Northern Rock and Banking Reform

I do not want to talk much about banking reform. Instead, I want to have an urgent look at what has been happening at Northern Rock in the two weeks or so since the nationalisation on 22 February. One of the most interesting things is that there has been virtually no press, media or parliamentary interest in what has been going on at the bank during that period. With the exception of a few well placed questions from Conservatives at Treasury questions, there has been remarkably little interest. The Financial Times has covered only one aspect in the past two and half weeks; I shall come on to the coverage of the Financial Times shortly—it is not infallible by any stretch of the imagination. That one aspect was that representatives from the British Bankers Association had been to see the Treasury to discuss possible market distortions, to which I shall come back in due course. At Treasury questions last Thursday, the Chancellor put everything down to the business plan; he said that everybody would have to wait for that and that there would be no answers to any questions until then. The Chancellor also said:"““We have had many discussions with the Commission””—[Official Report, 6 March 2008; Vol. 472, c. 1896.]" I find that particularly interesting. I shall come to the role of the European Commission. Before we rush into a new regulatory regime, we urgently need to have a look at what has been going on in this institution, which we own, in the past two and a half weeks. As I mentioned during the Second Reading of the Banking (Special Provisions) Bill, I worked on a trading floor for eight years in the 1990s. Bank regulation is not my specialist field, but I know rather a lot about banking malpractice in respect of risk control, risk management and related issues and about the effect it can have on the markets. What I have seen in Northern Rock since 22 February has been an institution whose behaviour, even since nationalisation, has carried on being reckless and unsustainable. That is very serious given that we, the people, now own it. Let me start with the foreign subsidiaries. [Interruption.] A couple of hon. Members are looking at me as if to ask, ““What are those foreign subsidiaries?”” I mentioned the Financial Times earlier. On 23 February, the day following nationalisation, its editorial said that the European Commission would not intervene. It added:"““Northern Rock also has the advantage of operating exclusively in the UK.""The Commission is more likely to give a government a free hand when the only economy being distorted is its own.””" The Financial Times certainly thought that Northern Rock was exclusively a UK business. I shall start by considering the Danish subsidiary. Its website, available in Danish and English, mentions ““swilling interest”” next to a picture of a large, bloated pig—an interesting way of marketing products in Denmark. The Danish subsidiary shows that Northern Rock is being reckless with UK taxpayers' money. The bank is both subsidising and guaranteeing above-market savers' rates to 10,000 Danish depositors—10,000 and counting, very rapidly. In the week after nationalisation, the website welcomed visitors to Northern Rock Denmark, saying that it was open for ““business as usual””. Under the heading ““Temporary Public Ownership: What It Means For You””, it stated:"““Your savings with Northern Rock continue to be safe and secure, protected by the UK government guarantee arrangements””." Why are the UK Government both guaranteeing and subsidising above-market interest rates to savers in Denmark? For one year, the UK Government will give 4.09 per cent. The Copenhagen inter-bank offered rate, or CIBOR, is currently about 45/8 per cent., so why are the UK Government paying Danish savers 5 per cent. through Northern Rock's Danish subsidiary? The website of Northern Rock's Irish subsidiary also mentions ““business as usual””. It gives a fixed rate for euros of 5 per cent.—staggeringly high, considering that the euro LIBOR is currently at 4.25 per cent. Let us turn to Northern Rock Guernsey, the offshore aspect of the bank. That subsidiary also offers an interesting set of products. Its website states:"““Investing offshore is the perfect solution for expatriates, foreign nationals or UK residents wishing to take advantage of tax planning opportunities””." So a UK taxpayer-owned bank is enticing UK taxpayers to avoid paying UK tax. That is all at our expense. The website says:"““Northern Rock's operations in Guernsey remain open for business as usual””." What rates does that subsidiary offer? Offshore in Guernsey, someone can buy a Northern Rock bond that will yield 6.75 per cent. a year; UK gilts currently pay 3.86 per cent.—one gets almost 300 basis points more for sticking money, at the UK Government's risk, in Guernsey than for keeping it in the UK. The same is true for money invested over three years: one can get 6.4 per cent. from Northern Rock Guernsey, compared to a gilt yield over the same period of 3.83 per cent. Staggeringly, a UK Government-owned bank is enticing UK taxpayers to invest offshore to avoid tax in this country. Finally, let us look at what is going on in our home market. There are extraordinary Northern Rock products that not only pay a very above-market interest rate, but have extraordinary conditions extremely favourable to the saver. I point hon. Members to the fixed-rate access bond issue 4. If someone invests a minimum of £1, they will get from that 6 per cent. for one year, effective from 4 March. Similar products from Barclays offer only 5 per cent. with a minimum of £500 and no access to the money during the year. Alliance & Leicester will also pay 5 per cent. on its fixed-rate bonds for one year, but early withdrawal costs 180 days'—half a year's—interest. That offer has a £1,000 minimum. Alliance & Leicester, of course, has been in the news quite a bit recently for possibly being under pressure in the market for reasons similar to Northern Rock's. Yet the Northern Rock product offers a 6 per cent. interest rate—far higher than that offered by Alliance & Leicester or Barclays. Not only that, the Northern Rock product has this important clause:"““Withdrawals can be made without