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.
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