Banking (Special Provisions) Bill

My Lords, I appreciate that the regulatory consequences of the collapse of Northern Rock will not be obscured by this Bill because the Government have said that they will undertake a consultation exercise on potential reform of the banking supervisory legislation and this will provide us all with an opportunity to review the effectiveness of the tripartite system and to rectify some of its shortcomings. I shall make one general observation and comment on a recommendation of the Treasury Select Committee, whose report was published on 26 January 2008. The tripartite system failed because it allowed the Treasury, the FSA and the Bank of England to shift the burdens of responsibility at crucial moments. As far back as January 2006, the FSA was aware of the tom-tom warnings in the markets relating to the financial strategy of Northern Rock. A year later in February 2007, Northern Rock’s share price began to tumble and between then and June the FSA could and should have stepped in. As other noble Lords have remarked, to compound the problem the Treasury then unwisely spurned the chance of a takeover by Lloyds TSB involving £30 billion in state-backed loans to be repaid over a two-year period. Here, too, I am forced to conclude that political calculations overrode sounder economic counsels. Surveying the aftermath of this debacle, the Treasury Select Committee produced a lucid report. I was struck by paragraph 276. It declared that despite the evidence of some of the witnesses to the contrary, the tripartite system had not worked well, partly because, "““the people side of the operation””" had shown weaknesses. And no wonder. As my noble friend Lord Lawson of Blaby observed, the Banking Act 1987 was dismantled, and with its demise went the necessity of appointing people with expertise and first-hand knowledge of banking and the markets in a clear, uncluttered structure of supervision. Under that erstwhile system 20 years ago, as the Economic Secretary to the Treasury under my noble friend Lord Lawson, I saw the importance of the quality of the daily relationships between the Treasury and the Bank at Under-Secretary and Deputy Secretary levels. If working relationships then broke down for reasons of chemistry, vanity or turf protection, new people were put in place. In the case of Northern Rock, it is clear that relationships foundered without the necessary corrective action. In these days of heavier, more prescriptive regulation, over-reliance is placed on the book and too little on putting the right people—experienced City banking practitioners capable of demonstrating good judgment—into key jobs at senior levels. That is one reason why I was struck by the Select Committee’s recommendation 66 that a new post should be established called the ““deputy governor of the Bank and head of financial stability””. He or she would head a new unit with powers to intervene in failing banks. That would help, in part, to remedy some of the defects of the tripartite system. The holder of this new post would have a key role in ensuring that the Chancellor received authoritative and co-ordinated advice in any future case of financial instability. If that new role is created, as I hope it will be, then I go further than the Select Committee by suggesting that the new post must be filled by a person with extensive working knowledge of the banking system and markets rather than by an economist, a civil servant, a journalist or an academic. I retain respect for the governor and the deputy governor of the Bank, but neither of them had direct or significant experience of the baking system or markets before assuming their offices. Surely that imbalance of first-hand knowledge at the top of the Bank of England must be avoided in future. Of course I would prefer a return to the better features of the Banking Act 1987, but, if that option is discounted by the Government, I commend to them the model recommended by the Select Committee.