it in October 2007 and 18 months after what the Government recognise as the start of the financial crisis in summer 2007. We are putting in place provision to deal with failing banks after the banks have failed and a year after we started debating the issue.
I want to turn to some of the clauses, although I am not going to go through all the clauses of concern to me because that can be done in Committee, and other hon. Members have raised many of my concerns already. However, I have a few questions that have not yet been touched on. Before I come to those, let me mention the special resolution regime and in particular the concept of the bridge bank as a stabilisation option. During the Banking (Special Provisions) Bill, I said that there was the facility for a primary transfer of private assets to a public body and then the provision for a secondary transfer back to the private sector. However, there did not appear to be provision for what we might call a private sector administration and then a secondary transfer to the private sector proper. I am very pleased that the bridge bank concept is there as an intermediate stage to allow secondary transfers to wherever; that is particularly helpful.
Clause 19 relates to the use of a share transfer instrument. That can allow bank directors to be appointed, removed or have their contracts varied, and that is extremely sensible. However as Mr. Todd, Mr. Clarke and others said, we need to look again at the relationship between the state and the banking system because of the new arrangements—the huge stake that the Government and the taxpayer have in the banks. It is worth the Treasury considering that that power to have bank directors appointed, removed or their conditions varied should be applicable only to the Bank of England and that the Treasury should not be included as a body able to hire, fire or vary contracts. If it had those powers, that would bring a real risk—even if only of perception—of the wrong sort of political interference. By all means, the Bank of England should have the powers, and quite right too. However, if the Treasury took such decisions, that might give the wrong signal. Why has the Treasury been included as a body able to direct such hiring and firing and the amendment of bank directors' contracts?
Clauses 42 and 43 are about the restriction of partial transfers to protect certain interests. That is also welcome, not least because it gives the Treasury the powers to avoid the difficulties with "set-off" or "netting" arrangements; that is incredibly important if everything is to be done properly. However, all that will be achieved by secondary legislation. When will the Treasury publish the draft statutory instruments? Will there at least be codes and guidelines for us to see in Committee?
Clause 64 has been touched on, and it is extraordinarily wide. It allows the Treasury, by regulation, to make provision in relation to capital gains tax, corporation tax, income tax, inheritance tax and stamp duty of varying sorts. Subsection (4)(a) allows it to
"modify or disapply an enactment".
The Chancellor said earlier that that would only happen in the prosecution of the delivery of a special regime for a failed bank—I am paraphrasing, but I think that that is what he said. They are very sweeping powers, and if the Economic Secretary could tell us why the Treasury deemed it necessary to include such a wide list, that would be helpful.
Clause 73 covers the distribution of assets on dissolution or winding up the surplus after creditors and shareholders have been paid. I presume that the power to alter priorities is to ensure that, where taxpayers money has been used to prop up and assist a building society, money can be returned to the taxpayer should there be any surplus left, rather than dispersed in the normal way with the winding-up of a company. I would be grateful for confirmation of the logic behind the power to alter priorities in clause 73.
Part 4 of the Bill will empower the Treasury to regulate the pre-funding of the Financial Services Compensation Scheme. We have heard a lot about that, and I want to go on record to say what everyone else has said: it is absolutely right and proper that pre-funding takes place, but to do it now at a time of fragility, thin balance sheets and terror in the banking system might not be the cleverest idea. It would be useful if the Economic Secretary could advise what the Government's thinking is on that, and tell us whether they want to see heavy-duty pre-funding now, or whether it will be rolled out over time as economic circumstances improve.
I turn briefly to part 6, which deals with Scottish and Northern Ireland banknotes. I understand that the provisions will allow authorised banks to continue to issue them in the normal way. The question that arises with the Lloyds TSB takeover of HBOS is whether the Bank of Scotland part of HBOS, or Lloyds TSB-HBOS, will still be an authorised bank to ensure the continued printing and distribution of Bank of Scotland notes, or would the new entity be authorised to do so? I am sure that that is the case—the Chancellor seemed to indicate that it was earlier—but clarification would be helpful.
I would like to end with two questions, which have been touched on, about the Bank of England. Clause 218 might effectively reduce the number of meetings of the court of directors by half, and clause 223 removes the requirement for the Bank to produce a weekly return of accounts. At face value, that opens up questions about the proper level of internal questioning and scrutiny, and of external transparency of the Bank. I understand the Chancellor's argument that when the Bank of England is the lender of last resort, in extremis, any indication that Bank A, B or C has borrowed £5 billion, £10 billion or £15 billion from the Bank of England might send a particular signal to the market. But on the basis that the Bank is currently almost a lender of first resort, that stigma has gone completely, and I wonder whether that lack of transparency and the consequent opaqueness is the right thing to do.
I am sure that the Economic Secretary has taken notes on those questions and will give me full answers in few minutes time when he sums up, or in Committee at some later point. We have no intention at all of standing in the way of the Bill. We welcome the stabilisation package, and we have said that we expect it to work. We may table amendments with the purpose to probe, or to improve, and we may well have tough questions on the rationale for certain things, but tonight at any rate, we will certainly not be calling for a Division on the Banking Bill.
I welcome a Bill on this subject, and I am glad that my right hon. and hon. Friends on the Front Bench are in a collaborative spirit, because this is a case where working together might improve the Bill. It needs a lot of improvement, because the main things that have gone wrong in the past 11 years stem from the grave weakening of the Bank of England that occurred in 1997.
I would like the Bill to go much further than the current draft in giving back to the Bank of England the powers that it had before 1997. I would like the Bill to make it clear that the Bank of England needs to see and understand all of the business in the money markets. The Bank needs to have powers and duties so that it is the prime driver of the money markets. I would like to see the Bank have those powers back so that it is a better judge of the amount of cash and liquidity that we need in the system at any given time, and so that it is more able to enforce its interest rates in the marketplace, which it has been unable to do during the recent, extraordinary breakdown of the markets.
Like my hon. Friend Mr. Maples and others, I believe that this is not just a story of big banking error—although it is clearly such a story—but a story of massive regulatory failure. I would highlight three regulatory failures, in a different way from my hon. Friends so as not to bore Members or repeat things that have already been stated. The first failure is the regulatory failure of the Monetary Policy Committee of the Bank of England. In the early part of the decade, the committee kept interest rates far too low. It seemed unaware of the power of low interest rates to drive ever more credit, lending and borrowing in the system, and it ignored all the warning signs in the asset markets and the credit bubble that was emerging in the banking figures. Worse than that, the committee is now making exactly the same mistake in reverse. Now that there is a need to fight the problem of recession and deflation, the MPC is driving the car by looking in the rear-view mirror. It is shocked at how much inflation has got out of control, so it is keeping interest rates far too high for current conditions, and way out of line with those in the United States of America, for example.
