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Northern Rock

I agreed with the mover of this motion, the hon. Member for Twickenham (Dr. Cable), who has been such a very effective temporary leader of the Liberal party, when he stressed the great seriousness of the situation we are facing. He pointed out not just the tremendous tragedy for those people, mainly in the north of England, who are depositors and shareholders, but the seriousness of the situation for our banking system, which is part of this debate and which, as the Minister pointed out in her speech, is part of an international banking system. For the past 10 years, while the present Prime Minister was Chancellor, whatever question I asked him on any subject, he always prefaced his answer by pointing an admonitory finger at me and saying, in his usual genial way, ““I want to remind the House that that was the hon. Member who spoke and voted against the Bank of England Act 1998, which has been such an enormous success.”” Having waited 10 years to reply, as unfortunately, unlike when I first entered the House, Back Benchers never get the chance of a second supplementary, I hope that the House will bear with me for a moment—rather a long one, I fear—while I read a bit of the speech I made on 11 November 1997:"““The capacity to act effectively and in time as lender of last resort in a crisis…depends on the Bank's commercial intelligence system. The roles of prudential supervision and operational surveillance are closely linked, but they are not the same thing, and they are now to be separated, leaving the Bank with responsibility for operational surveillance but stripped of its powers for supervising prudential banking.""Will the Bank continue to have the same day-to-day knowledge of everything that is happening in the banking world when its supervision staff are transferred to the new Financial Services Authority? I doubt it, although it will retain responsibility for the stability of the financial system as a whole. I therefore predict considerable buck-passing in the years ahead between the Financial Services Authority and the Bank of England when anything goes wrong. The Bank of England will say, 'We could not have known in advance that this would happen: we no longer supervise that institution, and the FSA never told us.' That will be a source of great trouble””.—[Official Report, 11 November 1997; Vol. 300, c. 761-62.]" Well, so it has proved. The institutional root cause of the Northern Rock disaster lies in that separation of powers by the present Prime Minister. I happened to be in Tokyo when the news broke and, of course, any senior banker or businessman travelling abroad—I have spent a great deal of my time doing that—spends most of his time in hotel bedrooms watching CNN. I was absolutely amazed to see queues of people waiting to draw their money out of Northern Rock. I happened to be in Tokyo to visit various banks, including the Bank of Japan, and the people there were exceedingly polite and hardly likely to raise the matter with me. The fact is, however, that it did a great deal of damage to the prestige of British banking. That is perfectly clear. One of the people I visited while in Tokyo was the governor of the Bank of Japan when it went into its great financial crisis in 1985; he is an old friend of mine whom I have known for more than 40 years. He told me that he had to buy up the equity of almost all the leading Japanese banks. They were starting to sell that equity back at a considerable profit when I was there. It is worth noting, however, that it had taken them 15 years to reach a position where they could start to do that. We should not assume that this crisis over Northern Rock will be solved in a matter of weeks or months. It is going to take years to unravel. The scale of the so-called credit crunch problem has yet to be fully revealed, and we might end up with the world's major banks engaging in massive asset reductions. When Citibank, the largest bank in the world, has to borrow $7.5 billion from the Abu Dhabi investment fund at 11 per cent. interest, and has to offer that amount in convertible preference shares, it is a pretty serious situation. I was in Abu Dhabi when the then ruler, Sheikh Zayed, opened the new, rather modest, building to house the Abu Dhabi investment authority. Of course, it is now a building of almost unexampled magnificence, as Lord Curzon might have said. The fact is that Citibank is paying 11 per cent. for that money. We can just imagine the arguments that went on before it agreed to that rate of interest, which is more than double what the Fed was proposing as the present inter-bank rate in the United States. The most dangerous aspect of this situation is the growing reluctance of banks to lend to one another. Inter-bank lending is a crucial and essential part of the banking system. Also, the central banks are in danger of losing monetary control if, when the Fed and the Bank of England reduce their bank rates, the inter-bank rate rises. That is what has been happening, and it sends a very dangerous signal. There are historical parallels, including what happened in Japan in the 1980s. Excess competition in the banking sector led to a huge property bubble and ended in one of the longest recessions in history. Japan is still technically in recession, 15 years later, and its interest rate is 0.25 per cent. The resignation of a few prominent chief executive officers, accompanied by huge golden handshakes, will not satisfy public opinion. The fact is that we face a grave international situation. The largest bank in the world, Citibank, is borrowing billions of dollars at 11 per cent. This means that money power has moved out of western hands and into those of Russia, China, India and the middle east. Have I only got 17 seconds left? I cannot solve the world's financial problems unless I am given another half hour.