Northern Rock and Banking Reform

I start by congratulating the Chairman of the Select Committee, the right hon. Member for West Dunbartonshire (John McFall), and his colleagues on producing a timely and substantial piece of work. Perhaps most remarkably, given the wide dispersal of political views on the Committee, they reached a consensus while being hard-hitting. That was a substantial outcome. Rather than go back over who said what to whom when, and who was to blame, it might be useful to be more forward-looking. I shall first ask some of the questions that I do not think the Select Committee asked, and that it certainly did not answer. I shall then turn to the policy implications of its conclusions. There were two important sets of questions on which the Select Committee did not focus properly. The first was the nature of the assets of the bank that we have taken over. The major theme of the Committee's criticism, which was right as far as it went, was that the bank's managers and directors made one massive mistake: over-relying on international wholesale markets. The Committee stated that the Financial Services Authority was negligent in failing either to pick that up or, if it did pick it up, to do anything about it. That criticism is fair. However, the Committee largely seems to have taken at face value the assumption that the bank's assets were basically sound. In paragraph 13 of ““The run on the Rock””, the Committee approvingly cites a quotation from Mr. Sants, stating that Northern Rock had had"““high quality assets—there is no suggestion here that this is an organisation taking on poor quality assets””." Northern Rock also got a glowing testimonial from the Governor of the Bank of England, who is quoted at some length. Among other things, he said:"““What I would say about Northern Rock…is that most of the staff that worked…on the lending side, all the evidence shows, did an excellent job in appraising the loans that they were making, and that they monitored very carefully and did not lend money to people who should not be borrowing from them. The lending side was handled extremely well.””" The issue is left there. I wonder how that came to be accepted. I have worried about this from the outset of the Northern Rock affair. The worry centres on the so-called Together mortgages, which are one of the main products of the bank. We know that there are 200,000 of those out of 900,000, which is a big chunk. Those mortgages varied, but the basic principle was that they were well over 100 per cent. of the value of the property—they were usually something like 125 per cent. It seems that the bank was lending a fairly conventional 95 per cent. mortgage to its borrowers and adding on a 30 per cent. unsecured loan, which was typically £25,000. A lot of that happened when the housing market was at its peak last year. I wonder how that could possibly have happened. The Governor of the Bank of England and the chief regulator concluded that this was straightforward and uncomplicated and that the assets were perfectly sound. That does not ring true. The Select Committee pointed out that managers were asked to undertake a stress test to see what would happen if house prices fell by 40 per cent. and concluded that the bank was safe and would have survived. I cannot understand how it could possibly have passed that test. Nothing we know about the bank leads us to believe that it would have survived that test, but it has become written into the orthodoxy that it was perfectly sound and secure.