Northern Rock and Banking Reform

I am grateful for the chance to take part in a debate that has been thoughtful and constructive. As a member of the Select Committee, I add my thanks to the staff of the Committee, who did a superb job, producing two complex and extremely good reports in a short time, and to our Chairman, for making sure that we achieved consensus in an area that could have been fraught. I shall focus on the topic of moving forward and the broad themes discussed by previous speakers. The right hon. Member for Hitchin and Harpenden (Mr. Lilley) said—I hope I do not summarise him unfairly—that there was a problem with the macro system, and indeed there is. Others said that political factors drove some of the decisions that were made. Some acknowledged that things went wrong, but argued that that does not mean that the regulation needs to be changed or increased for the entire system. Of course there are difficulties in the macro banking system, but I do not believe that the system is totally fractured. It needs to move forward, not back to where banking used to be some years ago. I refute the idea that there were political factors driving the decisions. The Treasury took the best decisions in extremely difficult circumstances, and we must move forward cautiously. No doubt over the coming months there will be many more difficult decisions to take in respect of Northern Rock. Changes are needed to regulation in the banking system. I shall pick out parts of the Select Committee's report which deal with that. One of the frustrating aspects of our inquiry was that everybody said that they did their job. Every box was ticked, yet we ended up with a disaster. In the course of the investigation it became clear that there was no interface between the regulatory system and what was going wrong in Northern Rock. Everybody said, ““We all saw that it was an extreme business model. We all knew the kind of mortgages that were being provided. We all knew that they were over-reliant on the wholesale market, even if we did not know the full extent””, and so on, yet there was no intersection between the regulatory requirements and what was happening in Northern Rock, until it was too late. A section in the Committee's report, ““The run on the Rock”” highlights the fact that Northern Rock had a Basel II approval and on that basis had agreed to increase its interim dividend. That was a reflection of slightly different factors, but it fed the impression that Northern Rock was doing well and could afford to pay out. It increased its payout at just the time that it was running into liquidity problems. That was one symptom of the fact that the regulatory system at the time did not deal with the problems that would cause, as everyone has said, the first run on a bank in the UK for about 140 years. A few of the weaknesses emerged in the course of our inquiry. In many ways the FSA has done a superb job, but it has always focused on macro issues and preserving the reputation of the industry internationally which, ironically, has been so damaged. Previous speakers mentioned the slowness of response, especially in the case of the tripartite system, and prior to that, the slowness of the FSA in recognising and tackling the problems that it had clues about. My right hon. Friend the Member for West Dunbartonshire (John McFall) spoke about the proposals for structural changes in regulation. I agree that those are important, as he said, to put a bit of grit into the system, to make it impact more on the problems, and to identify a lead person who would deal with problems of the kind that emerged in Northern Rock. I want to discuss two aspects of regulation in the changed circumstances. First, what will happen to the credit rating agencies? Our inquiry highlighted some serious problems, and the Committee's proposals are set out in the sixth report of the Session. We identified a conflict of interest by which the credit rating agencies provide both advice to financial institutions on how financial institutions should package products and the ratings for those products. Although the agencies assured us that they have safeguards and Chinese walls, the whole Committee felt that the safeguards are not adequate. Secondly, there is a lack of competition, because two US agencies and one European agency mop up almost the entire business.