The right hon. Gentleman talked about restoring powers to the Bank of England. Is he about to make the point that monetary policy decisions on interest rates should be taken away from it, almost as a quid pro quo? In the example that he gave of interest rates being set far too low in the early years of this Government, to which I infer he refers, surely the Bank was in pursuit of the target that it was given by the Chancellor of the Exchequer on inflation.
It clearly was not because the target was to keep inflation to 2 per cent. Inflation is currently 5 per cent., so it is 150 per cent. over the target. I am afraid we have to judge that the MPC got it comprehensively wrong. I am not suggesting taking the ability away, or putting the matter back under ministerial control; I am making a plea for a much stronger Bank of England that sees all the market activity and Government debt, which was taken away from it and nationalised into the Treasury, and which sees all the day-to-day transactions of the banks because it is regulating them. It would then understand the money markets, and if bankers, alongside academic economists, were trying to produce a total package on how we intervene, how much money we supply and at what price we supply money, the institution would have a better chance of making those independent judgments in the interests of the whole economy. I do not think that anyone in this House can allege that the MPC has been a success, because inflation stands at two and a half times the target, the money markets are in meltdown, and interest rates are now far too high for most borrowers. That increases the likelihood of default on loans and further undermines the asset base of the banking system, which is in a very fragile condition.
The second set of errors that were made by the regulators relate to money market liquidity. Perhaps things were too integrated on this occasion, but in the early part of the decade the Bank of England reinforced the message of the MPC by making large amounts of cash available—the markets were too liquid. More recently, the Bank started to withdraw liquidity and every time it did so in 2007, and even in 2008, it exposed more financial institutions to difficult pressures, which we have seen bubble up from time to time. The lesson has been learned there, and while I regard the MPC as still making the same old mistakes, the Bank is now doing exactly the right thing, with Government help, by making huge amounts of liquidity available. There have been statements that it intends to carry on doing so while the fragility continues, and I am pleased we have got to that point, but if we look at the record of the previous seven years, we see—because the Bank did not have the knowledge and powers it used to have—that it was too easy in the easy times and that it withdrew too much liquidity at times of stress and difficulty.
The third set of problems has arisen in the way that banking capital and banking caution have been regulated, as my right hon. and learned Friend Mr. Clarke and my hon. Friend the Member for Stratford-on-Avon said. There is no doubt that, again, we had pro-cyclical regulation. In the easy money times, the regulator did not seem too worried about banking capital and the gearing. Indeed, we saw the gearing of institutions massively increase over the levels of the '80s and '90s. I am afraid that those Members who say that such problems date back to the '80s do not understand the situation. The gearing in banks is far higher today than it was allowed to be under the system in the '80s and '90s.
Now we see, at this rather late stage, the regulatory pressures towards having more banking capital relative to the stock of debt, at exactly the point where the system is extremely fragile. I urge the Government to be careful not to go in for more pro-cyclical regulation, so that they do not increase the deflationary forces at exactly the wrong time, just as the regulatory system seemed to increase the inflationary forces during the days when money was far too easy.
I would like the Bank of England to be reconnected, by being the agent for Government debt, by being the supervisor of the banks, so that it sees all the money market transactions, and by being given more opportunity to manage not just the price but the quantity of money, so that we can have a smoother progression. We have lurched from boom to bust and from unacceptably high inflation to what I think will prove to be a lot of disinflation, as we see the impact of the credit implosion come through in prices.
When I was first invited into government, I was given the job of insurance regulator for the then Secretary of State for Trade and Industry. The two main duties of the insurance regulator, which was then a ministerial role, were to ensure that the insurance companies were solvent and to ensure that they were run by fit and proper people. That regime was rather similar to the kind of regime that applies in broad outline to banks and it was perfectly sensible. Coming from a financial background, I had a great fear that conditions would get tough in the early '90s and that there could be a casualty or two in the list, so I asked for proper information from my regulatory team. It took me a little while to get it in the form that I wanted, but we had the powers to procure it.
Once I had on my desk the balance sheet and the profit-and-loss risk, as we saw it, of those institutions, I managed it. If I saw an institution that I thought might be short of cash or in some other difficulty in six months or a year, I would get on the phone to the chairman of that company privately and say, "I am your friendly regulator. I do not have a power to instruct you to raise money, but it seems to me that it would be very helpful if you did raise some money." In each case the chairman was very obliging and said, "Actually, it's a good idea," or, "Yes, we're going to do it." In each case they raised money and those institutions got through what was a fairly unpleasant insurance downturn with no problem.
It is not that difficult for a regulator to do that, because they have access to the information, but it is most important to follow this fundamental principle: they must always act in private. They must never name the institution or seek any credit at the time, because we are talking about incredibly price-sensitive information. If any wind or whiff gets out of the office that the regulator has even a scintilla of doubt about an institution, there could be a run on it and a lot of negative journalism about it. The regulator's task will then be 10 times greater, because the institution will be on the slippery slope downwards and it will be damaged.
I therefore urge the Government to ensure that there are no leaks or running commentary to us and the public as such difficult and sensitive discussions are under way. Those occasions are ones when it is best if things are done in private and as speedily as possible, and if we are told only when the decision has been made and the proper authorities can be notified.
Apart from greater powers for the Bank and whatever powers the regulator needs to regulate intelligently in the way that I have described, I would also like to see some kind of control in the Bill of the ability of the Government and the Bank to use the special powers of acquisition. I strongly believe that in practically every case, if not in every case, it should be possible to solve such problems with private sector solutions, such as through private sector fundraising or by cancelling the dividend, cutting costs, shedding some assets, having some disposals or ensuring that capital can be found from sources outside over a reasonable time period.
Those are some of the panoply of ways a business can try to get its capital ratios into shape and get the cash that it needs to continue its business. It should be in the interests of all well-meaning people in the House to keep those things in the private sector, to make businesses accept the disciplines of the private sector, to blame those in charge of them when they get it wrong and to ensure that the new management sort things out as quickly as possible.
However, my worry about the proposals before us is that the taxpayer is being asked to take on too much risk. The three banks to which public capital might be subscribed—I say "might" because a number of votes have to take place and there are still opportunities for private shareholders to come forward with money—have, in aggregate, balance sheets of almost £3 trillion. That is twice the country's national income and around five times its annual tax revenue. If something went wrong and just 1 per cent. of those assets had to be written off, the owners of those banks would collectively lose £30 billion.
