Banking (S.I., 2008, No. 432)

It is a great pleasure to follow my right hon. Friend the Member for Wokingham (Mr. Redwood), whose closing remarks form a précis of the calamitous state of affairs regarding the nationalisation of Northern Rock that economics students will, in years to come, turn to first to get a proper understanding of what went wrong. The Chief Secretary to the Treasury has unfortunately again left the Chamber. It seems to be becoming a habit that whenever I stand up she goes off, perhaps to get help. I shall start my remarks by explaining to her colleague, the Exchequer Secretary to the Treasury, why the parallel with Bear Stearns is so pertinent; Ministers seem to have failed to pick up on that. I am pleased to see the Chief Secretary return. I should tell her that I am trying to explain why the parallel with Bear Stearns is so clear and direct. Last August, the financial authorities were made aware of the problem with Northern Rock and tried to put together a private sector rescue. They received an indicative proposal that was dependent on substantial, Government-guaranteed financing. If the authorities had sat round a table in the same room as the financiers, just as Secretary Paulson did with JPMorgan Chase, a deal would have been done over the weekend, and the Government would have avoided all their subsequent problems. It is for the Government to reflect on why that did not happen, and to repent for years to come. I should like to pick up on one or two of the revelations in Northern Rock's annual report and business plan, published today, which allow us a glimpse of why the Government were so reluctant to disclose what is happening in the bank. Consistently over a period—ever since he first discussed the issue with us—the Chancellor has told the House and the public at large that he is confident that Northern Rock's asset book is good, and that Northern Rock was solvent. He was confident about that because he had been told by the Financial Services Authority that that was the case. One of the final notes of the accounts—note 41(B) on capital management, on page 99—says that on 19 April 2007, the FSA was told that"““Northern Rock's regulatory capital was below the capital requirement imposed by the FSA by £85.5m””." As long ago as last spring, months before the problems emerged in the credit markets, the FSA was aware that Northern Rock was operating outside its capital regime. However, it did little about it—so little, indeed, that despite its having identified Northern Rock as one of the so-called high-impact firms, its regulatory regime was so lax that its own internal review, published last week, describes it as being"““at the extreme end of the spectrum””" of regulation. The FSA's decision that, alone among 38 high-impact firms, Northern Rock did not need a risk mitigation programme implies considerable scrutiny during ““close and continuous”” meetings. However, it is clear from the FSA's commendably frank and candid appraisal of its own performance that the number of such meetings held by the FSA in the three years from 2005 until 2007 amounted to none in 2005, one in 2006 and seven in 2007. Of the seven, five took place on the same day—I would describe that as a single meeting—and two took place by telephone. I calculate that that represents an average of less than one day of meetings per year during the three years in which Northern Rock was supposedly a high-impact firm. The organisation in which the Chancellor has placed such confidence said repeatedly that Northern Rock was a good bank, solvent and with good assets. It beggars belief that the Chancellor can have placed such trust in the regulator, given its performance over that period. Let us examine the asset quality revealed elsewhere in the accounts, which has already been mentioned by other Members tonight. A most revealing statistic is the proportion of residential mortgages—the primary and most secure category of assets held by the bank—which are at the"““extreme end of the spectrum””," as the FSA put it. Page 92 of the annual report reveals that in 2006-07, the proportion of mortgages with a loan-to-value ratio in excess of 100 per cent.—in other words, the loans were greater than the value on which they were secured—rose from £110 million, in round figures, to £432 million. That £432 million is now guaranteed by the taxpayer, although the company itself admits that the loans were greater than the security on which they were pledged. As for the second-worst-secured assets, those with a 95 to 100 per cent. loan-to-value ratio, the figures are remarkable. Since the end of 2006 the amount lent increased from £2.1 billion to £4.1 billion, an increase of £2 billion.