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Financial Market Instability

Volume 464: debated on Thursday 11 October 2007

With permission, Mr. Speaker, I should like to make a statement on Northern Rock plc. Before I start, however, I draw the House’s attention to the fact that I have informed both the Register of Members’ Interests and the Treasury’s permanent secretary that, like many others, my wife and I have a mortgage with Northern Rock, but no savings or deposits.

As I said in my written statement on Monday, Northern Rock got into difficulty following the problems triggered in the US mortgage market, which have gone on to affect the financial markets in countries all around the world. In early August, when the markets realised the extent of the problems in the US sub-prime market, they also began to have doubts about the value of other asset-backed securities. Uncertainty over which institutions were exposed and to what extent meant that institutions lent to each other at much higher rates, and in some cases stopped lending to each other altogether. The result was a large reduction of money in the market generally and an increase in the cost of borrowing, not just for those with exposure to the sub-prime market, but for all institutions.

Those developments have had a global impact, affecting major US mortgage lenders, a major French bank and banks in Germany. The availability of credit has increased over the past few weeks, so we can be more confident, but we cannot be certain when the current instability will end. Britain entered the global turbulence with a stable economy and a strong banking sector, which has experienced rapid growth, with well capitalised balance sheets. British institutions have less direct exposure to sub-prime assets and our sub-prime market share—5 per cent.—is much lower than that of the US. However, because of its business model, Northern Rock faced a particular problem. It has a large share of Britain’s mortgages, but they are primarily financed through the wholesale markets, including a significant proportion from securitisation. That meant that Northern Rock was particularly vulnerable to the virtual closing of that market over the summer.

On 14 August, the Financial Services Authority told the Bank of England and the Treasury about its concerns about Northern Rock and its vulnerability in the current market circumstances. During August it became increasingly clear that Northern Rock was having difficulty getting access to the financing that it needed and that the cost of doing so was increasing. The general situation and Northern Rock’s position in particular were monitored on a daily basis. On 5 September, the Bank announced £4 billion of extra support to provide increased liquidity to the wider market. As Northern Rock’s position deteriorated, it became clear that specific support was likely to be needed for it. On 13 September the Governor and the chairman of the FSA recommended that I authorise the Bank to provide special liquidity support. I agreed because I believed that that was justified.

There are clear principles governing such support, which are set out in the memorandum of understanding between the Treasury, the Bank and the FSA that was first signed in 1997. Such support should be undertaken only when there is a genuine threat to the stability of the financial system and in order to avoid a serious disturbance in the wider economy. That was the case here. The provision of support was announced on 14 September. Although the FSA had assured the public that Northern Rock was solvent and that if depositors wanted to get their money out, they could do so, it became clear that further assurance was needed. Therefore, on 17 September, again on the advice and with the agreement of the FSA and the Bank of England, I announced that during the current instability in the financial markets, and should it prove necessary, I would put in place arrangements that would guarantee all the existing deposits in Northern Rock. That undertaking was extended on 20 and 21 September.

The Treasury, the Bank and the FSA continue to work intensively with Northern Rock with a view to helping it to resolve the situation. Any future solution must lie with the company, but the Government have provided appropriate help and will continue to do so. As I reported to the House on Tuesday, I have extended the Government’s guarantee arrangements to all new retail deposits for which Northern Rock will pay a fee, while the Bank has provided an additional loan facility, which has replaced that of lender of last resort. I have today written to the Chairman of the Select Committee on the Treasury and the Select Committee on Public Accounts setting out more details. I am also publishing that letter and placing a copy in the Library of the House.

There are clearly lessons to be learned from what happened to Northern Rock and the wider instability across the world. The responsibility to minimise risks and prevent problems from happening in a particular bank lies first and foremost with the directors acting on behalf of its shareholders. That is their clear duty. It is the job of the financial authorities to set the policy and the regulatory framework in which institutions and markets work. Let me remind the House of those responsibilities. As the House knows, the Bank of England has complete independence in monetary policy. Its second core purpose is financial stability, a role that it discharges on a daily basis. The FSA, also independent, is responsible for the supervision of individual firms such as Northern Rock. Because of the importance of the financial system for the stability of the economy as a whole and because of the potential impact on the Exchequer in ensuring stability, the Government are rightly also involved. The Treasury is responsible for the overall legislative framework and I am accountable to Parliament.

It is right that the Bank and FSA should continue with those responsibilities. The model is one that others around the world are now following, but we need to review how the framework has operated and put in place whatever practical improvements are needed. As the FSA has said, it is reviewing its own lessons for itself. I look forward to its conclusions early next year. We need to make more reforms to prevent problems from happening internationally and in Britain. First, when the Financial Stability Forum reports to Finance Ministers at the G7 in Washington next week, I will urge faster rapid implementation of international agreements on solvency, accelerated work on international standards for regulating liquidity, more transparent information on credit ratings and action to improve the transparency of off-balance sheet vehicles. Secondly, I will propose an International Monetary Fund and Financial Stability Forum early warning system to strengthen financial sector surveillance and to identify risks to stability and co-ordinated regulatory responses to them. Thirdly, I can report a European agreement this week to strengthen arrangements for ensuring financial stability in Europe and increase cross-border management.

