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Northern Rock & Banking Reform

March 10, 2008

Northern Rock & Banking Reform

Mr. Mark Field (Cities of London and Westminster) (Con): This has been a very interesting debate. My hon. Friend the Member for Sevenoaks (Mr. Fallon) was absolutely right to identify the need to avoid at all costs the kneejerk reaction of rapid regulation that might unravel and be regretted in future. That was implicit in the Treasury Committee’s report.

The right hon. Member for Norwich, South (Mr. Clarke) made a very interesting contribution, drawing a parallel with the events of 7/7, when he was Home Secretary. It would be difficult to have the clear command structure among people in financial services that there was for the armed and emergency services on that day. It is a little idealistic to assume that we could put such a structure into place, however it worked. The Select Committee and the Treasury will continue to debate the issue.

There have been more spectacular banking crises than the one that affected Northern Rock in recent months. The phenomenon of a run on a bank was, after all, almost commonplace in Victorian times. More recently, the collapses of Bank of Credit and Commerce International in 1991, and of Barings only 13 years ago, show that even a highly regulated banking sector is never immune to mismanagement or to fraudulent activity. The fiasco of Northern Rock is a modern-day, sorry catalogue of poor judgment and woeful indecision.

I agree with relatively little of what the right hon. Member for Holborn and St. Pancras (Frank Dobson) said about the City, but some elements of his comments were right. Certain enormous incentives for the banking industry have allowed some of the problems that have emerged in the credit crisis to come into play. It is not for the Government to regulate on the matter entirely, and the right hon. Gentleman recognised that implicitly, but some perverse incentives in the banking industry have contributed in bringing us to this pass.

Some have been keen to point the finger of blame entirely at the actions—or inactions—of the Treasury and especially at the erstwhile Chancellor of the Exchequer. In truth, responsibility for what happened at Northern Rock should be more widely spread. First and foremost—it was absolutely right that the right hon. Member for West Dunbartonshire (John McFall) referred to this—the senior management of the Bank, in particular its former chief executive, and the array of non-executive directors bear some responsibility. Collectively, they should have realised that the aggressive growth in Northern Rock’s turnover strategy depended on continued economic blue skies and liquidity in the money markets. Northern Rock’s strategy was so diametrically opposed to those of its competitors that alarm bells should have been ringing about its sustainability amongst the well-remunerated non-executives—a roster that included some well-known City names.

Once the credit crunch hit in early August, the Bank of England should have been far more fleet of foot. Reference has been made to the role of the Financial Services Authority, but I believe that the Bank of England was at fault to a certain extent, particularly with regard to its amenability or otherwise to Lloyds TSB’s proposal to take over Northern Rock before the public became aware of the nature of the crisis. That would, no doubt, have required substantial Treasury guarantees, but UK taxpayers would almost certainly have been in a more favourable position than the one in which they find themselves now, several months on.

One of the biggest, longer term casualties of the whole affair will be the Governor of the Bank of England, who has played an important part in overseeing this debacle. His credibility in the City has been severely damaged, and it is difficult to see how he would be the right man to lead any restructuring of the Bank of England, which is my party’s preferred approach.

This episode, coupled with the rapid internationalisation of the ownership of financial institutions in the City, puts into perspective some of the harking back to the pre-1997 arrangements. The City is a club no more and the Bank of England’s role as judge and jury is probably best confined to the past. Meanwhile, as a number of hon. Members have pointed out, the Financial Services Authority lacks clout and respect among leading City institutions, meaning that banking reform should be informed by 21st century requirements, rather than by a return to some bygone era.

We must remember, however, that the difficulties for Northern Rock did not start last September—they only became public in that month. Once the crisis was out in the open, queues began to develop outside branches of the bank. At that stage, the possibility of an autumn general election, and the fact that the bank was a large, almost iconic employer in Labour’s north-eastern heartlands, resulted in a catalogue of ill-advised Treasury decisions. To a large extent, this crisis was driven by political considerations, which has not been helpful. I accept that simply allowing Northern Rock to collapse was never an option. As the right hon. Member for West Dunbartonshire said, banks are different from other companies in that they have depositors as well as shareholders. Although the value of a shareholder’s investment can, in principle, be allowed to diminish to zero, the entire competence of the banking system depends on banks’ depositors being assured that they will be compensated—in my view, fully—in the event of a collapse.

