Banking (Special Provisions) Bill

My Lords, I am glad to follow the noble Baroness, Lady Kingsmill, because I agree with her on one thing. I feel a great deal of sympathy for the employees of Northern Rock and for its small shareholders up there who regard it as a true rock and a safe place for their shareholdings. When I left university, my first job was in Newcastle. I grew to love the people of that deep, Labour heartland. While the Government may have let Northern Rock rather overbalance its judgment, I can understand why they stepped in, but I cannot understand the reasons why they proceed down the course of this Bill and the rather unlikely effort to make it business as usual. My first point, I hasten to say, is a personal one. I am a member of your Lordships’ Select Committee on the Constitution, which met this morning. It will be understood that there was not time to produce a report between this morning and this afternoon. What I say is entirely personal, but it was understood that I would say something. This Bill causes concern. In due course, the Select Committee will probably look at things with hindsight, because the Bill will have gone through almost certainly by then. But I and others share a view in asking: why the haste? The noble Baroness rather emphasised that. There have been five months of what she says is not dithering. Why now do we have to do it in two or three days? My second point is, of course, the important one of hybridity. In reality, this is unquestionably a hybrid Bill. It is dressed up as though it covers other—or all—banks, but this is a hybrid Bill, dealing with one bank, Northern Rock. Its shareholders have constitutional rights, hence the interest of the Constitutional Commission. Private individuals, be they companies or simply individual persons, have the right to petition in a hybrid Bill, to be sure that Parliament will take their views and interests into account when legislating. That is not possible in this Bill. I congratulate the noble Lord, Lord Goodhart—he is not in his place—and the Select Committee on delegated legislation on their speed and efficiency. They had an opportunity, which they thoroughly fulfilled, to warn this House. There are constitutional issues to which we shall have to return. I hope to make my key point at not-too-great length. A number of noble Lords have dealt with the fundamental problem in this case. It is clear enough that matters were triggered by the sub-prime lending problem in the United States, but that was not the fundamental problem. After all, almost all mortgage-lending institutions in this country have, at least so far, managed to survive the vibrations from the sub-prime crisis. What we really need to find out—and a great many of my noble friends have already put their finger on it—is: why did the disaster occur in the first place; who was responsible; and why did our existing, or then current, banking, regulatory and governmental structures fail not merely to prevent it, but even to warn Northern Rock against it? Here, I believe that the present Government and no one less than the Prime Minister himself, as the former Chancellor, have very real questions to answer. The immediate responsibility lies, as the noble Baroness said, with the directors and senior management of Northern Rock. They committed what my noble friend Lord Stewartby said vigorously was a breach of one of the prime rules of banking: that if you borrow short-term in the wholesale money markets, in order to fund long-term lending, you are very likely to go wrong. I speak as a lawyer, not a banker. It is that kind of mistake that we hope our regulatory structures, which get more and more complex, will prevent. At this morning’s meeting, those who understand regulatory structures and the terms of surveillance very well talked about the extraordinarily complex regulatory structures that are being built around everything, and the fact that they do not work. This was not started by this Government. The Financial Services Act 1986 has a good deal of complexity in it, but it has certainly been built upon and elaborated over the years. The fundamental difficulty lies in the elaborate tripartite system set up by the Prime Minister when he was Chancellor, where regulatory responsibility for the banking sector, instead of being, as previously, the clear responsibility of the Bank of England, was divided between the Treasury, the Financial Services Authority and the Bank of England. The FSA was supposedly in the lead but, frankly, was not up to the job. Sir John Gieve, as a member of the FSA, and appointed by Gordon Brown as deputy governor of the Bank of England, has taken a great deal of flak. It may or may not be fair, but it must be remembered that Sir John Gieve, who headed the FSA, has never been a banker. Sir John Gieve was a distinguished career civil servant. He is an administrator. In order to spot what was going wrong in banking circles and what was going wrong with Northern Rock, you needed to understand banking. When you see a comparatively small northern institution becoming the largest mortgage lender in the country, you wonder where the money is coming from. How are they funding it? It is not funded by capital. If you are a banker, it does not require genius to realise that it must be borrowing it. It is borrowing it on the wholesale market, and borrowing short and lending long. It is committing the fundamental error and there are very great dangers. The old-fashioned Bank of England would have said, ““We must step in and warn it to draw in its horns and have a contingency plan to help it out of the problem when it happens””. It is not the way of this Government. The Prime Minister gets plaudits for his intellectual capacity. He obviously has a huge capacity for detail, but there is an expression about failing to see the wood for the trees. That is what happened here. We need regulatory structures that will genuinely guard us against that in the future. I hope that they will soon follow.