Northern Rock and Banking Reform

May I begin by echoing comments made in the first two contributions to the debate? The first contribution was made by the right hon. Member for West Dunbartonshire (John McFall), and I echo what he said about the staff who helped to produce the Treasury Committee report. They gave not only great quantity, but great quality. The second contribution was made by the hon. Member for Sevenoaks (Mr. Fallon), and he paid tribute to the Chairman; it is worth restating what he said. I should also like to pick up on a comment that the hon. Member for Leeds, East (Mr. Mudie) made about my hon. Friend the Member for Twickenham (Dr. Cable). He is probably right to say that my hon. Friend's comments were harsh but accurate. The hon. Gentleman asked me to have a word with my hon. Friend after the debate. I say this to my hon. Friend: he is absolutely right, but it is worth bearing in mind that since we issued our report back in January, much evidence has come out. We were working on the basis of the evidence that we were given. My hon. Friend raised with me the point that although many eminent people gave one level of evidence, there are now somewhat different views coming out. He said that we might like to look again at the matter at some point, and perhaps it is an issue to which the Committee will return. I do not want to go over the whole report; I will cherry-pick a couple of points. The hon. Member for Leeds, East made a valuable point, the theme of which was people. That is the issue that we ignore at our peril. Interestingly, when I attended an industry dinner last week, I sat next to an eminent director of an eminent company, who said to me, ““Why on earth did you bother to rescue Northern Rock? Why didn't you just let it go under? What was the purpose of rescuing it?”” It is worth reminding ourselves of what we all set out to do. There are, of course, two reasons for what we did. The first, obvious, and probably most important, reason to act was to avoid contagion in the banking industry. We saw what contagion could do, if let loose, when we saw a televised run on a bank. Not only was it the first run on a bank in more than a century, but it was televised. The run gathered pace like a brushfire, so the Government were absolutely right to act quickly to deal with the situation. The second reason concerns our relationship with depositors—an issue that a number of speakers have raised. It is important that we look at what we mean when we talk about financial stability, as the hon. Member for Sevenoaks said. An important part of it is that the ordinary citizen should have confidence that when they place an amount of money in a bank, they do not find themselves the lowest unsecured creditor in the chain. We have heard the term ““moral hazard”” applied to banks, but during our inquiry, I heard the term applied to the high street depositor. That is why the old system was not 100 per cent. The idea was that there should be some moral hazard attached to the depositor. That is ridiculous, and has been proved to be so. If the entire weight of the regulatory system cannot ensure sufficient due diligence, how on earth can the individual in the street be expected to ensure it? A clear lesson from our report is that there should be 100 per cent. protection, up to an amount, to ensure that depositors are looked after. Our report makes it quite clear that the start of it all was the board of a bank that made some fairly disastrous decisions. It followed a very high-risk model. There are a few points arising from that, all of them about people. One of them concerns the board. Comment has been made about its composition, but there is a general point to be made. I serve on a plc board as a non-executive, and have served on other boards. I am deeply concerned that, after Greenbury, Cadbury, and all the other reports that have been produced, a box-ticking mindset has entered into many sectors of corporate governance, replacing an old-fashioned, common-sense duty of care. That duty of care needs to be recaptured. If the board of Northern Rock had applied a common-sense test, as opposed to ticking a lot of boxes, it might have realised what was so obvious to all of us, with hindsight—that its model was extreme. The last point about the company itself is that it was under tremendous pressure from the City and City investors to produce good-quality figures quarterly. I question whether banks are the appropriate vehicles for high risk and high return; we debated that point today. In return for banks having a degree of protection and a safety-net available to them, there must be a degree of utility as regards them. I would not take that too far, and I certainly would not go as far as the right hon. Member for Holborn and St. Pancras (Frank Dobson) does, but if banks are to be in that position, there has to be a balance. We should not really look to them for high risk and high rates of return. I now come to the tripartite authorities. Again, it is a question of people. The point was well made by the Chairman of the Select Committee and the hon. Member for Leeds, East that the relationships that existed in 1997, which were left over from a previous generation, no longer exist. The war game aspect is important, because while all three entities made mistakes, and all tried to do their best, things failed totally when the three of them had to act in concert in a crisis. It is that kind of work, which the right hon. Member for Norwich, South (Mr. Clarke) likened to Cobra planning in the services, that needs to be done. It is not yesterday's crisis, which has been regulated for, that has to be dealt with. What are needed are the people with the training and the skills to move in to deal with tomorrow's crisis. My last point on the topic of people concerns leadership. It is clear that we all expected the Treasury to be the lead organisation of the tripartite authorities in such an affair. There are many mitigating circumstances. Many of the key players in the Treasury at official level had moved next door not long before. There was a relatively new ministerial team. There were several reasons why the people were not necessarily in place, as they could have been. Concern is expressed in articles in the Financial Times today and in other financial pages about whether the Treasury has the skills in depth that it needs. That is not a criticism of any person. I recall that when I used to run businesses, one would look at the organisation and say, ““These are good people, but have they been trained sufficiently? Between them all, are there the necessary skills?”” It is a worry that the Treasury does not have those skills, and I hope it will be put right. A further point, which is not to do with people, is the stigmatisation of the lender of last resort. As the right hon. Member for Hitchin and Harpenden (Mr. Lilley) so eloquently pointed out, in order to work, the system must have an inherent flaw in it, and that is dealt with through the lender of last resort. Effectively, the status of the lender of last resort was stigmatised in the press. I do not remember which of the big five banks it was, but one of them had a little borrowing operation earlier, and newspapers were ringing up anybody and everybody to try and find out whether another bank had the same thing. If we are to have a lender of last resort, which is a prerequisite for ensuring that the system works smoothly, there cannot be a stigma attached to it. Finally, on house prices, we in the United Kingdom have a curious house market which, for historic reasons, delivers an increase in price and equity that is not shared with many European countries. Two parts of the market work simultaneously. One is a lack of supply of houses and land, and the other is an over-supply of money. When those two come together, the problem arises. My hon. Friend the Member for Twickenham has often made the point that we cannot rely on that kind of growth in the future. Like all great calamities, the run on the Rock, like the Tay bridge disaster, required a series of events to take place in an unforeseen order. It is easy, with hindsight, to point out all the things that went wrong. We must ensure for the future that there are the right people in the right place with the right skills and sufficient training. We need to make sure that banks as individual organisations are properly regulated and that—the point that our report makes—the system as a whole has overarching supervision.