The Financial Secretary to the Treasury (Jane Kennedy): I know that the hon. Gentleman genuinely and firmly holds his view about politically inspired decisions. I would like to understand his point, which I do not think that he makes flippantly, but it would be interesting to know which decisions he thought were wrong and politically inspired.

Frank Dobson: And whether they were supported by the Tory party. [Laughter.]

Madam Deputy Speaker (Sylvia Heal): Order.

Mr. Field: I shall try to make this a solo rather than a duet.

It is fair to say that, when the crisis emerged—I admit that it informed some Conservative policies, too—we were in the cauldron of a likely pre-election campaign. Consequently, we went down another path when we might have moved more quickly to nationalisation, which, many people realised by November and December, was definitely on the cards. I have some sympathy for the Government’s position. They wanted to look for a private sector buyer and perhaps they looked for too long. There was also an implicit recognition that, when we had come to such a pass, things would not get better and were, indeed, likely to get worse. However, in those few weeks in September, decisions were driven by a political agenda. I am not necessarily being naïve; a political agenda has its part to play at any time, but let us bear in mind the potential imminence of an election and the fact that the building society had great strength and roots in the north-east of England—perhaps if it had been in the south-east of England, there might have been less of a rush towards Government activity.

Mr. Mudie: Is not that a bit unfair? The institution was not simply a northern bank but a bank with queues outside the door, and there was a genuine fear that other badly placed banks would be caught up in the contagion. That made the Government take action. The decision was nothing to do with northern heartlands; systemic risk brought it about.

Mr. Field: There is some fairness in that, and I discussed systemic risk earlier. The agenda of a 24/7 media makes things difficult. The media got hold of the problem with floods not when they occurred in Hull and Sheffield but when they affected holiday homes in the Cotswolds. Suddenly, floods were a massive national issue in a way they might not have been previously. That reflects the media timetable.

Mr. Bailey: What decisions by the FSA, the Treasury or the Bank of England were influenced by political considerations?

The hon. Member for West Bromwich, West (Mr. Bailey) must be proud of his football team’s success at the weekend, although there is a heavy match against Portsmouth in the FA cup semi-final to come. [Interruption.] I am trying to show that I have some knowledge of culture, media and sport, if not necessarily of Treasury affairs. However, I have tried to make the point that there was feverish activity in September and October, when, without the perceived imminence of a general election, more long-term decision making might have occurred.

Mr. Philip Dunne (Ludlow) (Con): I am grateful to my hon. Friend for allowing me to offer him a suggestion. The decision not to advance a lender of last resort facility to the one credible private sector bidder that made overtures about acquiring the bank in August and up to the first week of September could be described as a political decision by the Chancellor.

Mr. Field: That is fair to say, about one of the Chancellor’s many minor decisions.

The “temporary” nationalisation of Northern Rock has been forced on the Government as an implicit recognition that, economically, things are likely to get worse in this country before they get better. No one should assume that uncertainty in the financial markets is a short-term phenomenon. Speaking to people in the City, I have detected that whereas confidence was renewed in January and early February, there has been a recent slump in confidence, although I appreciate that much of that can ebb and flow. However, there is little doubt that it will take less than five years at the absolute minimum for taxpayers to extricate themselves from Northern Rock without net losses.

The Government should be resolute in resisting the claims of shareholders for compensation. That applies particularly to the hedge funds that piled into Northern Rock stock in the autumn hoping for quick speculative returns. They gambled and they lost. Regrettably, however, we cannot draw distinctions among the different classes of shareholder, however much we might wish to protect the interests of small, loyal Northern Rock investors or former employees and suppliers who may have held stock for some years. No more taxpayers’ money should be expended on bailing out Northern Rock shareholders, beyond that which will be determined by arbitration.

Hon. Members in all parts of the House in the months to come will doubtlessly be inundated by pleading on behalf of well orchestrated, high profile shareholder groups, as they battle, perhaps even in the courts, for compensation. The temptation to make common cause with such groups should be resisted. We now need to give the new chief executive, Ron Sandler, the breathing space to make plans for the future that are economically viable, rather than simply politically expedient. The likeliest and wisest way to proceed involves the parcelling and sale of parts of the Northern Rock business, as market conditions allow in the months and, potentially, years ahead.

There is no easy fix. Politicians need to appreciate that if taxpayers are to stand a realistic chance of recapturing their guarantees and loans in full, we almost certainly face a long haul.