any notice or charges””." That is what is called a portable deposit. If interest rates rose, savers could easily pull their money out and stick it in a higher-yielding account, which would become available in an environment of rising interest rates. That is an incredibly useful option for the depositor. Why is Northern Rock, not only through its foreign subsidiaries but in this country, offering incredibly high, above-market interest rates? We need to consider those issues before we start discussing changing the regulatory regime. We need to look at what has been going on in the past two and half weeks; some staggering things have been happening. In the past, the focus has been on Northern Rock's reckless lending, but the bank has also been borrowing recklessly. As we know, Britain has the lowest savings rate of anywhere in the EU, and Northern Rock has been forced to go to countries such as Denmark and Ireland, and offshore, to hoover up savings from countries with higher savings rates. What can we do to seek reform? We need to consider risk management at Northern Rock. We know nothing about what controls and risk management measures are in place at this new bank that we have taken on. It is no use our waiting for the business plan, because the risk is here right now. We could be exposed to any number of risks—systemic risk, event risk, the risk from rogue traders—through today's Northern Rock. Who knows what risk management there is in place at the moment? Since I left banking in 1997, there has been huge growth in risk management, which is now a major part of most of our financial institutions. In my day, there were three or four risk management people out in the back, next to the legal compliance people and others with what in those days were called ““peripheral functions””. Now, however, risk management is right at the centre. Unfortunately, we know nothing about the risk management of this new institution. There was clearly a failure in the risk management of Northern Rock in the summer of 2007, and before, when we saw LIBOR rising and the risk of the drying up of liquidity in the inter-bank market. The possibility of that happening should have been foreseen in Northern Rock's risk management structure and policy. There is no reason to believe that that has changed one bit since 22 February; I rather suspect that the same individuals are in charge of it today as were there three weeks ago. How is Northern Rock managing its currency risk? I have just talked about its foreign subsidiaries. How is it managing the risk as regards having to repay those Danish savers in Danish krone in a year's time? Similarly, with the Irish savers, what kind of currency risk management is being undertaken in relation to the euro? What is its interest rate risk management strategy? It is offering a large number of fixed rate savings products, yet most of its mortgage lending is variable, as is most of its wholesale funding—if that is happening, as I suspect it now is. What is the political risk? It is by no stretch of the imagination impossible that there could be political risk in a state-owned bank; indeed, it happens all the time. Bankgesellschaft Berlin, a German financial institution, got into severe difficulties only five years ago because of inappropriate lending due to political influence. We heard on Second Reading the extraordinary statement by the Chief Secretary to the Treasury that one of the reasons for the speed of the nationalisation of Northern Rock and the urgency behind taking over this £50 billion-odd mortgage portfolio was that we were at the ““bottom of the market””. I do not know which market she was referring to—the housing market, the mortgage market or the interest rate market—but she was taking a massive punt on whatever market it was, and she offered no evidence to back up her decision. What kind of scrutiny are we going to give Northern Rock in this House? Last week, I tabled a set of questions to ask exactly how we are going to study this £110 billion business that we now own. Will there be a Question Time? If, as we did earlier, we have a 10-minute Question Time on the Olympic games, which has a budget of only £9 billion, should we not have a separate Question Time on Northern Rock, which is a £110 billion business? With the honourable exception of my hon. Friends at Question Time last Thursday, there has been woefully little parliamentary scrutiny of Northern Rock since nationalisation. My professional experience in banking predates the tripartite regime, so I cannot comment on how effective it is. I have found time to read the Treasury Committee's report—possibly the first time that I have read a Select Committee report not produced by one of the two Committees I sit on. Like other Members on both sides of the House, notably my hon. Friend the Member for Sevenoaks (Mr. Fallon), I urge caution against over-hasty and over-heavy regulation in reaction to one event. I have seen some of the major financial scandals and failures of the past 20 years, including in the 1990s. I was there during the Hammersmith and Fulham council swaps scandal. In the early '90s, the Belgian Ministry of Finance lost an enormous amount of money betting on convergence of European interest rates. Then there were the cases of Orange county, the US army facilities management fund and Barings bank. There are not necessarily common features to all those disasters. To some extent, there always will be financial failures. It is our duty as a Parliament to create an oversight structure that seeks to prevent them and to prepare for the consequences, but we have to balance that with a duty to ensure that business is not impeded or encumbered. We need to act cautiously in changing the regulatory system, but we must act urgently to consider the situation that we now face and to ensure that proper risk management controls are in place at this new Government Department called Northern Rock bank. In other words, we need to think about banking regulatory reform, but the more urgent and important issue is what our arrangements are for the oversight of Northern Rock, which is continuing many of the practices that were in place before nationalisation in an often dangerous and reckless manner.