Thirty billion pounds is a very large sum of money, even for the British taxpayer. It is 5 per cent. of tax revenue in a single year. Are we sure that there could not be a 1 per cent. loss on the assets of those banks when they come into public ownership? I know that some of those assets are as risk free as one can get, and include Treasury bills and that sort of thing, but some of them are not. Some of them are the mortgages and the loans to companies that we have been worrying about. We are being asked to absorb those assets as we go into recession, when it will not be just the mortgage book that deteriorates in quality, but the loan book to companies, as I fear that we are about to enter a period when companies will find it difficult to keep going. In some cases they will find it difficult to earn a profit or generate cash and will look to their bankers for more support. In some cases, businesses will stumble and be incapable of keeping the payments going.
I would therefore like a reminder in the legislation— and perhaps a requirement to come back to the House in an emergency—that there must be some limit. Just as we are now preaching to the private sector that banks should not get over-geared and over-borrowed, should we not be preaching to ourselves that the Government and the public sector should not get too over-borrowed and over-extended? I hope that the Government will go away over the next two or three weeks, work with those banks that have given an indication that they might like public capital, go through the figures again and ask, "How can you get the demand down? How can you generate more cash for yourself? How can you get more private sector capital coming into your bank to cut the taxpayer risk?" Otherwise, the British state will be left in a weakened condition, which is not what we want at this juncture.
My declarations are on the record, but I should add to them the risks that I have with a NatWest overdraft and a NatWest mortgage.
The Bill is welcome if it allows for the opportunity for bad debt to be brought off the balance sheets of the banks. In response to my earlier intervention, the Chancellor reminded us that there is already temporary provision for those bad debts to fall upon the balance sheet of the nation, but it is not a permanent change. My view is that what we are seeing is purely a relief rally. The prospects for things to get a great deal worse are still there. That is because, without the masking of Government support, the trust in those financial institutions still does not exist. They are badly wounded institutions that need that bad debt cleansed from the wounds that have done them so much damage. What has been done is a powerful palliative, but it is not a cure.
There is something very British about this debate, which is about pulling together. Also the Bill is perhaps about closing the barn door after the horse has bolted, because unfortunately the crisis will, I think, get worse, particularly if we rely upon some of the current consensus on how financial affairs should have been pursued over the past 25 years. It is not necessarily the case that the Bank of England's performance is so good that it should have more power. The Chairman of the Treasury Committee referred earlier to the experience of Japan, where the lack of a policy initiative led to interest rates being held far too high, damaging the economy for almost a generation through the destruction of asset value and the subsequent destruction of economic growth.
I attended an induction for a vicar in one of my local churches recently, at which the Bishop of Croydon spoke. He spoke from a moral point of view, but he also gave us an economic lecture about the value of money. He said reassuringly to the large congregation that the assets of the nation remained the same. That is very much an economic analysis, because in reality it is money that has been devalued over recent years.
Serious consideration should be given to the shadow Chancellor's proposals for the introduction of what I would call circuit breakers. In a bastardised means of pursuing Keynesianism through monetary policy, every time there has been an economic crisis, misjudgments have been made about the weakness of the economy. Recently, that has been seen in the collapse of the equity market in 1987, the Asian financial crisis and the dotcom boom. We also saw exaggerated easing maintained for far too long. Most importantly, the economic and political consensus has been about the targeting of retail price inflation, with no one taking responsibility for asset price inflation. The problems can perhaps be dated back to 1971, when President Nixon moved the dollar away from its gold link. In many ways, the abuse of money by bankers has been the problem.
I noted the comment by Frank Dobson about the way in which bankers can also devalue the use of language. The word "innovation" was often an alternative way of describing moving away from transparency in financial markets, which has left the financial institutions badly placed to take a proper measure of their risks and losses. Indeed, I was much taken by a commentary by Jon Moulton of Alchemy Partners, who very appropriately said that the economy needed innovation among investment bankers as much as we need innovation among airline pilots.
The problem of the loss of transparency ought to be addressed in legislation, as there is a continued desire by financial markets to move further and further away from transparency. There seems to be some support in the City—and, indeed, some blessing from the Government—for the idea of encouraging what are called dark pools. These involve the ability to trade in equities off the stock market and out of sight in terms of the immediate reporting of substantial trading in a market. That strikes me as a counter-intuitive approach.
A further issue that cuts against the general consensual thrust of the thinking on how our financial markets should be run is the impact of globalisation. There was a time when the Bank of England would have had real responsibility for giving permission for transactions to be issued within the sterling market. Perhaps there is a role for authorities to give such approvals, particularly for products that are sold from outside our own European region.
One of the strengths of the Asian financial system is that it is, to some extent, separate from the rest of the international global financial system. Some of the protection that has lessened the effect of the crisis on the Asian markets is a result of that market stepping slightly aside from markets elsewhere. We need to consider whether the liberal economic approach that we have taken over the past 25 years is indeed the right way to progress. Given our very damaged domestic financial institutions, we need to ask whether, even with capitalisation from the taxpayer, they will be in a position to lend for mortgages and for commerce.
There is a lot to be learned from what happened during the Swedish financial crisis. It was felt important to set up separate governmental organisations, such as SBAB and Finansius, to act as a spur to encourage competition and confidence in private sector institutions so that they would continue to lend money to the economy, to keep it robust.
There is also the issue of who gets the most protection in this kind of financial crisis. The reality is that it is not the small individual who has taken on large debts who will be bailed out, because they do not have the same fundamental impact on the overall macro-economy that the large financial institutions have. It is incumbent on any legislation—this Bill or any further legislation—to deal with the question of social and commercial responsibility, in relation to the danger of a further downward spiral in the performance of the economy if we were to pursue foreclosures and the shedding of assets, which would further complicate the economic crisis.
There is a need to impose on financial institutions some kind of circuit breaker, in regard to the disposal—and forced disposal—of assets. I am certain that my constituents in Croydon will think very little of the idea of bailing out banks and senior investment bankers if they themselves are not to be offered at least some breathing space in which to determine how best to cope with the financial crisis.
It is worth reiterating that a major banking failure in this country is extremely rare. That makes the need to answer questions about this crisis sooner rather than later even more important. We are told, however, that we are required to deal not only with the present crisis but to introduce a regime for long-term confidence—hence the Chancellor's reference to this legislation being permanent.