It is important that regulators focus on liquidity as well solvency. Here at home, the FSA will shortly set out proposals for a review of the UK liquidity regime. As the Governor has said, all central banks face problems in providing support to banks in difficulty in a world where markets rightly expect high levels of disclosure and transparency. I can therefore confirm that if it proves necessary to clarify in Europe the legal and practical issues surrounding the way in which such support is provided and disclosed to protect financial stability, we will work with other European countries to provide that certainty. We will now review whether rules about swift takeovers of banks need to be changed.

When problems occur, however, we need to have a system in place that is clear and which reassures depositors. We will introduce legislation in the next Session to establish a new regime. With the FSA and the Bank, I am proposing the principles for the new regime in a discussion document published today. The new regime would mean that depositors would be insulated from a bank that had failed and would provide them with both greater compensation and certainty that their compensation could be paid out quickly. As a first stage, the FSA has decided that the financial services compensation scheme covers 100 per cent. of deposits up to £35,000, but I have made it clear that that is just an initial step towards a more comprehensive change.

We will continue to work closely with the banking industry, consumer groups and others to agree the new regime, and I hope that there will be cross-party consensus on it. We must all, internationally and domestically, consider what lessons there are to be learned from the summer’s events, and if needed I will take action. The changes that we will make will strengthen our reputation as the world’s leading international financial centre, and will be founded on our commitment to maintain a strong and stable economy. I commend this statement to the House.

Let us be clear why the Chancellor is making this statement today. This country has seen its first run on a bank for 140 years, and while as he has pointed out the credit problems have been global, it is only in Britain that we have seen people queuing to withdraw their savings. That is because the system set up by the Prime Minister to prevent precisely such a crisis has failed its first serious test.

There are three accusations facing the Chancellor. The first is that he knew for more than a month that Northern Rock was in trouble and still failed to prevent the crisis. He said in his statement today that the company’s business model had made it particularly vulnerable, but he was praising that model earlier this year when he was Secretary of State at the Department of Trade and Industry. The Bank Governor told the Select Committee that a combination of four different pieces of legislation meant that the tripartite committee was powerless. Why did not the Government, with all the contingency planning that they have done over the past 10 years, realise that there was a gaping problem in their new financial oversight system? The director general of the CBI pointed out that

“you don’t wait for the cinema to catch fire before you check out whether the fire precautions are going to work”.

Why did the Chancellor choose to give an interview to the press on 12 September—the day before it emerged that Northern Rock was seeking emergency help—in which he attacked the banks and said that they should be more honest? Did he know that, within 48 hours, he would be trying to reassure the public about the honesty of the banking system? Was he not undermined by his own spin?

Will the Chancellor release the letters that he received from the Bank and the FSA? The Bank Governor has told the Select Committee that he is happy for them to be released, and I am surprised that they have not been released today. When the Chancellor was forced to offer the general guarantee to existing Northern Rock savers, he said that it would be “unfair to other banks” to extend it to new savers. Why has he changed his mind this week and done just that?

The second accusation facing the Chancellor is that, when the crunch came, no one knew who was in charge. The Bank Governor confirmed this in an answer to the Select Committee, which I praise for the work that it has done on this matter. When the Bank Governor was asked who was in charge, he answered:

“What do you mean by ‘in charge’? Would you like to define that?”

Is not the fundamental flaw in the tripartite system set up by the Prime Minister 10 years ago a flaw that the then Chancellor was warned about when the measures passed through the House—namely that no one would know who was in charge?

For example, the FSA says that it saw its job as simply reporting Northern Rock’s liquidity problems to the Bank. However, the Bank says that it sees its job as looking at the liquidity of the whole financial system rather than that of individual institutions. Frankly, it is a bit late for the Chancellor to stand at the Dispatch Box and say that we need to review the liquidity regime. Who is in charge? The answer is that the Chancellor of the Exchequer was supposed to be in charge, but he was not.

The third and final accusation against the Chancellor is that he does not yet seem prepared to take strong and decisive action to prevent such a disaster happening again. He says that he wants cross-party consensus. I wrote to him on 20 September offering the full co-operation of the Opposition in making the legislative changes necessary to protect depositors and to allow the Bank to do its job. He has not bothered to reply to me, but I can tell him that we will work with the Treasury on this to create an oversight system that works.

The proposals that the Chancellor has set out today, and those that he is consulting on, need to meet certain tests. We need to be clear about who is responsible for monitoring liquidity and to ensure that regulation does not prevent us from dealing with a liquidity crisis when it arises. We need to be clear whether the regulation is European or has been gold-plated by the British Government. We need to reinforce the independence of the Bank so that there can never again be any suspicion of political pressure. We also need to insist that any new system, while protecting savers, does not stifle financial innovation or protect investors when that innovation goes wrong.

Will the Chancellor explain why he failed to mention the £100,000 figure that he gave to a newspaper in an interview three weeks ago as the sum that was likely to be covered by deposit insurance? It was not mentioned in his statement or in the consultation document, yet he chose to mention it to a newspaper. We also need to take steps now to tackle the growing personal and public debt that leaves Britain’s economy more exposed than others to financial turbulence, and we need to be clear about who is ultimately in charge.

It will take many years for the memory of the queues of panicked savers on our high streets to fade. The Government’s boasts about stability and financial competence will now ring hollow. We will work with the Government on the changes that are needed, but the first thing that the Chancellor needs to do is to take responsibility for this mess. It is about time he provided the leadership and the decisive action that his high office demands.

I am grateful to the hon. Gentleman for what I take it was meant to be helpful advice, at least in respect of some of his comments. Let me deal with the points that he has raised.

