Northern Rock and Banking Reform

I do not want to get into pronouncing on the shareholder issue; today, I am focusing on our Committee's report. However, I am coming to the FSA and its failings, so I will take up what the right hon. Gentleman has mentioned. The FSA failed because early warnings were ignored and there was an inappropriate FSA response. The Committee was concerned about the resources used in supervising Northern Rock, particularly in the light of what we called the ““outlier status”” of the business model. For a year or two beforehand, there had been murmurings about the type of model that Northern Rock was following. My own opinion is that the FSA gave its best regulators to the large banks and its less well-accomplished ones to the smaller banks and the building societies; it thought that it had to keep its eyes on the big banks and it let the former building societies go. The FSA has learned that lesson; from my personal discussions with FSA officials, I can say that the point has been well taken. There were also shortcomings in the legal framework. There was no special administrative system, such as that in the United States of America, for failing banks. Furthermore, a legal uncertainty seemed to prevail with regard to the European Union market abuse directive. That issue needs further examination—not only at a UK level, but at a European level. One basic question that the Committee asked itself was whether Northern Rock was a systemic bank. We concluded that it was. It had grown over the years, certainly since demutualisation, but it was not a huge presence other than in its heartland area of north-east England. In essence, it was systemic because it identified weaknesses within the tripartite system for dealing with failing banks. Depositors could get only £2,000 of their money in full, so when a run started, they were likely not to get the full amount and also likely not to get it soon. As the Governor of the Bank of England stated during his appearance before our Committee, once a run had started it was logical for people to queue up for their money. The Northern Rock run was a message to consumers that other banks might be weakened by the crisis and that they, too, could lose deposits. There was a spectre of contagion, and it comprised a systemic risk. I well remember getting a phone call at home one evening from a constituent who told me that he and his wife had their money in Northern Rock. They had not had much money for most of their married life, but had received some lately and put it all into Northern Rock. He asked me for advice on whether he should take it out; that was a rather awesome task for me. I told him that because the Government were supporting the bank, he should keep it there. However, there was a real concern among people, who took a logical stance, about the future of Northern Rock and of their deposits. The Committee concluded that the Chancellor was right to authorise the support operation for Northern Rock because of its systemic nature. The Northern Rock failure identified to the public a lack of protection for depositors and further weakened the confidence in which financial institutions were held in the public eye. A run on other banks and a more widespread systemic failure could have been possible. The Committee also identified a failure of the tripartite authority in respect of the handling of an announcement about the problems of Northern Rock and the support being provided to it by the authorities. The announcement that public funds were being injected into Northern Rock should have reassured the public; perversely, however, it led people to see the bank as fatally injured—hence the run. That was compounded by a lack of speed as regards the support operations announced by the tripartite authority. Everyone was aware that a leak was possible, yet when the decision to proceed with the support operation on Tuesday 11 September was made, it was not to be announced until Monday 17 September—that was far too long a period. In my opinion, no journalist can be blamed for the leak. Rumours were circulating prior to the press statements, and a leak to the press was a matter of when, not if. The Committee concluded:"““In failing either to make an announcement earlier in the week or to put in place adequate plans for handling press and public interest in the support operation, the Tripartite authorities and the Board of Northern Rock ended up with the worst of both worlds.””" That was exacerbated by the failure to prepare for the Government guarantees for the Northern Rock depositors. The Committee says:"““It is unacceptable, that the terms of the guarantee to depositors had not been agreed in advance in order to allow a timely announcement in the event of an adverse reaction to the Bank of England support facility.””" Had such preparations been made, Northern Rock might not have been as weakened by the run as it was. The second issue is the extent of state support and the accountability for that public commitment. Concerns have been expressed regarding the lack of transparency in the state support appropriate to maintain the bank, given that we are being asked to approve the revised spring supplementary estimate, page 22 of which shows that the first two commitments are there, but with no moneys against them. Public accountability is very important, and those columns should be filled in by the Government, not just left blank. In the initial stages of the crisis, and prior to public ownership, the Treasury incurred contingent liabilities relating to its underwriting of the Bank of England support operation and the guarantees that it offered to Northern Rock—the first two elements in the spring supplementary estimate. I am making a plea for the Treasury to be more forthcoming in reporting such contingent liabilities. The third and final area to which I wish to refer is banking reform. Banks must be allowed to fail, because market discipline must form the core of banking regulation in the United Kingdom. If the likes of Northern Rock take unacceptable risks and the market turns against them, they should be allowed to go to the wall. The profits from banks cannot be private while the risks of their failure are public. However, that failure must happen in an orderly manner. In the case of a company, the shareholders must be the key losers. Small depositors should not lose out, nor should they lose the banking services needed to operate in our modern economy. Those who are financially excluded in this society are socially excluded, so it is important that they do not lose out.