My Lords, the Governor of the Bank of England meets Treasury Ministers regularly and often discusses topical market issues. In recent months, there have been more frequent discussions between the Governor and Ministers, which have covered sub-prime lending issues and the disruption of the global financial market that was triggered by problems in the US sub-prime mortgage market. The Chancellor of the Exchequer provided a Written Statement to Parliament on
My Lords, I thank my noble friend for his Answer. The Governor of the Bank of England said recently that it was not his job to rescue banks from difficulties caused by their risky behaviour. Does my noble friend agree? If so, does he also agree with the Governor's statement that the Bank of England is the lender of last resort? Can he reconcile the two statements for us?
My Lords, I do not think that the two statements are difficult to reconcile. The Bank of England is not there to underwrite all activities by any bank, however unwise they might prove to be. What is clear is that the Governor is the governor of the bank of last resort and we have in place components for the proper regulation of the market, to respond to vicissitudes. As will be recognised, there have been exceptional features in the market in recent months and lessons have been derived from that.
My Lords, is the Minister aware of a speech made in Newcastle last month by Richard Lambert, Director-General of the CBI, which had the headline, "Three-way system failed the big test"? He was referring to the system that the present Prime Minister set up when he was Chancellor of the Exchequer, dividing the responsibility for supervision between the bank, the FSA and the Treasury. Do the Government agree that the system failed the test? Whose responsibility is that?
My Lords, it is clear that there were difficulties attendant on Northern Rock and it is equally clear that more careful analysis of that bank's operations would perhaps have led to earlier action. That the system failed against a background in which, despite the difficulties in global financial markets, the United Kingdom is remarkably stable—and a great deal of these anxieties are distant from our shores—is surely testimony to the fact that basically the structure is sound.
My Lords, the Minister said earlier that it was not the job of the Bank of England to underwrite all the business of any bank. Will he accept that the Bank of England is underwriting all the business of Northern Rock? Does he, like me, find it strange that this very week Northern Rock is still making new loans on the basis of very high multiples of income and very high proportions—over 100 per cent—of the value of the property, backed by the Bank of England?
My Lords, the noble Lord will recognise from his deep knowledge of these issues that operations of Northern Rock are being monitored very carefully by the FSA. He will appreciate that a guarantee was given to depositors to the bank, underwritten by the Government and the Bank of England, to give security, and that it is anticipated that Northern Rock will carry on its operations with that degree of successful development to lead towards eventually a wider rescue.
My Lords, have Ministers and the Governor discussed the problems of conflict of interest for the credit rating agencies, which, being paid by the financial institutions whose products they rate, have duly colluded in the alchemy of transmuting sub-prime mortgages into triple-A-rated bonds? If the game is to be worth playing, don't you need to be able to trust the umpires?
My Lords, I am not sure that I follow the simile accurately, but I follow the sense of my noble friend's question. It is important that we recognise that undue risks have been taken by a well regarded institution of considerable significance both to the banking sector and to the many people who put their trust in it. It behoves us to look at the whole question of credit rating and how credit is provided to ensure that we do not have this catastrophe again.
My Lords, will the Government discuss with the Governor his assertion that the market abuse directive prevented a covert support operation? What representations do they intend to make to Brussels about that?
My Lords, we are looking at that factor. This is a developing situation that we need to analyse with the greatest care. All these institutions are subject to close scrutiny, not just by the Government; there is also public and open scrutiny. The noble Baroness will appreciate the work that is being done by the Treasury Select Committee in interviewing both the FSA and the Bank of England on these matters. Of course, the issue must be analysed properly, but there is no easy, flip answer to this significant development, which has certainly shaken the financial community and to which the Government need to respond properly in due course.
My Lords, may I make the following practical suggestion; namely, that the SFA should be requested to inform the firms that it supervises that they should not include in their accounts assets that have not been formally approved by accountants in this country under the procedures established by existing United Kingdom legislation? Thus, funds such as the US non-prime mortgage loans could not be used in balance sheets here without the approval of the SFA. I should explain that I have no current interest in the City of London, although on retirement from the public service I was for some years a member of the board of the Securities and Futures Association before the establishment of the existing authority and I served as a member of its disciplinary committee. The Minister may feel inclined to reply that this would bolt the stable door after the horse has gone but the purpose is to—
My Lords, I am grateful to the noble Lord for his great expertise in this area and for his constructive suggestion on how this issue should be tackled. The whole House will recognise that in certain areas it is easier to be wise after the event, but his proposal needs to be looked at carefully and taken into account in future arrangements.