The problem that I have with the reference by Dr. Cable to a tsunami is that tsunamis are natural and largely uncontrollable. The image of a house fire used by my hon. Friend Mr. Osborne is much more apt, because house fires are often caused by the carelessness of owners, and they can be prevented. We have heard a series of recommendations from Conservative Members on how reform needs to take place. To give the Government credit, we have also been teased with opportunities for reform that will be brought forward in due course, including the much-awaited report from Lord Turner.
It would be a much greater reflection of confidence in the UK financial system in the long term if, as I would have liked, there had been some provision in the Bill to return to parts of it at a future date, in the light of experience and of needs. The impact assessment highlights the potential for shareholders' interests to diverge from those of depositors in times of financial stress. That is seen most clearly in the balance that needs to be struck between making rapid payouts to depositors and the need to maintain value in the banks. Disorderly bank failures will affect the City's pre-eminence as a financial centre, but so too will maintaining a divergence between the interests of shareholders and depositors, when they do not normally conflict. It is important to ensure that these are brought back into alignment as quickly as possible, and I would like some assurance from the Minister that he feels comfortable that that is embedded within the Bill.
I raise this issue because the time scales for the Government holding shares and being involved in the management of banks are likely to be long. The impact assessment hints at that, in showing that the average length of the crises in the developed countries is five and a half years. As the Bill proceeds, we need more detail on how and when intervention will occur, more modelling of the effects on shareholder confidence and a reassurance that the Government will resist micro-management for long periods. There is a follow-on from that in respect of the work done for the impact assessment, as we must ensure that the costs of the proposed measures have been accurately defined, given the lengths of time that are likely to be involved.
The Bill is heavily dependent not just on secondary legislation, but on the code of practice. I was grateful for the comments and assurance earlier that the code of practice will be produced in parallel with progress on the Bill. I would like to make two points about the code. A restricted number of people are presently envisaged as consultees for the code of practice. It needs to be wider, and we need input from practitioners to ensure that the code is practical and avoids unintended consequences. I look forward to hearing the Minister's comments on that.
The list of areas to be covered in the code is set out in clause 5. Given the emphasis elsewhere on protecting depositors, I am surprised that the code of practice makes no mention of communication with depositors and provides no guidance on it. I would very much like to see a widening of the code beyond its current narrow confines, so that we can see how it will operate at a wider level.
The problem of information from the Bank of England is still a live issue. Clause 223 removes the need for the Bank to prepare a weekly return of accounts. I cannot pretend that the Bank of England's weekly return of accounts has been my favourite bedtime reading, and I understand why the measure is necessary—something my right hon. Friend Mr. Redwood hinted at in his speech. However, the lack of transparency over introducing it now, when the weekly return is already in place, will create the impression of doing deals behind closed doors, leading to the inability of shareholders and depositors to hold management to account. I have to say that I do not think that it will work, as I am less sanguine than my right hon. Friend about the City's ability not to leak. It was never my experience that it was able to keep a secret for very long; indeed, the situation where rumours are about is far more dangerous than where there is real information.
A number of Members have spoken about the role of the Bank of England. I support the greater prominence of its role, as set out in the Bill. I also welcome the Chancellor's agreement to review the regulatory system. What we need to ensure is that it regulates the right things, but I pick up a point made by some Labour Members: having a light touch and being radical are not incompatible in producing a review of the regulatory system. I welcome the Bank of England being given oversight of inter-bank payment systems, as when the Bill kicks in, customers should see no difference during a crisis.
Thank you for calling me, Mr. Deputy Speaker, as I have had the slow torture of being the last Back-Bench Member to speak in the debate. May I say how pleased I am to see my hon. Friend John Howell making such an impression after spending such a short time in this place? I reserve particular pleasure for seeing Mr. Pelling back in the Chamber; he has been away for a short while, but he made a robust speech and seems to be in robust form. It is very good to have him back.
This is the first chance, apart from the 90-minute debate we had last week, for Members to get near to the events—the almost calamitous events—of the last couple of weeks. I appreciate that this is not a debate on the current banking crisis, so I will try to speak within the bounds of the Bill before us. Clearly, however, there has been a collective failure of the regulatory sector and the banking sector. Of course, having been in power for the last 11 years, the Government have to take their share of responsibility as well, but I do not want to take a gratuitous swipe at the Government at this stage, as there will be plenty of opportunities to do so in the future. The collective failure has been clear and we cannot ignore the fact that the International Monetary Fund has said that, of probably all the developed economies of western Europe, we are one of the least well placed to cope with the current downturn. The Government need to take a good long look at themselves and ask whether they have done the right things over the past 11 years.
Unlike my right hon. Friend Mr. Redwood, I am not a financial expert; I worked in the City for a mere three months before being given my marching orders. I am absolutely staggered by the amount of risk banks have taken on board. I understand from my right hon. Friend that their liabilities are somewhere in the region of £3 trillion. That is simply staggering. What amazes me about the crisis is that we have moved on from talking about £10 billion as being a lot of money to £100 billion as being the same, and we seem to have moved seamlessly on from that to speaking of trillions of pounds and trillions of dollars. It is difficult to keep up with these enormous figures, but enormous they are.
What amazes me is that we did not learn the lessons of Barings. When Barings failed, the board of directors admitted that they really had no concept or understanding of the derivatives being traded on their trading floors. The complexity was simply beyond them. I thought and believed that the Bank of England and the Financial Services Authority had taken that into account and would do something about it to ensure that the boards of banks did not allow it to happen again. Clearly, however, it has happened again. We have seen banks leveraging their capital thirty-fold or perhaps more. What that means is that one pound of capital on the balance sheet—an asset of £1—is supporting £30 worth of risk or £30 worth of what could be called "make-believe money". The pyramid has been inverted, with £1 supporting £30. Like all pyramid selling schemes, it works well in the good times, but sooner or later, something goes wrong, the pyramid collapses and everyone is left picking up the pieces. On this occasion, I am afraid that it is the taxpayer who is left picking up the pieces.
This Member of Parliament has some very humble suggestions to make. First, the FSA has to tell banks that if they are going to trade in financial derivatives, as they will continue to do, we have to be able to understand them. We must understand where the risk resides. If we do not understand them, we should say, "Buddy boy in the red braces, you are not going to trade them." There has always been a sneering regard in investment banks for the FSA. They say, "We employ people who earn £3 million a year, and these thickos in the FSA understand nothing, as they can afford to employ people earning only £250,000 a year." Well, in this case that is a good thing. All the rocket scientists in the investment banks will have to sit down and come up with financial instruments that mere mortals—talented people, but still mere mortals—understand, and if they do not understand them, they will not be traded. [ Interruption.] Does anyone want me to give way? I think that someone does, so I give way to him. I am sorry; I have taken my glasses off, so I am completely blind.
