Northern Rock and Banking Reform

I well remember the Bill; indeed, it was proposed by an Opposition Member, and I supported it in the Chamber. The Bill allowed greater flexibility to be exercised, but it also introduced an FSA regulatory process for wholesale lending to building societies, and it was never envisaged that that would reach the 75 per cent. proportion that was evident in Northern Rock. Whereas the situation is more relaxed for building societies than it was before that legislation, regulatory restrictions still apply to the amount that building societies can borrow from the wholesale market. Northern Rock—its staff almost boasted of this—had ““an extreme business model””, to use the FSA's phrase. As I have said, it was disproportionately wholesale-funded. There was an absence of suitable insurance, and there was no plan B—no stand-by facility, whereby alternatives could be found if the existing sources of funding dried up. Ultimately, the blame for that must lie with the directors—the chairman, the chief executive and the non-executive directors—because they alone had devised that model, and in doing so they knew that they could aggressively seek new mortgages. The hon. Member for Twickenham (Dr. Cable) outlined some of the mortgages that they boasted of securing. Again, they boasted about them in the evidence that they gave to the building societies group. The fact is that they were using a model to borrow money to lend aggressively in mortgage packages that were somewhat doubtful and the sources of which were very vulnerable. I mention that in particular because we have all been subject to shareholder pressure to get Government compensation. Indeed, one of the issues that must be examined is that of the Bank of England's moral certainty and the belief that it should provide liquidity to underwrite bad business practices—or not. It seems to me that the fundamental stance of the shareholders is basically that it should, but the Bank of England took a hard-line position and it did not. My right hon. Friend the Member for Norwich, South (Mr. Clarke) supported that, as the issue of moral hazard is obviously crucial in the robustness of the banks' business models. Similarly, the Financial Services Authority has attracted criticism because although it recognised that the business model was extreme and inappropriate, it did not challenge Northern Rock either to change it or to provide an alternative source of funding, should things go wrong. Those areas of concern must be taken up in any Government inquiry in order to understand what regulation, if any, is appropriate to change that approach. Ultimately, when it comes to compensation and the role of the shareholder, it must be that the balance of culpability for this fiasco has to lie with the directors and the company. The public cannot be expected to underwrite either through the Bank of England or as taxpayers the business decisions of a board of directors. What should be done? With a spectacular failure such as this one, there is a danger of issuing emergency regulations that are just window dressing and provide no substitute for dealing directly with the actual problem. The hon. Member for Cities of London and Westminster (Mr. Field) might not have said that the whole thing was political, but he did emphasise the role of political decisions. However, neither his answer to my intervention nor the intervention of the hon. Member for Ludlow (Mr. Dunne) provided a very convincing basis for making that allegation. In respect of the comments of the hon. Member for Cities of London and Westminster about the local football team, I should make it clear, speaking as a resident of West Bromwich, that I am a Cheltenham Town supporter—and my team was considerably less successful on Saturday! We need to ask whether the existing regulatory framework is sufficient and whether the problem was simply the result of its not being properly applied. I think that there is considerable evidence to demonstrate that most of the regulatory framework was actually in place and, had it been properly applied, it might have prevented the problem. Comments were made earlier about the small number of FSA staff who were charged with dealing with Northern Rock. I note that it states in this morning's The Times that five FSA members have resigned. It seems that there is a problem with staff turnover. How far that contributed to the lack of adequate monitoring and supervision of Northern Rock, I am not in a position to say, but it is obviously an issue that must be addressed. There is little point in implementing a whole set of new regulations if those fundamental problems are not dealt with at the same time. The second question is about the Bank of England and the balance of responsibility on the moral hazard. The refusal to provide the necessary liquidity in the market is said to have contributed to the problems, but the Bank's overall responsibility for the preservation of the robustness of the banking system has also been emphasised. I believe that there is a debate to be had about that.