Banking (Special Provisions) Bill

My Lords, I will address part of the wider context of recent events, particularly the events surrounding Northern Rock. Most of us realise that we are now in the throes—perhaps the very early throes—of a major international financial crisis, which will ensure that the future of credit and of all mortgage businesses is radically different from how things are today. How different it is not yet possible to say, but what we can say is that the market for structured credit has virtually collapsed and there is at present no prospect of revival. If and when it does revive, it will look very different from how it looked, say, 12 months ago. We can also say that the regulation of the credit markets will be different. The role of credit ratings agencies will, I hope, be different and it is likely that the structure of the products themselves will be different. All that means that there will be fundamental changes in the way in which the UK mortgage market operates. The changes are likely to be forced on our banks and building societies over a relatively short time horizon of, say, two years. Given the international crisis, it is obvious that the business model espoused in the past by Northern Rock is no longer viable. It is also obvious that the action being taken by the Government in bringing Northern Rock into public ownership is not only right but the only possible action today, dictated by force majeure. Not only should that be obvious in the context of today’s events, but it is also the lesson of history. It is the nature of banking that there exists a relationship of mutual dependency between the major banks and the state. As the United States Government learnt in 1984 in the case of Continental Illinois, large banks are ““too big to fail””, for their failure would pose too great a risk to the banking system as a whole. This is as true in the UK today as it was in the US 24 years ago. All the large retail banks operating in this country today are too big to fail. Hence, when credit markets seized up around the world, it was obviously right that the authorities should seek to ensure that Northern Rock did not collapse. If the authorities had not acted as they did in September, the consequences for UK financial markets would have been disastrous. We know that the Government then gave the private sector the opportunity to develop plans for the absorption of Northern Rock by other banks. The noble Lord, Lord Marland, who participated in that process, told us that the Government gave insufficient time—not too much time but insufficient time. Again, doing that was absolutely right, as evidenced by rescue operations in the past—for example, the Bank of England operations in the secondary banking crisis in the 1980s. It should also be remembered that in September no one, except perhaps my noble friend Lord Desai, could be sure that the crisis in credit markets would be as severe or persistent as we now know it to be. Once it became clear that private sector institutions were unable to absorb Northern Rock, taking it into public ownership was again clearly the right thing to do. In this context, the solution proposed by the noble Lord, Lord Lawson of Blaby—the strategy of working out the book, as I understand it—is available to Mr Sandler if he wishes to pursue it. If that secures the best deal for the taxpayer, I am sure that Mr Sandler will pursue it. However, it would be quite wrong for the Government to tie Mr Sandler’s hands in that respect in the way that the noble Lord, Lord Lawson, wishes to do. Instead, Mr Sandler should simply have the instruction to secure the best deal for the taxpayer within the constraints placed on him by the competition authorities. It is important for the House to realise that the solution proposed by the noble Lord, Lord Lawson, is the same as the Government’s, plus a particular restriction placed on the management of Northern Rock.