My hon. Friend is very kind. I understand what he is saying, but, in his opinion, what level of thought is required for an understanding of what is going on? Is he talking about asking people in the street, or on the bus? What sort of people is he describing?
My hon. Friend makes a good point. The regulators must understand the position and be comfortable with it. Some derivatives will be more risky than others. The regulator will say "If you want to trade in more risky derivatives, you must have a stronger balance sheet. Your balance sheet must, in a sense, be insured against failure by carrying more capital." That too will act as a disincentive to some of the more outrageous financial instruments.
Let me move from the exciting world of investment banking to the world of retail banking. Some of those present—including, I am afraid, many Members opposite—speak of the "tsunami", the crisis that began in America in the sub-prime market and swept over to the United Kingdom. Let us be perfectly honest: I do not think that Northern Rock trades in the United States, I do not think that Bradford & Bingley trades in the United States, and I am sure that HBOS does not have a mortgage business in the United States, yet those banks, and perhaps others, were offering people outrageous mortgages. They were offering 125 per cent. of a property's value, and they were offering self-certification. They were saying "Pick a number, and we will not challenge you." No wonder we have a home-grown crisis in this country.
I have to ask why on earth the regulator allowed the banks to get away with that. It was not done in secret; there were flaming advertisements all over their branches letting people know what a great deal they would get. If that did not set alarm bells ringing in the FSA, I do not know what would.
I thank the hon. Gentleman for his kind remarks earlier.
Perhaps one of the fundamental reasons why such offers could be made is the fact that rating agencies often provided the necessary securities, especially in the form of inflated ratings. That applied to a large section of mortgages sold as AAA products. In many instances, neither regulators nor senior managers would even think to look at the quality of the securities that were being sold.
The hon. Gentleman makes a telling point. The Minister may wish to look into it.
I think that the relationship between rating agencies, auditors, banks and accountants has become a little too cosy. There are a few too many long lunches, pats on the back, and matey shooting parties after grouse on large estates in Yorkshire. I am making a serious point: we need to examine these relationships. If there has been a failure in a duty of professionalism, legal action may well need to be taken against the responsible individuals.
This is a banking Bill—a banking Bill about the regulation of the banking sector—so let me return to that. I make a plea to the Minister, and to all my colleagues, that we examine, collectively, the practices of some of our high street banks at this moment in time. It is simply not acceptable for a person who exceeds his or her overdraft limit at a major high street bank by £1 to be immediately slapped by a charge of £15 a day. If it takes three or four days for the bank to send a letter to such people alerting them to the fact that they are overdrawn by £1, the charge may have increased to £60, £75 or even £90 before that person realises that they have a £1 overdraft.
Such rates of interest are absolutely usurious. Anyone who sold them door to door would be arrested. They would be locked up and, rightly, the key would be thrown away. The practices of some of our high street retail banks are shocking and shameful, and now that they are being underpinned by the taxpayers, those taxpayers—our constituents—will have even less patience with the outrageous and, quite frankly, vicious charges levelled at some of the most vulnerable and least well-off members of society.
Let me make a couple of other points. Banks need to strengthen their balance sheets. They want to obtain cash from wherever they can obtain it, and there is every chance that they will target good and successful businesses in pursuit of that money by raising interest rates to a level that not even a successful business in the good times could possibly hope to meet. So they will sacrifice the long-term viability of that business—that client—in return for a short-term gain to their balance sheets. I hope that the Minister is aware that that may happen, and will follow developments very closely.
I am sorry that we have come to this stage, but it is absolutely right for the Government to be guaranteeing savers' deposits. Let us be in no doubt, however, that this is a massive transfer of wealth from some of the least well-off in society, and I shall now briefly explain why that is the case. We all have many constituents—some Members have more than others—who earn at or just above the minimum wage. They live day to day and week to week. They do not have savings—or, at least, significant savings—or mortgages, yet they will underpin this bail-out through an inevitable increase in their taxes over the next two or three years. Therefore, we need to be mindful—as I know my hon. Friend the shadow Chancellor is—that some people at the very bottom of the income scale will get very little out of this bail-out, and if we get into Government at the next general election, we must find a way of helping them. In the meantime, I hope the government of the day are also mindful of their plight, and that they find a way of helping them.
Having expressed those few thoughts, I will sit down, but I must first have just one passing swipe, not at the Government, but at the British Bankers Association—I believe that is what it calls itself. The brief it sent round in advance of this debate was pathetic. It should hang its head in shame; there was not a note of humility anywhere to be found in it. Yes, we need the banks in this country, but they have a lot of ground to make up, because no one trusts them anymore, and as we all know from our time in this place, trust needs to be earned. We must at present have all hands to the pump, therefore, and we will have the forensic examination of this Government's record and policies in the next few months.
People will be surprised that when debating a Bill of such importance to the future of the banking system, our proceedings start to wind up at 25 minutes to 9. It is disappointing that although plenty of Members turn up on the Government Benches to cheer nationalisation, not enough are here to talk about the important measures this Bill contains.
When the Bill was conceived, I do not think anyone would have expected its Second Reading to take place the day after the Government pumped billions of pounds into the banking system by taking equity stakes in three banks. What happened yesterday does not lessen the need for the Bill, nor should we think the bail-out package and the Bill are enough in themselves to restore long-term stability to financial markets. Other structural changes are needed, and I will turn to them later.
The Bill presents both an opportunity and a threat. It presents an opportunity to strengthen confidence in the UK as a place for banks, their customers and investors to do business, in the knowledge that there is a proper framework for dealing with failure so that deals do not need to be cobbled together overnight, and that the right measures are in place to help the financial services sector emerge from this crisis wiser and stronger. The threat comes from the need to ensure that sufficient safeguards are in place to reassure people that the far-reaching powers in the Bill are the last resort and not an easy substitute for effective regulation. Without proper safeguards in place, we could have a situation where the cost of capital to banks increases and that increase is passed on to their customers. There are concerns that some of the Bill's clauses—particularly clauses 42 and 43—create such uncertainty about straightforward matters such as netting off transactions that they could add to the costs of doing business in London.
The Bill grants powers to the tripartite authorities to intervene to save a bank with actions ranging from partial transfer of its operations to another bank to nationalisation, but the safeguards governing the use of those powers will be contained in a code of practice that is yet to be published in draft form. Until the code of practice and the regulations are published, banks and others will be anxious that the powers will undermine the legal framework our financial services sector depends upon, and legal uncertainty brings risks and costs.