As I told the House in my statement, it first became apparent to the FSA and the Bank in the middle of August that Northern Rock had difficulties. Between then and Northern Rock formally asking the Bank for facilities, a great deal of effort was made to try to help Northern Rock to resolve the position. The position was monitored on a daily basis, and Northern Rock was in close contact with the FSA, the Bank and the Treasury. During that period, a number of alternative courses of action were looked at, but unfortunately they did not work.

The problem that Northern Rock faced was that, because it had to get new financing facilities on a pretty regular basis and because the market could spot that fairly quickly, it became apparent that it was in difficulties. It could not therefore get access to funds, and the price that it was being charged was going up. I can tell the hon. Gentleman, however, that we did everything that we could to try to resolve the situation without special support becoming necessary. Eventually, however, it became obvious that unless special facilities were made available, the bank would be in very great difficulty indeed.

That brings me to the second point that the hon. Gentleman raised, on help for banks. The Governor did not say that the Bank was unable to help Northern Rock because of current legislation. What he was talking about was whether that help could be given in a covert way as opposed to being completely open about it. I am bound to say to the House that this is a real problem. In this country—and perhaps right across the world—we have been moving towards more transparency and openness, which is generally a pretty good thing. The difficulty was that, because Northern Rock’s trading position had deteriorated so rapidly, it was advised by its own legal advisers—for perfectly understandable reasons—that it would have to issue a profits warning. It was also coming to the view that, because of its listing requirements, the fact that it was about to get facilities from the Bank of England would probably have to be disclosed. The Governor was also saying that the current legislation might require that disclosure. In addition, he made the point that, if it had been possible to arrange for another bank to come in, part of the takeover code might make that difficult over a weekend. I am looking at all these things, and if we need to change the legislation, we certainly will.

When we were discussing these matters prior to the Bank’s support being made available, I was pretty sure that it would get leaked, and I was absolutely right. The House will know that the story was broadcast by the BBC the night before the formal announcement was made, which is what led to the difficulties over the next few days. We need to look at that, because it is in the interests of the financial system not only in this country but across the world that, if central banks need to intervene, they should be able to do so in a way that is sensible.

The hon. Gentleman raised a number of other points. The Chairman of the Treasury Committee has written to me asking about the letters that I have received from the Governor and the FSA, and I will respond to my right hon. Friend before I appear before the Select Committee later this month. Yes, we have extended the guarantee, because I believe that it is right to help Northern Rock to have a period in which it can explore the options available to it, with a view to resolving these difficulties.

On arrangements between the Bank, the FSA and the Treasury, ultimately I am responsible to this House for whatever they do; that is part of being Chancellor. I hesitate to agree, however, if the hon. Gentleman is suggesting that we should move towards a situation in which the Bank or the FSA were merged, which would not be the right thing to do, as the institution would become unmanageable. If the question is whether I think that improvements should be made and that we should look further into the arrangements between the Treasury, the Bank and the FSA, of course that is the case. We do need to learn the lessons.

Finally, I am consulting on the protection of consumers. Having had some experience with courts in relation to consultation, I put out some general principles because the law appears to be that, if Ministers consult and then go on to close off or close down some of the options, we have to start all over again—and I do not want to get myself into that position.

In conclusion, there are clearly lessons to be learned from what happened with Northern Rock, but as I have said on many occasions over the past few weeks, we benefit from having a strong economy and a generally strong banking sector, which I believe will enable us to get through these difficulties and maintain our reputation as the world’s leading financial centre.

I thank the Chancellor for his statement. He knows that the Treasury Committee is looking into the issue and doing so in a wider context. The point that he raised about covert operations brings into question the concept of the lender of last resort, which is an issue that the Treasury Committee will be looking into. The real issue is how we help to protect depositors. Is the £35,000 figure correct? I would suggest that the key is consumer confidence. If consumers do not have confidence, the figure will be incorrect and it is important that we have the widest consultation on that. Another lesson is that depositors need easy and immediate access to their savings. Given that more than a quarter of global assets are now internationally owned, we need to address these problems in an international context. Will the Chancellor tell us exactly what he intends to do in that particular area?

I am grateful to my right hon. Friend. As I said a few moments ago, I am due to appear before the Treasury Committee later this month.

My right hon. Friend is absolutely right that this matter needs to be addressed internationally as well as here at home. I said in my statement that I thought that a number of steps were necessary internationally. We have to ensure that regulators look not just into the solvency of institutions but into any liquidity problems that they might have. That also means ensuring that current rules as they apply internationally as well as domestically allow regulators and institutions to focus on that.

My right hon. Friend is quite right too about the deposit protection scheme. A number of steps are necessary to reassure people. If a bank fails, it should be possible immediately to remove the depositors’ money from it and run it separately, and ensure that it can be paid out as quickly as is reasonably possible. I have made it clear that the £35,000 is a first step; that is all that the FSA can do at the moment. I think that we need to go beyond that. That is precisely why I am consulting, because, of course, the scheme is financed by banks and other financial institutions. International action, as well as action to protect depositors, is absolutely essential.

I thank the Chancellor for making his statement. He could have hidden behind his Tuesday written statement and the pre-Budget report, but he has come before the House now, which is good. I am afraid that that is the only positive thing that I want to say, because this statement reeks of complacency. Frankly, the Government have become complicit in large-scale irresponsible lending by the same management—and it continues even today—in what amounts to little short of a banking scam.

