Banking Bill

The hon. Gentleman is missing the point; the whole point is that it is designed to restrain rapid lending in a boom period and that that relaxes when the cycle turns in the opposite direction. [Interruption.] No, it is not. Technically, this is well understood; the Governor and people in the Financial Services Authority fully understand how it could work. It has been applied in other countries, and I think there is a fair degree of consensus about implementing it. Let me move on to the substance of the issue and some of the ideas behind it. Before plunging into the technical arguments about banks, a useful starting point would be to acknowledge the fact that banks are inherently rather unstable, and that they always have been. This proposed legislation is the latest in 300 years of attempted legislation to tackle a big problem: how one preserves stability in a system of banking institutions where there will always be significantly less cash and liquidity than needed to meet the claims banks ultimately face. For that reason, banks have always faced runs or the danger of runs, and principles have been established over the years as to how to deal with that. Indeed, it was a British commentator, Bagehot, who came up with the idea—which I think the British authorities forgot last summer—that the first thing to do in a bank run is to pump in as much liquidity as is required at a commercial rate of interest against good collateral, in order to stop it happening. The other subject the old-stagers always used to argue about in terms of banking was the problem to do with moral hazard. We have heard a great deal about that over the last year, and a constituent recently asked me what moral hazard was. I rooted around for a good definition, and I found what I think is a particularly good one from somebody called Herbert Spencer, who was, I think, a rather famous Darwinian. He said:"““The ultimate result of shielding people from the effects of folly is to populate the world with fools.””" In a non-technical way, that summarises what moral hazard is all about. Over the last year, the phrase has been used in a technical sense by the Governor of the Bank of England and others, but I think Spencer's comment serves to remind us that if one goes too far in the direction of protecting banks or depositors, they will inevitably invest in risky activities, knowing perfectly well that ultimately somebody else—ultimately the taxpayer—will bail them out. Despite the problems of moral hazard, there has been an acceptance in recent decades that protection must go beyond the simple Bagehot rule of pumping liquidity into the banks, and hence we have had in the post-war period—and in the pre-war period in the United States—systems of deposit protection, which have, among other things, assisted people, particularly when small banking institutions have gone down. There is quite a long history of that. When I was looking up the history of our own scheme, I found that there have been occasions when credit unions, for example, have fallen and the deposit protection scheme has been very useful in those cases. However, it is obvious that in our recent events that scheme simply did not work, or was not adequate and was simply overwhelmed. In the Northern Rock and Bradford & Bingley cases, for example, the upper limit had to be abandoned, and people were given indefinite protection. It became very clear at the beginning of last week when panic was spreading throughout Europe that the one thing people understood was that their deposits were safe in British banks because, at the end of the day, if the banks collapsed, they would be nationalised and people would therefore be protected. Not many people were worried terribly much about the precise details of the deposit protection scheme.