I am grateful to the Minister and the Chancellor for reiterating their commitment to ensuring that the code of practice is published before we debate the relevant clauses in Committee. That is welcome not just in the House but outside. We will co-operate with the Government to get the Bill through, but we need to ensure that it strikes the right balance by tackling failure quickly and effectively without putting the wider interests of the economy at risk.
Before I make some broad points about the Bill, I shall reflect on the themes that have emerged in this evening's speeches. My right hon. and learned Friend Mr. Clarke, my hon. Friends the Members for Sevenoaks (Mr. Fallon) and for Stratford-on-Avon (Mr. Maples), my right hon. Friend Mr. Redwood, Mr. Pelling and my hon. Friends the Members for Henley (John Howell) and for Broxbourne (Mr. Walker) all made important speeches about the fate of the banking sector.
From the Labour Benches, John McFall, the Chairman of the Treasury Committee, outlined some of his concerns following its inquiry into the draft legislation. The Committee has produced two powerful reports, which will help to inform the Committee stage. The hon. Members for South Derbyshire (Mr. Todd) and for Edinburgh, North and Leith (Mark Lazarowicz) spoke about their concerns, and the latter particularly reflected on the impact on his constituents of the changes to the ownership of Scottish banks.
Frank Dobson gave a virtuoso performance, which made those of us who were not in the House in the early '90s think about the sort of speeches that we might have been able to hear as daily occurrences rather than on a special occasion such as tonight. I wonder how he must have coped in the Cabinet when the then Prime Minister Tony Blair and his colleagues willingly embraced big business, and how he must have held his nose when talking about some of the reforms that contributed to the problems that caused the crisis in today's banking sector.
Some themes emerged clearly from the debate, one of which was the need for prompt payment from the Financial Services Compensation Scheme to reassure bank customers. It is unfortunate that the Government were unable to bring forward legislation relating to the scheme earlier, because that would have given consumers more confidence. Another theme has been the need to avoid similar crises in future through further reforms to the regulatory system. The Bill is quite narrow, and more work is needed to put in place the right institutional mechanism and arrangements to prevent the recurrence of asset price bubbles in future.
A number of my right hon. and hon. Friends expressed concern about the reforms to the financial regulation system introduced in 1997 by the Labour Government's then Chancellor, now the Prime Minister. There is a sense that to avoid future crises, we need to strengthen the role of the Bank of England in the regulatory system. We have particular ideas about that, and I shall touch on them later. Several hon. Members highlighted the challenge that arises when the Bank of England focuses on controlling inflation through interest rates. What mechanism can it use to try to control asset price inflation? I shall refer later to a mechanism that should provide a new weapon in the armoury to ensure that there are controls over asset prices in future.
Several Members mentioned the long gestation period of the Bill. It was in January that the first consultation took place, and there was a further round of consultation in July. The Bill was published and received its First Reading last week. One almost senses from some people that the need for the Bill popped out only last summer with the problems of Northern Rock. The reality is that prior to that both the Governor of the Bank of England and the then chairman of the FSA, Sir Callum McCarthy, said that there needed to be a proper review of the arrangements in the UK for dealing with bank failure, so the issue is not just a recent one. It should have been on the Government's agenda for some time, and it is disappointing that it has taken so long to get to this Bill. Of course, we do not intend to impede its progress, and we want to ensure that it is on the statute book when the Banking (Special Provisions) Act 2008 expires in February next year.
We need to scrutinise some areas of the Bill further, because they remain unclear, and not only because we await draft regulations or the code of practice. For example, the Public Bill Committee will need properly to address issues associated with the Financial Services Compensation Scheme. Conservative Members believe that the scheme should not be pre-funded. The Bill gives the power to set up a pre-funded scheme, but we believe that setting up such a scheme is against the interests of consumers and the financial services sector as a whole. We also need to address issues associated with how customers should be covered. Will they be covered for £50,000 per brand or per bank? The FSA is consulting on those issues, but it is important that hon. Members have the opportunity to debate them in Committee.
The Bill refers to the need to pay depositors as soon as possible and, again, the FSA is consulting on how that might be brought about. Hon. Members should debate that issue during the passage of this Bill. We also need to work out how we balance the need for depositors to be paid promptly, within seven days of a bank's being taken into the special resolution regime, and the need to mitigate the losses that could be faced by other types of creditor, including those who provide debt and other forms of capital to the bank—obviously, that capital is then lent on to businesses and households. We need to resolve that tension.
The Bill is about just one element of the changes we need to put in place to restore the stability of the financial sector and the economy as a whole. The Bill focuses primarily on how to deal with a failing bank. It also legislates for the changes that strengthen the Bank of England's governance and establishes the financial stability committee. One or two hon. Members, including the hon. Member for South Derbyshire, discussed the Treasury Committee's findings in that area, which were critical of the arrangements in the Bill. I am sure that if he gets his wish and serves on the Public Bill Committee, he and others will wish to debate that fully.
The Bill could have been the means to put long-term reforms in place. For example, the Conservatives believe that it is vital to strengthen the independence of the Bank of England, and we want the Governor and the members of the Monetary Policy Committee to be appointed for a longer single term, rather than for up to two terms. Such an approach would put beyond doubt any prospect that reappointment could influence the decisions of MPC members or the Governor and his deputies. We think that it is important to strengthen, rather than weaken, the independence of the Bank of England. Unlike the Liberal Democrats, we are not going to ditch the independence of the Bank when the going gets tough.
The Conservatives believe that the Bank of England's role in regulation could be strengthened too. That issue has been discussed by my hon. and right hon. Friends. When the Prime Minister broke the link between the Bank of England and the supervision of individual banks, he created a system that focused on the risks to individual banks and not on the risk to the market. By breaking that link, debt was allowed to grow uncontrollably across the system, and we are paying the price for that today. To avoid repeating that mistake again, we believe that the Bank should write an open letter to the FSA, setting out its understanding of market risks and requiring the FSA to respond. Through that process we would establish a mechanism that would lead to banks increasing their capital to protect themselves from the risk of default. That is a way of trying to regulate the debt that is in the market and, thus, to control asset price inflation. The Prime Minister himself recognised the importance of these measures when he spoke yesterday. He said:
"In future regulatory systems there will be both greater attention to issues of solvency and liquidity and probably a pro-cyclical attitude where in a period of growth you have got to lay aside more for the possibility that there will be contractions".
Some of us might call that fixing the roof when the sun is shining, and it is a far cry from the Prime Minister's mantra of no return to boom and bust. He now recognises the existence of contractions, having spent 10 years trying to deny the existence of the economic cycle. Reality has now caught up with the Prime Minister. Changes to the capital rules are not only a matter for UK regulation: the rules in Basel II should be altered to reflect that priority.