It has already been said that financial turbulence has existed in the financial community internationally throughout history, but this is the first time since the collapse of Overend, Gurney and Co. in 1866 that we have had a run on the system. The Chancellor talked about the business model, so does he agree with the FSA that that model was, in its words, “extreme”? This was a bank that was doubling its mortgage lending in six months and taking 20 per cent. of the market, on the back not of depositors but of large-scale rapid securitisation into markets, which became discriminating and pulled the plug on it.

The Chancellor said in his Tuesday statement that the bank had “very little exposure” to the sub-prime market directly, but is he aware that, indirectly, it was forced to issue a statement on 14 September acknowledging that £600 million of its assets—30 per cent. of its shareholders’ funds—were of questionable provenance? I know that there has been a postal strike, but why was that information not communicated to the Treasury, which seemed to be unaware of it?

Worse, is the Chancellor aware that the same lending practices are continuing today? A member of my Treasury team, Lord Oakeshott, rang the bank yesterday and made inquiries about its mortgage opportunities. As we would expect, he is someone of good credit standing, but the terms that he was offered were quite extraordinary. He was offered 127 per cent. of the value of the house, including the roll-up of the arrangement fee—five to six times his income—and 30 per cent. of the loan was to be unsecured. I do not know whether that is what the Chancellor meant when he talked about a return to old-fashioned lending practices. In the current economic circumstances and given the warnings about house prices from the Royal Institution of Chartered Surveyors, most reasonably cautious bankers would say that that borders on the insane. It is happening because the Government are underwriting the bank. That is precisely what the Governor of the Bank of England warned of when he talked about moral hazard.

Will the Chancellor tell us how much taxpayers’ money is exposed to this bank? I believe that there is £11 billion in lending and £23 billion in guarantees, so we are talking about a sum of money in one bank that is roughly equivalent to annual spending on the armed forces. When the Chancellor agreed to the effective nationalisation of the liabilities of this bank, why was the management—including the chief executive, who has been paid £10 million in five years for taking his bank on to the rocks, and the directors, including the ubiquitous Wanless—not sacked? I would include the FSA, which has admitted that in 18 months it did nothing to check the bank.

We all understand that once the run had started, the Chancellor had no alternative but to guarantee deposits, as opposed to the institution and the shareholders, and I am sure that that was right, but why is he now extending that guarantee to new depositors? Does that not encourage irresponsible lending and is it not unfair on other banks that are acting responsibly? Is it not even more unfair on pensions institutions, which, as the hon. Member for Wolverhampton, South-West (Rob Marris) reminded us yesterday, do not have such a guarantee?

My concluding point is that this is not just a passing embarrassment. It is potentially a tragedy for the 5,000 or more people in Newcastle whose livelihoods depend on the bank, but it is also a scandal in which substantial numbers of people in the financial community are heavily involved. When the Chancellor has taken the necessary prudential action, will he have a full independent—

Order. I was reluctant to interrupt the hon. Gentleman, but he is going beyond the conventional length of time that he is allowed.

First, the hon. Gentleman suggested that I should have sacked all the directors of the Northern Rock bank, but I do not have the power to go around sacking the directors of any company. The company is owned by its shareholders and the directors are responsible for the running of it. The decisions taken by Northern Rock in respect of its business model and its lending—whether generally or to the noble Lord Oakeshott in particular—are a matter for the bank and not for any Minister. The hon. Gentleman seems to be confused about that. The bank belongs to its shareholders and is run by the directors. If the directors are to be changed, it is a matter for the shareholders.

The FSA is responsible for the regulation of Northern Rock. The chairman of the FSA, Sir Callum McCarthy, said before the Select Committee earlier this week that it clearly has lessons to learn about the supervision of not just this bank but others. The hon. Gentleman seemed to suggest that Northern Rock’s problems were because of the sub-prime market, but according to the FSA the bank has a good quality loan book. That has been fairly well established over the last few years.

I was not clear whether the hon. Gentleman was for or against the guarantee that was given: he seemed to shift his position two or three times. It was necessary to provide the guarantee for the stability of the financial system as a whole. The present arrangements are also necessary to give the bank time to make whatever adjustment is appropriate and whatever arrangements are appropriate for the future.

My right hon. Friend will know that Northern Rock employs 4,000 people at its headquarters in my constituency. Contrary to the attitude and tone adopted by the official Opposition, and the lack of support given to Northern Rock and the people who work there by the Liberal Democrats, depositors around the country very much welcomed the action taken by the Government and the Bank of England in September, and again this week, to protect deposits. People who work at Northern Rock in my constituency have made the point to me that the business is viable, and if it is kept together as an entity it will continue to be viable and the jobs of 4,000 people in my constituency and 1,500 people in the constituency of my hon. Friend the Member for Sunderland, South (Mr. Mullin) will be protected. That is the priority. Will my right hon. Friend use his good offices to do what he can, even in an unpredictable situation, to retain that entity?

My hon. Friend makes a good point. The Northern Rock bank is of great importance to his constituents and to the north-east of England. It enjoys a good reputation and employs more than 6,000 people nationally. I very much hope that a solution can be found in the next few weeks and months that will enable the bank to continue. Ultimately, that will be a matter for the bank, but I very much recognise the point that my hon. Friend makes and the importance of the Northern Rock bank to Newcastle in particular.

