Banking Bill

Charles Walker highlights the collective failure of the regulatory and banking sectors in the run up to the current financial crisis and calls for more robust regulation of banks at every level.

Mr. Charles Walker (Broxbourne) (Con): Thank you for calling me, Mr. Deputy Speaker, as I have had the slow torture of being the last Back-Bench Member to speak in the debate. May I say how pleased I am to see my hon. Friend the Member for Henley (John Howell) making such an impression after spending such a short time in this place? I reserve particular pleasure for seeing the hon. Member for Croydon, Central (Mr. Pelling) back in the Chamber; he has been away for a short while, but he made a robust speech and seems to be in robust form. It is very good to have him back.

This is the first chance, apart from the 90-minute debate we had last week, for Members to get near to the events—the almost calamitous events—of the last couple of weeks. I appreciate that this is not a debate on the current banking crisis, so I will try to speak within the bounds of the Bill before us. Clearly, however, there has been a collective failure of the regulatory sector and the banking sector. Of course, having been in power for the last 11 years, the Government have to take their share of responsibility as well, but I do not want to take a gratuitous swipe at the Government at this stage, as there will be plenty of opportunities to do so in the future. The collective failure has been clear and we cannot ignore the fact that the International Monetary Fund has said that, of probably all the developed economies of western Europe, we are one of the least well placed to cope with the current downturn. The Government need to take a good long look at themselves and ask whether they have done the right things over the past 11 years.

Unlike my right hon. Friend the Member for Wokingham (Mr. Redwood), I am not a financial expert; I worked in the City for a mere three months before being given my marching orders. I am absolutely staggered by the amount of risk banks have taken on board. I understand from my right hon. Friend that their liabilities are somewhere in the region of £3 trillion. That is simply staggering. What amazes me about the crisis is that we have moved on from talking about £10 billion as being a lot of money to £100 billion as being the same, and we seem to have moved seamlessly on from that to speaking of trillions of pounds and trillions of dollars. It is difficult to keep up with these enormous figures, but enormous they are.

What amazes me is that we did not learn the lessons of Barings. When Barings failed, the board of directors admitted that they really had no concept or understanding of the derivatives being traded on their trading floors. The complexity was simply beyond them. I thought and believed that the Bank of England and the Financial Services Authority had taken that into account and would do something about it to ensure that the boards of banks did not allow it to happen again. Clearly, however, it has happened again. We have seen banks leveraging their capital thirty-fold or may be more. What that means is that one pound of capital on the balance sheet—an asset of £1—is supporting £30 worth of risk or £30 worth of what could be called “make-believe money”. The pyramid has been inverted, with £1 supporting £30. Like all pyramid selling schemes, it works well in the good times, but sooner or later, something goes wrong, the pyramid collapses and everyone is left picking up the pieces. On this occasion, I am afraid that it is the taxpayer who is left picking up the pieces.

This Member of Parliament has some very humble suggestions to make. First, the FSA has to tell banks that if they are going to trade in financial derivatives, as they will continue to do, we have to be able to understand them. We must understand where the risk resides. If we do not understand them, we should say, “Buddy boy in the red braces, you are not going to trade them.” There has always been a sneering regard in investment banks for the FSA. They say, “We employ people who earn £3 million a year, and these thickos in the FSA understand nothing, as they can afford to employ people earning only £250,000 a year?” Well, in this case that is a good thing. All the rocket scientists in the investment banks will have to sit down and come up with financial instruments that mere mortals—talented people, but still mere mortals—understand, and if they do not understand them, they will not be traded. [ Interruption.] Does anyone want me to give way? I think that someone does, so I give way to him. I am sorry; I have taken my glasses off, so I am completely blind.

Mr. Andrew Turner (Isle of Wight) (Con)
: My hon. Friend is very kind. I understand what he is saying, but, in his opinion, what level of thought is required for an understanding of what is going on? Is he talking about asking people in the street, or on the bus? What sort of people is he describing?

Mr. Walker: My hon. Friend makes a good point. The regulators must understand the position and be comfortable with it. Some derivatives will be more risky than others. The regulator will say “If you want to trade in more risky derivatives, you must have a stronger balance sheet. Your balance sheet must, in a sense, be insured against failure by carrying more capital.” That too will act as a disincentive to some of the more outrageous financial instruments.

Let me move from the exciting world of investment banking to the world of retail banking. Some of those present—including, I am afraid, many Opposition Members—speak of the “tsunami”, the crisis that began in America in the sub-prime market and swept over to the United Kingdom. Let us be perfectly honest. I do not think that Northern Rock trades in the United States, I do not think that Bradford & Bingley trades in the United States, and I am sure that HBOS does not have a mortgage business in the United States; yet those banks, and may be others, were offering people outrageous mortgages. They were offering 125 per cent. of a property’s value, and they were offering self-certification. They were saying “Pick a number, and we will not challenge you”. No wonder we have a home-grown crisis in this country.