There are changes too that we need to make to the FSA to strengthen it, so that it can be more effective in the regulation of the financial services sector, including improving the mix and experience of staff so that the regulator is able to challenge regulated businesses more effectively to avoid some of the problems of its supervision of Northern Rock. As my hon. Friend the Member for Sevenoaks pointed out, given the increased availability of more sophisticated financial products in the retail market and the increase in opportunities for people to borrow, we need to improve the financial education of people in this country so that they have a greater appreciation of the risks of financial products and can plan for their own financial circumstances with greater confidence. That would help to avoid the present situation in which, at a moment of economic uncertainty, the UK has £1.4 trillion of personal debt.
The Bill cannot be seen in isolation. It must be seen as part of a wider plan to restore confidence in financial markets and in the wider economy. There must be other reforms to strengthen the regulatory system to prevent problems from arising in the future. The Prime Minister put in place a framework that helped to create the age of irresponsibility—it allowed debt to grow to an unsustainable level and taxpayers are paying the price for that today. We need to reform that framework if we are to return to the financial stability this country needs. This Bill addresses how to deal with the failure of a bank, but we need a regime that prevents that failure from happening. If we are to avoid asking taxpayers to pay for future problems, then this Bill is only the start of rebuilding confidence in the financial system and not the final word.
I welcome the strong cross-party support for the Bill and I look forward to future stages, during which Members will have the opportunity to examine its provisions more closely and to improve it. I will try to reply fully to the key points made in the debate, but I hope that hon. Members who have contributed—12 Back Benchers in all—will not be disappointed if I cannot mention all their names.
These are challenging times for financial markets and economies across the world. The Bill is one important part of a package of action and reform to improve the UK's system for ensuring financial stability and protecting depositors. Over the past year, the Government have been working with the Bank of England and the Financial Services Authority to tackle these issues in the UK and also at international level.
As the House is aware, the Government have stepped in on several occasions to protect the stability of the UK's financial system—in the cases of Northern Rock and Bradford & Bingley—using the powers provided by the Banking (Special Provisions) Act 2008, but that legislation was only ever designed to be temporary, and the need for long-term arrangements to ensure financial stability and protection for depositors in the UK is clear. I am glad that it is widely supported.
The Bill is a central part of the Government's package to strengthen the UK's framework in this sphere. The decisive and comprehensive action that we have taken to improve the capitalisation and liquidity of UK banks, on which the Chancellor has made recent statements to the House, is another fundamental element of the package.
I want to emphasise that the Bill is the result of a comprehensive process of consultation, including three consultation documents issued jointly by the Treasury, the Bank and the FSA. We have consulted extensively with key industry players and experts and, of course, we have had valuable input from the Treasury Committee.
One of the criticisms from the Opposition has been that we have not moved quickly enough. People in the industry, however, might say that we were moving too quickly. However, as I understand it, there is an urgent requirement to get legislation on the statute book by the time the temporary provisions in the Banking (Special Provisions) Act 2008 expire.
The Bill provides a permanent addition to the UK framework for financial stability and depositor protection, and the arrangements will provide the UK authorities with a refined and proportionate set of tools to deal with difficulties in the banking sector that can affect depositors and the wider economy. I accept that it is vital to get these proposals right, ensuring that the UK's framework is sufficiently robust to deal with the future as well as with current challenges. I believe the Bill provides the right framework and range of powers to ensure that, but it can no doubt be improved by debate in Committee.
I am quite happy to give way to the hon. Gentleman, although he has not played any part in today's debate.
It is very kind of the Minister to give way. In fact, I have just returned from Brussels in the past hour. As the Chancellor will know, a stream of European proposals are being made, which we have just heard about from our people in Brussels, to do with capital requirements, credit ratings and accountancy standards. Will the Minister ensure that whatever comes out of the proposals as they emerge will be considered seriously in the Bill? In the case of part 7, which affects the governance of the FSA and the Bank of England, will he ensure that the issues are properly considered and are not guillotined or subject to knives?
Will the Government be cognisant of the fact that however valuable European co-operation has been during this financial crisis, there are also important national interests in terms of any changes to regulation that could compromise the primacy of the City of London in the European financial markets?
A number of right hon. and hon. Members contributed to the debate. Let me respond directly to a number of the comments that they made. First, I want to address some of the comments made by Mr. Clarke, Mr. Maples and my right hon. Friend Frank Dobson. In their own ways, they all made eloquent contributions—thrashing around, seeking to blame people.
The right hon. and learned Member for Rushcliffe blamed pretty much everyone, but I thank him for his support for the proposals to give the Bank of England a statutory responsibility for financial stability.
My right hon. Friend the Member for Holborn and St. Pancras gave a tongue-lashing to bankers, auditors, credit rating agencies and quite a few other people besides. On his points about credit rating agencies, we support the principles behind the proposed EU registration scheme. We will look to Adair Turner for advice on the regulation of credit rating agencies in the future.
I realise that the Minister is new to his portfolio, and I myself have been new to very difficult portfolios at difficult times so I am not certain that I will get a reply to my question. However, I asked about the arm's length arrangement for managing the Government's shareholding in the banks that are to be partially nationalised. What can be said to give some substance to the Government's assurances that there will not be a politicisation of lending policies and other things? Surely it must be possible for someone to let him and us know exactly how that is to be handled. There is a real fear that there will quite strong political input into the rationalisation of the banks, lending policies and so on. So far, that question has not been answered at all.
I might be only 10 days into the job, but I can certainly answer the right hon. and learned Gentleman's question. The Government have no intention of politicising the lending or other decisions of the banks that have been nationalised or part nationalised. My right hon. Friend the Chancellor will make our position very clear—indeed, I think that in his earlier contribution he made the basis on which we are seeking to set up that arm's length body very clear when he referred to the Shareholder Executive and the similar circumstances in other nationalised industries.
The hon. Member for Stratford-on-Avon raised an important point about lending. That has been clarified already by my right hon. Friend the Chancellor, but the hon. Gentleman was concerned that there might be a danger of lending returning to the imprudent levels of 2007. I assure him that that will not happen. As I have said, banks that use the recapitalisation scheme will be managed on a fully commercial basis by an arm's length body, but it is important to recognise that there will also be conditionality. Over the next three years, those banks will have to maintain the availability and active marketing of competitively priced lending to homeowners at 2007 levels.