The Chancellor will accept, however, that there is widespread concern and anger in the north-east at the way in which the affair was handled. In particular, what provoked the Bank of England to announce that Northern Rock was looking for help? The European Central Bank managed to rescue—I think—two German banks and a French bank without a similar panic. I am at least grateful that the Chancellor appreciates the importance of the bank to the north-east economy and to many of my constituents, who, like those of the hon. Member for Newcastle upon Tyne, North (Mr. Henderson), want to see the bank rise again. As the Chancellor said, the order book is strong. We will note the complete lack of support from the Liberal Democrat spokesman for the bank and the people who work in it in the north-east.

As I said in reply to the shadow Chancellor, the difficulty with the announcement that the Northern Rock bank would get specific help from the Bank of England was that, as I always suspected, somebody told the BBC about it. In the light of that, the information could not have been kept private. That is a problem not just in this country but across the world. We want to be as open and transparent as possible, but there will be circumstances in which support may be necessary for one or a group of institutions, and if someone chooses to go and tell the BBC or another outlet about it, the whole thing becomes public. That is the reason why the decision was ultimately taken to make an announcement. Unfortunately, just a few hours before that announcement was made, a highly damaging story appeared on the BBC that caused huge problems for the Northern Rock bank. That is a problem, and we will have to consider how to resolve such problems in future. I agree with the hon. Gentleman, who represents a constituency just outside Newcastle and will know the importance of the bank to the north-east. The more that we can do collectively to help the situation, and not make sometimes irresponsible statements, the better.

As a long-standing customer of Northern Rock—I suppose that I should declare an interest in the usual way in that regard—I assure my right hon. Friend that savers are very grateful to the Government for the support afforded at a difficult time. Our concern, however, has now turned to the future. What can the Government do to help to ensure the continuation of Northern Rock as an independent north-east based company? Will he take on board the comments of my hon. Friend the Member for Newcastle upon Tyne, North (Mr. Henderson) and assure the House that the Government will help to protect the security of employment of thousands of Northern Rock staff in the north-east, and to protect the Northern Rock Foundation, which supports arts and culture, young people, children in need and other disadvantaged groups across our region?

On that last point, as my hon. Friend knows, the Northern Rock Foundation has given grants of more than £28 million, and that is one of the reasons why the Northern Rock bank has much popular support in the north-east, along with the fact that it is a major source of good-quality employment. The most significant thing that the Government can do is to continue to provide the support that we have offered to Northern Rock, and to give it time to consider its strategic options. We stand ready to do whatever is appropriate as and when the bank decides what the best option is.

Which of the two regulators has primary responsibility for ensuring that banks are sufficiently liquid as well as solvent? Why did Ministers choose to implement the EU market abuse directive in such a way as to take out the exemption of situations of grave and imminent danger, thus making a rescue more difficult?

On that latter point, as I said a few moments ago, the EU directive was not the stumbling block. We looked at many considerations. As I said in reply to the shadow Chancellor, given that the bank was going to have to issue a profits warning, that it had to have regard to the listing requirements and the impact of getting facilities from the Bank of England, and that the news would almost certainly get leaked, which turned out to be the case, we believed that it was better to make an announcement than not to do so. If we need to look at the current law, we will do that. In relation to the hon. Gentleman’s first point, the primary responsibility for supervision of individual institutions lies with the Financial Services Authority.

May I underline the points made by my hon. Friends the Members for Newcastle upon Tyne, North (Mr. Henderson) and for Tyne Bridge (Mr. Clelland)? Despite all that has happened, Northern Rock is a respected institution, and remains so, in the north-east. It also employs a large number of my constituents. No one wants to see it taken over by some predator and asset-stripped. Will my right hon. Friend do all in his power to prevent that from happening?

I know that my hon. Friend also represents a constituency where many people work for Northern Rock. As I said, I am happy, on the part of the Government, to do everything that we can to bring about a satisfactory conclusion to this matter. Obviously, it is for the company to decide what the best option is. If the Government can help in an appropriate way, I will certainly consider any proposal put to us.

Does the Chancellor deny that ultimate responsibility for the crisis in Northern Rock, which has done such worldwide damage to the reputation of British banking, lies with our present Prime Minister for removing banking supervision from the lender of last resort? May I put it to the Chancellor that no amount of tinkering about improved liaison between the Financial Services Authority—which has never commanded much confidence in the City—and the Bank of England will overcome that fundamental problem? That was one of the reasons why the then Governor, Lord Eddie George, nearly resigned when that new scheme was imposed on him by the present Prime Minister.

Perhaps I can remind the hon. Gentleman that even in the old days to which he refers the Bank of England was responsible for the prudential supervision of banks but not for the supervision of many of the activities in which banks were involved, such as the sale of insurance. I also remind him that 10 years ago, no fewer than seven different regulators operated in the market: the Bank of England; the Securities and Investment Board; the Building Societies Commission; the Register of Friendly Societies; the insurance division of the Department of Trade and Industry; and three self-regulating organisations—the Investment Management Regulatory Organisation, the Securities and Futures Authority and the Personal Investment Authority. No one wants to go back to those days, when seven organisations were sometimes responsible for the same institution. That makes no sense at all. Having the central bank responsible for the stability of financial markets, and one organisation responsible for the supervision of institutions, is the right way to go, and most countries are moving towards that model, not towards the regime that was around many years ago, which would not work in today’s markets.

