Banking (Special Provisions) Bill

My Lords, when I first started my business, I was introduced to a well known businessman who told me something that I will never forget. He said, ““Young man, empires are built on trust””. What we have before us today is the result of the breakdown of trust—a breakdown of trust from the global banking system to a breakdown of trust at all levels. We have heard today that most observers refer to the summer of 2007 as the start of this crisis. It was then that the word ““sub-prime”” entered common usage, exported from the United States, and it was then that we became aware of the troubles at Northern Rock. It has been reported that the first warning that the Governor of the Bank of England received from the Financial Services Authority regarding the potential impact of the global credit squeeze on Northern Rock was in a telephone conversation in August 2007. As we have heard, that warning came far too late. What most people overlook is that the warning signs appeared much, much earlier than that summer. As we have just heard, early in 2007, Northern Rock was roaring ahead. In the first six months, there was an increase of 50 per cent compared with the year before. As we have heard, it was issuing 20 per cent of all the new mortgages in this country. In fact, even earlier than that, two years ago in 2006, the FSA had classified Northern Rock as a, "““high impact bank under close and continuous supervision””." It has come to light that the FSA did not plan an impact assessment for Northern Rock until January 2009. Maybe I have misread this—I do not know whether I am missing something here—but how could the FSA justify a delay of three years before scheduling a high-impact review of Northern Rock? In the globalised world in which we live, things move pretty quickly. The old saying that the United States sneezes and we catch a cold is true. What is more, if a bank is pursuing an especially aggressive policy, as was Northern Rock, surely one would expect rigorous supervision. Let me quote a professor from the Cass Business School at City University, Geoffrey Wood. He said that, "““the FSA was asleep on the job. A very clear signal of a bank running a big risk is rapid expansion—it is really remarkable that the FSA missed it””." Then, at the end of June last year, Northern Rock finally admitted that it had serious problems. Instead of taking decisive action, the FSA relaxed the technical requirements on the bank, allowing it to free up more assets. Then came the global credit crunch and the rest is history. I have often said this, but I will say it again: one of the best moves that the Government made in 1997, after they came to power, was to grant the Bank of England independence through the formation of the independent Monetary Policy Committee. Since then, the Bank has had the ability and the wherewithal to set interest rates and control inflation on a proactive and reactive basis month by month. That move has been instrumental in providing our country with the stability that has made our economy the envy of Europe. However, the regulatory framework that accompanied the independence of the Bank of England also introduced the now infamous tripartite system of the Bank, the FSA and the Treasury. When times were good, the tripartite system was a happy merry-go-round that seemed to work fantastically well. As we have now seen, when times were bad and pressure was placed on the system, it became a bitter blame-go-round. The lines of responsibility, accountability and authority all became and remain blurred. The Bank of England is widely respected around the world. It has a proud and historic reputation for authority, prudence and capability and it has had many outstanding individuals, including the current governor, Mervyn King, serving as its governors. Look at what has happened. In the Northern Rock crisis, under the new regulatory system the Governor of the Bank of England is fighting with his hands tied behind his back and, at times, blindfolded. In the United States, on the other hand, the Chairman of the Federal Reserve has in a crisis the advantage of being both the lender of last resort and the regulator. In the sub-prime crisis, the Fed was able to act swiftly to inject liquidity into the market and drastically reduce interest rates. In the case of the Federal Reserve, the right hand knew what the left hand was doing. In the UK, on the other hand, a month passed between the FSA’s telephone call to the governor alerting him to the serious problems that the credit crunch would have on banks such as Northern Rock and the decision to inject £10 billion into the money markets. I genuinely believe that this Government have made great efforts to create an environment where business can prosper. Britain is one of the most open economies in the world and we are respected worldwide for our principles-based regulatory system. However, the once warm relationship that the Government have had with business has now definitely cooled. The Government have come under criticism for proposals that appear not to have been fully or clearly thought through. To give a few examples of what has happened in less than 12 months, I refer to the increase in corporation tax for small businesses; the proposal to almost double capital gains tax by removing taper relief, which was a wonderful incentive encouraging investment in enterprise and entrepreneurship; and, more recently, the uproar in the business community from all quarters surrounding the proposal to tax non-domiciles. Is the tripartite system of banking, governance, supervision and regulation yet another example of a policy not fully thought through? Did the Government truly and fully consider how the system would operate in a crisis? Today, we have been presented with a Hobson’s choice. It is a situation that no one wanted, but we are being forced to rush through a Bill that will give the Government the power to nationalise Northern Rock. This crisis demands far more than this Bill. I urge the Government to continue with their plans and completely to revamp the regulation, supervision and governance of our banking system to enable it to be proactive, reactive and rapid. The Government will also have to establish clear lines of responsibility, accountability and authority. The eyes of the world are on us. At stake is more than the reputation of a Government or the future of a bank. At stake, as we have heard, is the reputation of the United Kingdom. At stake is our position as the leading financial centre of the world.