My Lords, this is the first time that I have spoken in public since my severe stroke in 1999. It was only the brilliance of the National Health Service over nine years and the care of my wife over the same period that have allowed me to be here today or any other day.
I would like to take noble Lords back to the early 1980s, as all major disasters have a long track record. At that time I was trying to launch a trade union bank. This was the time when we were told that there was no such thing as society. There was media reference to enemies within. It was during the height of power of Margaret Thatcher's regime and the unpopularity of the trade union movement.
The supervisory department of the Bank of England was very efficient and demanding in order to ensure that a new bank met all the requirements properly demanded by law. In fact, it gave me a book on the subject. Eventually, I, as a controller, received the licence from the Bank of England and the bank has prospered ever since, making profits of £5 million in each of the last two years; I understand that the profits continue today. However, although I also attended 10 Downing Street and was seen by a very senior civil servant, the procedure was never foolproof, as a new bank launched at the same time, named after the famous capitalist Adam Smith, failed within some three years.
At the same time I had executive responsibility for group development of the Co-operative Bank, where such building societies as Abbey National and Nationwide, among many others, were our customers. I knew their executives and many board members. I was on record, on television and radio, morning and evening, saying that the privatisation of building societies, moving from being a mutual to a plc, was obscene—that was the word that I used—particularly the possible pay-off to existing members and executives. My argument was, first, about the unfairness of funds built up over generations being distributed to existing members and executives. If it was so good, why had it not been done after the First World War, the great depression or the Second World War? Secondly, the ethos of building societies and their customers was to save before borrowing and this discipline would be lost. Indeed, it has been lost. I was confident because, on my own recent experience, I knew that they would have difficulty in becoming banks, as few were managed by qualified bankers and their business models were perhaps not appropriate for a fully fledged bank.
At this time the Bank of England was the responsibility of a member of the Cabinet. During this period, the executives of those mutuals who would be eligible for a financial reward if the vote was in favour of privatisation were successful. All these building societies were converted and only a few executives that were against privatisation won their case with their members. Societies such as Nationwide and a handful of others survived. Today there are few survivors from those that chose the plc route, whereas many mutuals have survived and operate today.
Then, to my amazement, the same supervisory department at the Bank of England allowed those building societies to become banks. We should not blame the people in 1997, as the decision had been made in the 1980s. It is not for me to speculate as to which political decisions were made at that time, but something fundamental must have happened between the time—only a few months earlier—when I had applied for a licence and when the building societies were let through the same net. No central banker worth his salt would have ever licensed a bank that was going to rely partly on wholesale funds, which some clearly did and do.
The subsequent worst offender was the arrogant Halifax, which, when I last saw the figures, had a mortgage book twice as large as its personal customer funds, so was entirely dependent on wholesale funds, whereas its mortgage book should have been restricted to its customer deposits, plus capital and reserves. This phenomenon was driven by its executive rewards for more and more new mortgages. We were not the first. President Reagan did it first by changing savings and loans into banks although, at the same time, they were heavily involved in fraud. It seems that nothing changes.
The media have been full of the pressure to reduce lending rates but, in my experience, it is more important to concentrate on the savings rates, as there are more savers than borrowers. The banks have too long ignored that fact, which is what led to the need to use and be dependent on wholesale moneys, with all the problems that that has caused.
Most people—and, strangely, many bankers—do not realise that, unlike for all other companies, the first responsibility for bankers is to their depositors and not their shareholders. Banks were recently offering 6.25 per cent for deposits, so their average cost of money would be around 4 per cent and lending to the corporate sector with the current economic situation would be a minimum of 9 per cent. The base rate at 2 per cent is largely irrelevant, because you set the lending rate in relation to your average cost of funds; if banks are borrowing wholesale money at 7 per cent or more, the situation is even worse. Gordon and Alistair have done a good job in saving customer deposits—just imagine if we had all lost our deposits—and trying to finance more expenditure from people who are feeling the pinch just to survive, but they have yet to finish the job.
What is now required is legislation to instruct banks to reduce their exposure to mortgage lending to a lower sum than their personal deposits and no longer to finance their mortgage lending with wholesale moneys—in fact, to return to being like building societies. Wholesale funds were only ever appropriate for corporate customers, never for personal customers. To do this, banks must be compelled to lower their exposure to mortgage lending by selling their overexposure to this market now. This is the fundamental error of judgment, which has taken nearly 30 years to eventually generate these problems.