I have to ask why on earth the regulator allowed the banks to get away with that. It was not done in secret; there were flaming advertisements all over their branches letting people know what a great deal they would get. If that did not set alarm bells ringing in the FSA, I do not know what would.

Mr. Pelling
: I thank the hon. Gentleman for his kind remarks earlier.

Perhaps one of the fundamental reasons why such offers could be made is the fact that rating agencies often provided the necessary securities, especially in the form of inflated ratings. That applied to a large section of mortgages sold as AAA products. In many instances, neither regulators nor senior managers would even think to look at the quality of the securities that were being sold.

Mr. Walker
: The hon. Gentleman makes a telling point. The Minister may wish to look into it.

I think that the relationship between rating agencies, auditors, banks and accountants has become a little too cosy. There are a few too many long lunches, pats on the back, and matey shooting parties after grouse on large estates in Yorkshire. I am making a serious point: we need to examine these relationships. If there has been a failure in a duty of professionalism, legal action may well need to be taken against the responsible individuals.

This is a banking Bill—a banking Bill about the regulation of the banking sector—so let me return to that. I make a plea to the Minister, and to all my colleagues, that we examine, collectively, the practices of some of our high street banks at this moment in time. It is simply not acceptable for a person who exceeds his or her overdraft limit at a major high street bank by £1 to be immediately slapped by a charge of £15 a day. If it takes three or four days for the bank to send a letter to such people alerting them to the fact that they are overdrawn by £1, the charge may have increased to £60, £75 or even £90 before that person realises that they have a £1 overdraft.

Such rates of interest are absolutely usurious. Anyone who sold them door to door would be arrested. They would be locked up and, rightly, the key would be thrown away. The practices of some of our high street retail banks are shocking and shameful, and now that they are being underpinned by the taxpayers, those taxpayers—our constituents—will have even less patience with the outrageous and, quite frankly, vicious charges levelled at some of the most vulnerable and least well-off members of society.

Let me make a couple of other points. Banks need to strengthen their balance sheets. They want to obtain cash from wherever they can obtain it, and there is every chance that they will target good and successful businesses in pursuit of that money by raising interest rates to a level that not even a successful business in the good times could possibly hope to meet. So they will sacrifice the long-term viability of that business—that client—in return for a short-term gain to their balance sheets. I hope that the Minister is aware that that may happen, and will follow developments very closely.

I am sorry that we have come to this stage, but it is absolutely right for the Government to be guaranteeing savers’ deposits. Let us be in no doubt, however, that this is a massive transfer of wealth from some of the least well-off in society, and I shall now briefly explain why that is the case. We all have many constituents—some Members have more than others—who earn at or just above the minimum wage. They live day to day and week to week. They do not have savings—or, at least, significant savings—or mortgages, yet they will underpin this bail-out through an inevitable increase in their taxes over the next two or three years. Therefore, we need to be mindful—as I know my hon. Friend the shadow Chancellor is—that some people at the very bottom of the income scale will get very little out of this bail-out, and if we get into Government at the next general election, we must find a way of helping them. In the meantime, I hope the Government of the day are also mindful of their plight, and that they find a way of helping them.

Having expressed those few thoughts, I will sit down, but I must first have just one passing swipe, not at the Government, but at the British Bankers Association—I believe that is what it calls itself. The brief it sent round in advance of this debate was pathetic. It should hang its head in shame; there was not a note of humility anywhere to be found in it. Yes, we need the banks in this country, but they have a lot of ground to make up, because no one trusts them anymore, and as we all know from our time in this place, trust needs to be earned. We must at present have all hands to the pump, therefore, and we will have the forensic examination of this Government’s record and policies in the next few months.

8.37 pm



Mr. Charles Walker (Broxbourne) (Con): Does my hon. Friend not agree that it was crazy for the Financial Services Authority and the Bank of England to allow Northern Rock to offer mortgages in excess of 100 per cent. of the value of a property, and sometimes worth up to 125 per cent. of that value? Also, was it not crazy to allow self-certification of income? People could just pick a number, and the banks and building societies would accept it.

Mr. Osborne
: I certainly think that we need to learn the lesson that one cannot build an economy on unsustainable levels of personal debt. The Opposition made that point—and, more to the point, so did the Bank of England on various occasions. The International Monetary Fund also said that there were concerns about levels of indebtedness and so on. My hon. Friend’s point is therefore well made.

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