Northern Rock and Banking Reform

We are talking about slightly different things. Is not the purpose of deposit protection to prevent a panic run on the industry? That is what it is designed to achieve. The right hon. Gentleman is right in saying that if the institution itself gets into difficulties, there are various ways of handling it, including closure. I entirely understand his point. The third set of questions that arise from the conclusions of the Select Committee are about how banks should be regulated in the broadest sense of liquidity. There was an interesting passage in ““The run on the Rock”” which I had not understood previously, about what happened when the Northern Rock bank managers discovered that they had excess capital—that they had over-complied with the capital adequacy requirements. As I understand it, they simply blew it on a big payout to their shareholders. That raises the question what those capital adequacy ratios are for. Common sense suggests that in a boom period, as those bank managers were, with a massive expansion of lending and a booming housing market, the requirement should have been tightened rather than relaxed. Similarly, a period like the present, when the market is going down, should be the point at which it was relaxed. I ask, and I do not know the answer, whether it is possible to design a system that is counter-cyclical, and whether that is compatible with the rules of the European Union, under whose auspices these institutions now operate. That is the kind of mechanism we should consider. Albeit from different standpoints, the right hon. Member for Holborn and St. Pancras and the hon. Member for Sevenoaks have both asked what banks are for in the new world and what they should look like. Mr. Don Cruickshank raised those questions seven or eight years ago, when he pointed to the apparent anomaly that the industry is ultimately underwritten by the state but makes well above average profits in terms of the rate of return on its capital over a long period of time, which, from his point of view, is unacceptable. There are two ways to resolve that situation. The first is to treat the banks as utilities by making them highly regulated and highly controlled. That would directly or indirectly control their profits, which is what the right hon. Member for Holborn and St. Pancras wants. The alternative is to say that provided deposits are protected, the banks should compete and the industry should be treated like any other. I am more sympathetic to the latter approach, but getting there will be difficult. We need a clear understanding and commitment from the Government and the Financial Services Authority about which of those two models they are going for, because simply adding a new layer of regulation to the existing system will not help.