Northern Rock and Banking Reform

I could have made a point about that in response to the hon. Member for Hammersmith and Fulham (Mr. Hands), but we have covered such areas many times before—[Interruption]—not in the detail that he mentioned, but I hope that the hon. Member for Ludlow will accept all the issues raised in today's debate and the detail that the Select Committee has included in its report will be looked at very carefully by the Government. We are engaged in a detailed consultation. Opposition Members in particular have criticised us for not doing more, but I draw to their attention—they may have failed to see it—the very significant response that has been included in a well-received consultation document that responds in many respects, although not all, to some of the Select Committee's recommendations. It is entirely appropriate that we now learn the lessons of the experience of last summer and the decisions and circumstances that led us to nationalise Northern Rock. The decision to nationalise was taken some weeks after the Select Committee had completed its work, but none the less, we can take into account what then happened and look at the detail of its report and the Government's response to date with, I hope, a positive outlook. My right hon. Friend the Member for West Dunbartonshire said that there was too much political involvement in Government proposals for a Cobra-style arrangement during the crisis. A number of hon. Members raised that issue. The Government are consulting on how such arrangements should operate in practice and which institution is involved in which circumstances. Beyond that, we agree with my right hon. Friend that the Chancellor should have the final say on any decision that involves money and that the Bank of England is responsible for the provision of general liquidity. The House may want to know that the memorandum of understanding between the three authorities will also be revised to clarify responsibilities for decisions taken in a crisis. My right hon. Friend the Member for West Dunbartonshire—again, along with other Members—questioned whether the FSA failed in its regulation of liquidity risk. Primary responsibility for liquidity risk management by banks lies with banks' boards and management—that is a difficult sentence to get out—and that theme runs through our whole response to this situation. The FSA is reviewing its regulation of liquidity risk in the light of the recent events to learn lessons from market turbulence. The FSA published a discussion paper in December that sets out preliminary ideas for reform. It had a very good response to that document, and it is considering further how to respond to those responses. There is an ongoing debate about how it should respond. A number of hon. Members asked about international work. The FSA is considering responses to the discussion paper and in the context of ongoing international work on liquidity by the Basel Committee, which a number of hon. Members have mentioned. The FSA expects to publish more definitive proposals in the summer of 2008. My right hon. Friend also said that the FSA should work more closely with the boards of banks to identify issues early and take corrective action quickly. As set out in the tripartite consultation to which I have referred, the FSA intends to consult on new rules to require banks to produce additional evidence to the FSA at short notice, including strategies for correcting any problem identified. My right hon. Friend the Member for Norwich, South (Mr. Clarke), who has not rejoined us, argued very passionately and persuasively—as did a number of other Members, including most lately the hon. Members for Ludlow and for Fareham—for a new deputy governor and head of financial stability. All those Members will have seen that we proposed changes to the governance arrangements relating to the Court of the Bank of England to enhance its effectiveness, particularly in respect of financial stability. We also propose establishing a statutory role for the Bank of England again in respect of financial stability. These are ongoing consultations, and we do not seek to be prescriptive. We will listen to the representations in the ongoing debate around exactly what the new structure should be. The Government are thus taking these issues very seriously. As hon. Members will know, the Treasury, along with other tripartite authorities, published that discussion paper. Let me deal now with the Government's proposals for banking reform, which several Members asked about. We are proposing reform around five core objectives and those proposals build on examples of best practice around the world, many of which are highlighted in the Treasury Committee's report. The hon. Member for Hammersmith and Fulham and the right hon. Member for Hitchin and Harpenden (Mr. Lilley) raised questions about international precedence, and the hon. Member for Twickenham (Dr. Cable) proposed the US model, about whose adoption the hon. Member for Hammersmith and Fulham advised caution. It is true that most industrialised countries have a regime for banks either defined in law—in the US and Japan, for example—or created by specific exemptions carved out for financial institutions from the general insolvency law, as in France and Italy. At that point I was particularly taken with the suggestion by my hon. Friend the Member for Leeds, East that we read the book, ““A Random Walk Down Wall Street”” if we have not already done so; I shall see whether there is a copy in the Library. I look forward to reading it. The first objective of our reforms is to strengthen the stability and resilience of the financial system. That covers similar ground to the more recent Treasury Committee report on financial stability and transparency, which we also welcome—in relation to the operation of the securitisation markets, for example. The second objective is to reduce the likelihood of banks' failing. That includes new powers for the Financial Services Authority to gather and share early information and to make improvements to the framework for the provision of liquidity assistance. I am very conscious that another debate is about to take place, Mr. Deputy Speaker, so I offer my regrets if I do not manage to cover all the issues that have been raised. They are all important, but I will try to cover those that I think the House would most like me to deal with. A number of Members attacked, although some defended, the role of credit rating agencies. The current tripartite consultation to which I have referred identifies a number of causes for concern about the role of credit rating agencies, including conflicts of interest, the information content of ratings and over-reliance on ratings. We are supporting international work by the Financial Stability Forum and the European Union to look further into the role of rating agencies in financial markets. The Treasury, the Bank of England and the FSA are fully involved in those discussions, so I hope that that reassures not only those Members who had concerns about credit rating agencies but those who wanted to see us work more in an international context. My hon. Friend the Member for West Bromwich, West (Mr. Bailey) asked a very good question: if the FSA did not use its powers, what was the point of giving it any more? That is a paraphrase of what he said. The FSA is reviewing its internal supervisory systems in the light of Northern Rock and it will publish some conclusions in the spring. My hon. Friend also asked why we do not treat building societies in the same way as banks. The authorities appreciate that building societies are fundamentally different from retail banks; however, they must mitigate the risk of a building society failing, so they are consulting on which parts of the special resolution regime should be applied to building societies. We propose that liquidity assistance provided by the Bank of England should be exempt from the calculation of the proportion of building society funding which arises from wholesale funding. That change, Mr. Deputy Speaker, would remove an impediment to a building society being able to borrow from the Bank of England and would ensure that building societies are treated in a similar way to banks for these purposes. I am very much up against the clock at this stage, but I cannot resist responding to my right hon. and dear Friend the Member for Holborn and St. Pancras (Frank Dobson), whose rumbustious contribution raised several always very interesting points. I would like to reassure him on one particular point—that interventions using special resolution tools, which interfered with shareholders' property rights, would be to secure the wider public interest in financial stability, the continuity of banking services and the protection of depositors. Very careful consideration would need to be given as to whether compensatable value remained in a bank where such interventions were necessary. In other words, shareholders are a long way down the list of those who will be considered for compensation. This has been a very interesting debate, to which I have been privileged to listen and to be invited to respond. We have a wide-ranging set of proposals and the Government are committed to legislating on them as soon as possible—but only when we are satisfied that we secured the right response to the circumstances that we all lived through last summer. These proposals are only part of our work to learn the lessons from what has happened over the last six months or so. As the Chancellor has set out, we are also determined to play a full role in the European Union's and the international response to what has clearly been an international series of events. The UK is heavily involved in work at both the EU and the G7 level to analyse the causes of market turbulence and to develop an appropriate international response. As I hope I have explained, the Government are looking closely at the issues raised by the Treasury Committee under the chairmanship of my right hon. Friend the Member for West Dunbartonshire. We will keep the Committee's views firmly in mind as we continue to consult on our proposals and as we take them forward to legislation. Question deferred, pursuant to Standing Order No. 54(4) and (5) (Consideration of estimates).