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Lord Eatwell: My Lords, I am sure that we are all most grateful to the noble Lord, Lord Mackay of Ardbrecknish, for repeating that extraordinary Statement made by the Chancellor of the Exchequer in another place.

The collapse of the Barings Bank is the third major financial collapse in the past 10 years following Johnson Matthey and BCCI. As one financial collapse follows another, a persistent and fundamental question has been raised about the supervision of the British financial system and in particular about the role of the Bank of England as the body with overall financial responsibility for the financial stability of the system.

This question is raised by the Chancellor's Statement: Is the regulatory system of the UK adequate to meet the demands of an increasingly integrated, increasingly global, financial system in which the distinctions between banking and securities, and securities and insurance, have increasingly broken down? That was the

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question which the Barings' failure posed. That was the question which this report has again exposed and has again failed to answer.

The main issue raised by the report is the role of the Bank of England as principal regulator of Barings Bank. The questions are simple. What did the Bank of England know? When did it know it? And what did it do about it? What did the Bank know about the operations of Barings Bank? Is the Minister aware that the Singapore papers were publishing on a regular basis—monthly, prior to the collapse—tables indicating the market exposure of Barings on the Singapore Exchange? Will the Minister confirm that paragraph 13.36 of the report states, in relation to Barings' financial position:


    "Queries were raised at a high level from reputable sources, and even included a query on 27 January 1995 from the Bank for International Settlements".

Why, then, did the collapse at the end of February come as a surprise to the Bank of England?

Is it not the case that over the past few years the structure of the financial system, both in Britain and throughout the world, has altered beyond recognition? Merchant banks in the City of London have been busy transforming themselves into the equivalents of American securities houses. Indeed, it was the solo consolidation of Barings, discussed by the Chancellor in his Statement—the combining of the capital base of the banking operation and the capital base of the securities house—which led to the collapse.

The report tells us that the Bank of England displayed a lack of rigour with respect to solo consolidation. Does the Minister consider that solo consolidation should be permitted at all even under the increased supervision proposed in the report? Does he not agree that the capitalisation of banking and securities operations should be kept separate?

An important aspect of the rapid changes in financial markets to which I have referred has been that regulatory procedures have become outdated. The principal regulator, the Bank of England, has traditionally had regulatory responsibility for banking and, as lender of last resort, for the integrity of the banking system. However, securities trading demands an entirely different approach. There is no longer a lender of last resort function. No such function is exercised, for example, by the United States SEC, and in principle there is no systemic risk.

In the case of Barings, the securities and futures authority had specific responsibility for the supervision of Barings securities operation in the UK alone—not overseas, not in Singapore—while the Bank of England, which has far less detailed expertise on securities matters, was responsible for the overall operations of Barings including the overseas securities operation.

That responsibility the bank clearly failed to exercise. Indeed, it is clear that the bank has been complacent and has been not a little gullible. Does the Minister recall that Mr. Eddie George, the Governor of the Bank of England, stated in the Observer on 24th July 1994:


    "We now have an expert team monitoring derivatives who are getting even better every time they go in to see a firm. What they are reporting back from the most active players in the market is very reassuring. These people know what they are doing, whether it is at director level or the chaps on the desk"?

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Does the Minister further recall that Mr. Brian Quinn wrote in the Bank of England quarterly bulletin in August 1994:


    "I believe both the market participants and the regulatory authorities have come a considerable way in identifying the capital needed for derivatives and all other instruments carrying market risk"?

No wonder the Bank did not know what was happening. It thought it knew already. But what has the report to say about the bank's complacency? In paragraph 13.58 we are told:


    "The Bank regarded the controls in Barings as informal but effective".

The Chancellor's Statement says:


    "The Bank ... reasonably placed reliance on local regulators"—

regulators who, according to the Chancellor's Statement, are now refusing to co-operate with the British authorities. The report continues that the Bank,


    "was ... entitled to place reliance on the explanations given by management as to the profitability of these operations and on the other information provided by Barings to the Bank".

Paragraph 13.61 states:


    "Had the Bank had a greater understanding of Barings' Far Eastern operations and a greater awareness of the degree of control of these operations as exercised by Barings in London it would have been better placed to supervise the consolidated group. There does not appear to have been any guideline or system in place within the Bank for determining whether the situation with regard to a member of the banking group for which the Bank was responsible for consolidated supervision was material such that it could affect the well-being of the bank".

Complacent and gullible, no guideline or system in place.

We might have expected that in those circumstances the internal inquiry by the Board of Banking Supervision would have recommended a fundamental and thorough review of the regulatory apparatus. However, in the section on lessons to be learned and recommendations the report states, in paragraph 14.35:


    "We believe the Bank should explore ways of increasing its understanding of the non-banking businesses (particularly financial services businesses) undertaken by those banking groups for which it is responsible".

It should increase its understanding of the job that it is supposed to be doing. Paragraph 14.37 states:


    "The Bank should ensure that it understands the key elements of the management and control structures of those banking groups where it is responsible for consolidated supervision".

In the face of a report which argues that the Bank of England should begin to try to understand the institutions which it is supposed to be regulating, it beggars belief that the Chancellor should accept the proposition, and I quote from his Statement,


    "that the events leading up to the collapse [do not] point to the need for any fundamental change to the framework of regulation in the UK".

That is an astonishing statement. Does not the Minister understand that in accepting the advice of an internal committee of the Bank of England into the future of the Bank's own supervisory role the Government are further damaging the already tattered credibility of the British regulatory system? Will the Government now set up a proper independent review to consider what should be the structure of a modern supervisory system, suited to the

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effective and competitive supervision of a modern deregulated financial system? In the light of the increasing integration of banking and securities operations and the development of global markets, that review should consider whether the Bank should continue with its supervisory role or whether that role should pass to a new banking commission, better attuned to the supervisory demands of the modern world.

Is not such a review necessary after three significant and embarrassing failures? Should not the Government ensure that effective supervision and greater confidence for savers and investors underpin the integrity of the British financial system?

Turning briefly to another aspect of the report, does the Minister agree that one of the most distasteful aspects of the whole affair is that, while a large number of bondholders—many of them elderly—have lost virtually all their savings, the management of Barings who, as the report makes clear, share responsibility for those losses, have also shared in bonuses of nearly £100 million? Given that the report also specifies the major failings of the regulatory authorities in this matter, will the Government now undertake to indemnify those who lost money because of the Bank of England's lack of understanding of the markets it was supposed to be supervising?

I conclude by raising an important matter concerning the conduct of business in your Lordships' House. I received a copy of this 400-page report a little over an hour-and-a-half ago. I know that other noble Lords, with the exception of the Minister I suppose, have not seen it at all. There are in your Lordships' House unique understanding, expertise and skills in the complex financial matters covered in the Report, many of which I have not been able to consider at all in this brief reply. In the light of that fact, the Opposition has been pressing since last week to debate the report on this coming Friday, where there is ample time on the Order Paper, rather than wait until October. The Government have refused to countenance such a debate. Will the Minister reconsider the action in blocking the opportunity for your Lordships to comment on the report before it gathers dust? Will the Government give the opportunity for the House to debate the report on Friday?


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