As a former employee of Northern Rock, a former shareholder and someone who still has an account with Northern Rock, I join my hon. Friends from the north-east in giving personal testimony both to Northern Rock’s status as a great employer and to the fondness for it that lies in the hearts of all north-eastern people. Everyone in my constituency, and in the north-east more widely, will know someone who works for Northern Rock, has a mortgage with it or holds an account with it. As has already been said, it is vital for us to give it all the help we can to resist any hostile takeover, and to continue as a north-east based bank.

As my hon. Friend the Member for Tyne Bridge (Mr. Clelland) pointed out, the Northern Rock Foundation is one of the major charitable givers in the north-east. Will my right hon. Friend commend the campaign by The Journal, which has done a great deal to highlight the need for the company to remain based in the north-east?

I know that the Newcastle Journal has been running a campaign, and that is not surprising because the Northern Rock bank is of great importance not just to Newcastle but to the north-east.

As I said earlier, the Government are providing support through the guarantee for Northern Rock, which will allow it time to decide which strategic option is best for it. However, as I have said many times this afternoon, at the end of the day it is for the bank’s directors to make that decision. It is their bank, and they must decide what is best. If we can help and it is appropriate for us to help we will do so, but ultimately the bank’s directors are responsible for all the decisions that they have made in the past and for any that they may make in the future.

It is clear to me that there were failures on the part of the regulatory bodies and also on the part of the directors of Northern Rock, who should have been questioning the extent to which their bank had become dependent on short-term lending, far out of line with all other banks.

Does the Chancellor recognise—he has already indicated in part that he does—that the bank as an institution is hugely important in the region, and that the Northern Rock Foundation, with its 5 per cent. share of the bank’s pre-tax profits, is also hugely important throughout the north-east? Whatever emerges—whether the institution is reformed or others participate in it to give it a future—it will be necessary to recognise the social responsibility that has been shown by Northern Rock as a company, and the need to support the work done by the Northern Rock Foundation in future.

I agree with much of what the right hon. Gentleman has said. I repeat that both the bank and its foundation are very important to the north-east, and are much appreciated.

I agree with the shadow Chancellor’s analysis: a lack of liquidity was central to the problem. We need to know from the Chancellor whether he has had a satisfactory explanation—perhaps even an apology—from the Bank of England for its bizarre initial decision not to follow the lead of the Fed and the European Central Bank in putting that liquidity into the system. That decision was reiterated a week before the event, and in full knowledge of the Northern Rock position, in a three-page letter which was made public and sent to the Treasury Select Committee, and was reversed after the Northern Rock fiasco. A good, sound bank was brought down by strange decisions, and I think that the House should know whether the Chancellor has spoken to the Governor and received an adequate explanation.

As the House would expect, I have had many conversations with the Governor, as well as with the chairman of the FSA. As I said in my statement, the Bank of England did make funds available to the market, but Northern Rock’s position was such that even with the money in the system, it was clear that it was experiencing more and more difficulties. As I said in reply to the shadow Chancellor, the market quickly became aware that Northern Rock had a problem which meant that it was finding it difficult to obtain funds, and the price of the funds that it did obtain was rising. That is one of the factors that eventually made it clear that only specific help for Northern Rock would be appropriate.

Can the Chancellor explain what he and the Bank of England are doing to ensure that the turmoil we have seen in the credit markets and in Northern Rock does not reduce competition in the mortgage market, and to ensure that any advantage does not fall into the hands of big United Kingdom and overseas banks?

I agree that it is important for us to have a competitive mortgage market, and we have such a market. There are many different mortgage providers. But I do not think it would be right for the Government to decide whether a particular company should or should not be taken over. We have a Competition Commission to examine such matters, and if it considers that anything is happening that is anti-competitive or would affect the mortgage market as a whole it has the power to intervene.

I welcome what my right hon. Friend said about changes in the regime for the credit-rating agencies and the liquidity rules. Will he tell us what he will do to ensure that discussions are speeded up internationally so that we see improvements here, and will he assure us that the United Kingdom, as the leader in financial services, will also take the lead in ensuring that those improvements are implemented?

My hon. Friend has made some very good points, especially about credit-rating agencies. I agree that international action is needed to ensure that reforms are implemented. It should also be borne in mind that information from a credit-rating agency is just one piece of advice on which directors draw. Ultimately, the directors of an institution must form their own judgment on whether the lending into which they are entering is sound, or—if they are buying pieces of commercial paper—whether they know what lies behind them.

My hon. Friend is right about another aspect of international action. I said that I hoped to be in Washington next week at the meeting of the International Monetary Fund. I think that the events that originated in America and have now spread across the world must serve as a wake-up call alerting those who have talked of the need for changes in relation to liquidity, in particular, to the necessity to do something about it. I am ready to show a lead in this country, and I will do all that I can to persuade my fellow Treasury Ministers to take action as well.

I broadly agree with the Chancellor’s observations about transparency, but in lamenting the lack of flexibility, does he not recognise that—as my hon. Friend the Member for Louth and Horncastle (Sir Peter Tapsell) rightly pointed out—much of the blame must lie with the Government, who changed the regime in 1997? With hindsight, would the Chancellor prefer Northern Rock to have been taken over by another bank? Would that have been preferable to the rather unseemly and hasty reaction that we saw from him?

The decision on whether Northern Rock should merge or be taken over by another institution had to be a decision for the directors. The advantage of the Government’s continuing to provide support is that the directors will now have several weeks in which to consider which option is best for them.