It is important that banks lend responsibly and meet their legal and regulatory obligations. We must not see a return to irresponsible lending practices, but it is right that we insist, as a result of our investment, that competitive mortgages are available in the market. We must also ensure that banks lend responsibly to small businesses.
Recent events are affecting many countries across the world, regardless of their regulatory frameworks. That point was sometimes missed in the contributions made to the debate. This has been, and still is, a world financial crisis: I am sure that we will look to learn the lessons from it, and some of the lessons learned from previous episodes have been incorporated in the Bill.
The FSA has recognised that there were regulatory failings in the case of Northern Rock, and that is why it is implementing an enhanced programme of supervision. As the Chancellor made clear in his remarks opening this debate, the FSA is also conducting reviews of other aspects of regulation, including remuneration. We will look to its findings in due course.
The Government believe that the structure of current arrangements and the allocation of responsibilities within the tripartite system remain fundamentally right, and I note that that view was endorsed by the Treasury Committee. Recent developments have not changed the basic view that it makes sense to provide for a single, integrated regulator covering financial services.
We must remember that, before the FSA was created, there was a dog's breakfast of regulators. One large financial services group would have to deal with any number of different regulators. I worked for a small company that was regulated by the Investment Management Regulatory Organisation, the Life Assurance and Unit Trust Regulatory Organisation and the Financial Intermediaries, Managers and Brokers Regulatory Association. I do not think that that was satisfactory. The overall structure of the present regulatory framework is the right one, but there is no doubt that it can be improved and that lessons can be learned.
If the tripartite structure is fundamentally right—we know that it has failed—and if the Government's intention is to maintain the 2007 small and medium enterprise and mortgage lending levels, what guarantee do we have that next year there will not be the same over-exposure to the wholesale market, which has been the cause of some of the problems in the banks that have failed?
As I said, these are unprecedented events. Lessons are being learned right across the world about international regulation and the operation of domestic regulatory regimes. It does not make sense to go back to a situation in which regulation of the banking system is separate from regulation of insurance services, for instance. In today's modern capital markets, it is right that there is a single regulatory structure.
The shadow Chancellor made reference to Equitable Life. Although he is not in his place, and indeed this is not in the Bill, I want to respond by saying that, as the House will be aware, the parliamentary ombudsman published a long and complex report in the summer. We are considering her report carefully and we will give our response to the House later this autumn.
Yes, as my right hon. Friend the Chancellor has said clearly, we will do whatever it takes to bring stability to the banking system. The fact that we have taken this integrated package of actions and reforms has been widely welcomed by the financial community. It is a programme that is being adopted by other countries in Europe and, indeed, partly in the United States, depending on their own circumstances. We believe that it is the right path to take.
Let me turn to the special resolution regime, which has been the subject of much of the debate. It will replace the temporary powers taken in the Banking (Special Provisions) Act 2008. When a bank gets into difficulties, they can be resolved through normal regulatory interventions or voluntary action. However, as we have seen recently, bank failures will sometimes occur and they can damage confidence, disrupt financial markets, harm depositors and generate significant costs to business and the economy as a whole. The objectives of the SRR include protecting and enhancing financial stability and confidence in the banking system, protecting depositors and protecting public funds.
The SRR provides the authorities with a range of tools to meet those objectives, including the transfer of a bank or its business to a private sector purchaser, to a bridge bank—which I know was welcomed by Stewart Hosie—and temporary public ownership. Further, a new bank administration procedure is to be put in place to support partial transfers of a bank's business. The Bill also creates a new insolvency process for banks that can be used where appropriate to enable prompt FSCS payments to eligible depositors and also provides for the winding-up of the bank's affairs.
By setting out a clear and credible statutory resolution regime to address failing banks, which removes control from the bank's management, the Bill provides a strong incentive for banks and their directors to take action to prevent their businesses from getting into difficulties.
We can debate in Committee in greater detail some of the issues raised such as the trigger mechanism and the role of the Bank of England, but I note what the shadow Chancellor has said—that although he is raising concerns, he does not want to resist the overall thrust of the Government's conclusions.
I failed to follow the rationale for the Government's decision not to count as national debt the bank debts that they are taking on to their books. Perhaps he could explain that, for the benefit of the House.
If the hon. Gentleman is fortunate enough to serve on the Public Bill Committee, I am sure he will find that we can get into the details of the issue then.
A number of hon. Members raised the issue of partial transfers. The Government listened to many of the representations that have been made on this matter. I refer hon. Members to clauses 43, 55 and 42, which provide safeguards. I emphasise again that we recognise the importance that market participants attach to those safeguards. That is why I have announced the creation of an expert liaison group to ensure that all available industry expertise is brought on board.
In recognition of the views of industry and the Opposition, it has been agreed in principle by the usual channels that we will make sure that we consider the special resolution regime later on in our deliberations on the Bill, including in Committee. That should allow sufficient time to ensure that a draft code on part 1 is available. It will also enable us to be clear about the general principles behind some of the secondary legislation associated with clauses in parts 1 to 3 of the Bill.
We are taking action to strengthen the authorities' institutional arrangements, primarily through announcing the Bank of England's role in respect of financial stability. The Bank will have a new statutory objective relating to financial stability, and I note that that was welcomed by a number of right hon. and hon. Members. Again, we can discuss the detail in due course.
Will my hon. Friend reflect carefully on the reservations that the Treasury Committee expressed about the format of the financial stability committee? That format was criticised not just by us, but by some of the witnesses from whom we heard in our inquiry. There was confusion about where precisely accountability would lie, and about the division between executive and non-executive authority.
I am sure that we can debate that issue in Committee. However, I would not like my hon. Friend to think that the Government did not give the issue extensive consideration when we came up with our proposals.
In summary, the Banking Bill will be a permanent piece of legislation that will provide a set of measures to enhance the UK's framework for financial stability, now and for the future. The Bill is a key element of enhancements to the UK framework for financial stability and depositor protection, but it is only a part of the story; the Government have also taken action in other areas. As the House will be aware, the Chancellor yesterday announced a £37 billion bank recapitalisation package. In addition, we have extended the special liquidity scheme to £200 billion, and are providing up to £250 billion in bank debt guarantees.
We are not out of the woods yet, but we have a map, and we have friends who have joined us on the path. We still face a difficult journey, but I believe that we are moving in the right direction. It is important that we get the legislation right, so that it complements the strong, decisive action that has been taken by the Chancellor and the Prime Minister. I am determined that Parliament should have adequate time extensively to scrutinise and debate the provisions. We will work with the House, and in the other place, to gain Royal Assent for this crucial legislation in a timely manner.
Question put and agreed to.
Bill accordingly read a Second time.