I strongly disagree with what the hon. Gentleman said about the regulatory regime as a whole. I am not sure whether he was advocating a return to the pre-1997 position, but as far as I am aware no one outside the House has advocated such a course. As for the boundaries between the FSA and the Bank of England, obviously we will keep that under review; but I think that fundamentally the structure is right, although there are clearly lessons to be learned from what has happened over the last few weeks.

Order. Mr. Speaker has a rule that Members who wish to put a supplementary question to a Minister who has made a statement should be present at the start of the statement. I understand that one or two Members have powerful constituency reasons for wishing to ask a supplementary question, but I will place them at the end of the queue, and give priority to those who have been here from the beginning.

Given that this was a monetary policy crisis made in Downing street and Threadneedle street, why was no action taken in early September, when many of us were warning that the credit crunch was too severe? If the Monetary Policy Committee is to be anything more than a highly paid monthly debating competition, its rates must be enforced by the vigorous use of open-market techniques by the Bank of England. Unlike other banks, the Bank of England failed to take such action, thus needlessly putting not just Northern Rock but several other financial institutions at risk. Why did the Chancellor not intervene earlier?

I am bound to recall that just a few weeks ago, the policy commission that the right hon. Gentleman chaired suggested to the Conservatives that there was

“no need to continue to regulate the provision of finance, as it is the lending institutions … taking the risk.”

I think the right hon. Gentleman ought to reflect on what he was recommending a few weeks ago.

I am afraid to have to admit that I have worked in the banking sector in the City, and I was the City editor of a national newspaper. I am too young to have witnessed at first hand the secondary banking crisis of the early 1970s, unlike the hon. Member for Louth and Horncastle (Sir Peter Tapsell), but I have seen a few rollercoasters in the past 25 years, when stock markets and the banking sector have all too easily forgotten the painful lessons of history. We must remember that Northern Rock did not go bust, unlike Johnson Matthey Bankers and Barings under a previous political and supervisory regime. Also, Northern Rock depositors were protected. Regrettable though those queues outside Northern Rock were, does the Chancellor agree that, as long as lessons are learned by all involved, short, sharp shocks to the banking sector in general are not necessarily a bad thing to warn against unwise lending practices and against forgetting those lessons of the past?

It is important that banks and other lending institutions, when they are lending money, satisfy themselves that whoever they lend money to can repay it and that, if they are lending it against security, the security is sufficient to allow the loan to be repaid if necessary. People should also remember that the financial institutions and the financial services industry in this country are generally pretty strong, which is why we have a very good international reputation. I am determined to keep it that way.

The Chancellor will know that, under the memorandum of understanding, the principles are unambiguous accountability—the public must know who is responsible for what—transparency and avoidance of duplication. Given that the arrangements provide only for partial independence for the Bank of England, can he explain, in the context of the market abuse directive—the MAD directive as it is called, aptly—and other directives how he is able to discharge his responsibility for the overall functions when he has to look over his shoulder the whole time at what is being decided, potentially, by the European Court of Justice in relation to European directives that have a direct impact on this matter? How will he resolve that question?

I know that the hon. Gentleman tends to blame Europe for just about everything. It is worth bearing in mind the fact that the market abuse directive governs disclosure of inside information. As I said earlier, I do not think that that was the key determinant in this case. However, I am prepared to look at all those matters and if we need to make changes we will certainly do so.

May I make the same declaration of interest as the Chancellor? I have a mortgage with Northern Rock and no savings with that bank.

I welcome the statement and the good advance notice of it. I welcome in particular the intention to have more comprehensive protection for depositors, the issues he raised about his intentions for the Financial Stability Forum, the proposed international warning system, and the discussion paper. I also note the review of the rules on swift takeovers of banks, which I am sure will look at issues of transparency and at weekend takeovers, which was a particular issue in this case. However, the review of the takeover rules is outwith the scope of the consultation in relation to the discussion paper. When does he intend that review to start? When does he expect recommendations or proposals to be brought to the House for further discussion?

The discussion paper is pretty broad; that certainly would not discourage anyone who wants to make representations on that matter or anything else from doing so. If it is the case that any of the legislation currently in place would prevent action from being taken, of course we will look at it, although I do not think that that was the fundamental problem in relation to what happened with Northern Rock. Otherwise I am grateful to the hon. Gentleman for his support on our broad approach.

When the Prime Minister invented the tripartite system of control of banking, informed commentators said that it would be inadequate in a crisis, and so it has proved. The Chancellor has now joined the FSA and the Bank of England in supporting the present regime, but if this is success, what is failure? Is not the fundamental flaw in the system the fact that the FSA is firmly responsible for the supervision of banks and building societies, whereas the levers of financial control are held by the Bank of England?

I am not sure whether the hon. Gentleman is suggesting that the two should be merged, but I would have some concerns about that, because it would create an extremely large organisation that dealt with individual supervision, the stability of the financial markets and monetary policy. I am not sure that that is the right approach. I certainly would not want to go back to the regime that we had before 1997. I am not making a party political point; I just think that that regime may have been appropriate in the 80s and 90s but it is not appropriate for the 21st century markets.

We should not lose sight of the following: it was not because of the present supervisory structure that Northern Rock got into trouble. It had a particular business model which left it very exposed in the event that liquidity dried up. It is important that we keep that at the forefront of our minds when deciding what to do. Whatever changes are necessary, it is important to remember what the problem was in the first place and the problem that we are trying to fix.

As my hon. Friend the Member for Tatton (Mr. Osborne) said earlier, that business model was endorsed by the Chancellor himself in the spring. There is something structurally unsound about expecting the Bank of England to be responsible for the overall stability of the financial system when it is not responsible for the stability of individual institutions, upon which the stability of the markets overall depends. Is he not failing to learn the central lesson of this crisis, which the Government and the Prime Minister were warned about when the Financial Services and Markets Act 2000 was passing through the House? They were warned that dividing the responsibilities left no one in charge. Who should have taken charge? Will the Chancellor answer that question?

On the present division of responsibilities, as I said in reply to the hon. Member for Louth and Horncastle, before 1998 the Bank of England was responsible for the prudential supervision of banks but not all aspects of what banks were actually doing. I do not think that going back to that system would be a good idea. I have said on a number of occasions that there are lessons to be learned and we will look at them, but a return to the old days is not appropriate.

I am conscious of the importance of Northern Rock to the north-east—not only the employment it offers but the valuable contribution it makes to the community through its foundation. However, may I put to the Chancellor a straightforward question, to which I hope he will give a straightforward answer? Did irresponsible lending and the provision of irresponsible packages by mortgage brokers in any way contribute to the problems that were encountered by Northern Rock?

The problem in relation to irresponsible lending was primarily in the United States. When the sub-prime market collapsed there, it was largely as a result of the fact that people had been able to take out mortgages who were in no position to repay them, especially when interest rates went up. According to the FSA, Northern Rock has a good mortgage book. That point has been made by a number of my right hon. and hon. Friends, who are aware of the importance of Northern Rock.

The difficulty that Northern Rock had was not because of its exposure to the sub-prime market per se. It was because, as I explained in my statement, when credit virtually dried up, it found it very difficult, with the particular model it had, to refinance its loan book. That is why it got into difficulties. I think that there are lessons for everyone here. In particular, institutions have to ask themselves whether they have any particular exposure and, if there is one key element of their business that is critical, what provision they have if something goes wrong. It is the responsibility of directors as well as regulators to get that right.

Is the Chancellor satisfied that the FSA discharged its responsibilities in terms of its supervision of Northern Rock satisfactorily and appropriately, including the normal stress-testing exercise that it would undertake to test any vulnerability to a particular institution?

If the hon. Gentleman has had an opportunity to read the evidence that Sir Callum McCarthy gave to the Treasury Committee—[Interruption.] The hon. Gentleman is a member, so he was there. In which case, he will have heard what Sir Callum had to say about the lessons that the FSA is drawing from this and the steps it is taking to make sure that its procedures can be tightened up.

As a Newcastle United fan, I think I should declare an interest. I appreciate that there is a consultation process going on over the £35,000 depositor guarantee, but why did the Chancellor speak to a national newspaper about a £100,000 guarantee? Surely that undermines his own consultation process.

It is not unusual for Chancellors, Ministers or indeed Opposition spokespeople to give interviews to newspapers. I said earlier that I would publish my consultation, which I do not want to pre-empt. It is important that people have the opportunity to put forward their views, which the Government will then consider with a view to early legislation.

My apologies, Mr. Deputy Speaker, for being a little late for the opening of the statement. I was meeting representatives of the staff at Northern Rock.

The decisions that my right hon. Friend has taken are welcomed by people in the north-east, as they have given sufficient breathing space to the company so that it is not bounced into a decision or a sale that would prove unsatisfactory in the short and long term. One of the major considerations in the strategic decision that the bank has to make should be the future of the staff: the many thousands who work in the constituencies of my hon. Friends the Members for Newcastle upon Tyne, North (Mr. Henderson) and for Sunderland, South (Mr. Mullin), as well as those seeking the 2,000 additional jobs at a development at Rainton Bridge in my constituency. My right hon. Friend’s decisions have allowed a more rational approach to be taken, rather than allowing the bank to be sold off to a hedge fund, which could have happened within a short period.

I am not sure if my hon. Friend was here earlier, but the opportunities are now there for the bank to take some important strategic decisions as to what it does in future. I hope that there will be a satisfactory outcome.

I, too, very much welcome my right hon. Friend’s statement—I was here for the start—and the emphasis that it placed on maintaining stability in the financial sector. I have heard comments about Northern Rock from hon. Friends from across the north-east whose sentiments I very much share. What pressure are the Government putting on Northern Rock to ensure that the jobs stay in the north-east and that the charitable arm is protected in any future negotiations?

My hon. Friend is aware of the importance of Northern Rock and its foundation to the north-east. I hope that the directors of the bank can now decide on a satisfactory option for the future, but they have to make the decision; it is their bank. The Government can certainly provide them with support to enable them to get the breathing space to which reference has been made. I hope that the bank and its directors will come to a conclusion as soon as they can that proves to be satisfactory for the future of the bank.


Motion made, and Question put forthwith, pursuant to Standing Order No. 83A (Programme motions),

That the following provisions shall apply to the Greater London Authority Bill for the purpose of supplementing the Order of 12th December 2006 (Greater London Authority Bill (Programme)):

Consideration of Lords Amendments

1. Proceedings on consideration of Lords Amendments shall (so far as not previously concluded) be brought to a conclusion three hours after their commencement at this day’s sitting.

Subsequent stages

2. Any further Message from the Lords may be considered forthwith without any Question being put.

3. The proceedings on any further Message from the Lords shall (so far as not previously concluded) be brought to a conclusion one hour after their commencement.—[Mr. Michael Foster.]

Question agreed to.