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2.16 p.m.

Lord Spens: My Lords, Friday the 13th is probably a good day to discuss the Bank of England. I took to bed the latest inflation report of the monetary policy committee. Normally its reports send me to sleep but this one made me sit up because of a sentence on page 9. It said:

That surprised me because earlier this week I was doing some figure work based on the State of the Union speech of the President of the United States. In it he said he was quite certain that America would reduce its deficit of 11 noughts to one nought--in other words, it would balance the budget. I have also been reading the Chancellor's views on a balanced budget. It seems to me that they will both coincide at more or less the same time. Given that sterling and the dollar are the two world trading currencies of any consequence, the implications of that are quite frightening.

I put the figures into my computer, gave it a kick and out came some astonishing scenarios, which may or may not happen around the year 2000. The first is that the Stock Exchange valuations of then will be far in excess of what they are today. The market will go up and up and up both in America and here. The same will apply to exchange rates. That has already happened in Asia. People forget that in Asia there has been a devaluation of Asian currencies against sterling and the dollar on a massive scale. If these two scenarios come to bear, there is little doubt that sterling and the dollar will dominate the world in two or three years' time and will virtually destroy every other currency, including the Deutschmark.

My calculations show that there will be four Deutschmarks to the pound in two years' time. I am not an economist but I am an accountant and a banker. I can remember when there were four Deutschmarks to the pound. It was in my youth, in the days before we really started to devalue. If that happens, and if the Government have no policies to link--it is the absence of linkage which worries me--the sterling exchange rate to the monetary policy committee--we shall see blood on the streets, to quote a famous politician. We are already starting to see blood on the streets of France. It

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will not be long before that stretches to Germany. We shall see real problems in the common market. Although I am an EMU person, I do not believe that it will ever happen for those reasons. Under those circumstances I question whether this Bank will ever be independent.

I turn to supervision. I declare a passing interest in that I suppose most Members of this House know that I am currently suing the Bank of England, and principally their supervision department. I do not want anyone to think that I am biased in anything I have to say, because I am not. I am suing the Bank for "unlawful" interference in my employment contract. I stress the word "unlawful" because I believe that there has been a culture of incompetence and dishonesty in the supervision department of the Bank of England for some time.

I give two examples. The first is BCCI, which people dismiss, but which actually lost the best part of £10 billion not only for people, particularly Asians, in this country, but also for many people around the world. As a result, it has been swept under the carpet. I know that the noble and learned Lord, Lord Bingham, prepared a report, but it was a very poor one and was probably not based on any of the paperwork which has now come to light. There have now been some five trials of BCCI employees, culminating in the trial of a Mr. Gokal last year, when a great many Bank of England documents from the supervision department suddenly became available. I shall quote one such document. In 1984-85 BCCI lost £285 million. That loss was made up by a contribution from the parent company, which extracted the money from its staff benefit funds. That was picked up by Price Waterhouse, the auditors, and a paper was sent to the Bank of England. On that paper was a comment from the head of supervision, Mr. Quinn. Very simply, I would describe his comment as, "Blimey, they have nicked the pension funds". He actually wrote:

    "We will of course have to meet to consider the implications for BCCI's future here and their solution in sequestering staff trust fund shares itself raises questions of legality and probity".

That is really Bank of England talk for, "They have nicked the pension funds". That was something that Robert Maxwell was to do five or six years later. I am absolutely astonished that no one in the Bank of England resigned, was fired or anything else. Picking up the point made by the noble Lord, Lord Peston, people should have gone.

The person who was head of supervision when all this was happening was the present governor. He was promoted. The present governor is about to be re-engaged for a second term. The former governor at the time, and who obviously had the decision in his hands, is now a Member of this House. It is an astonishing culture. Nowhere else in business could that have occurred; absolutely nowhere could two people responsible for such a disaster have survived. Therefore the transfer of supervision is very important.

I would like to make one small point, which is an anecdote from my case. During the criminal trial a document turned up from the Bank of England. It is a document which I can only call an options paper; namely, "What to do with Lord Spens". There were

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three options, the first of which is the only relevant one because the other two were reasonable. The first I shall quote,

    "To pressure Fenhalls [my chairman] into action by threatening reconsideration of recognition".

That is why I am suing the Bank of England. What is interesting is that this paper went from the head of supervision to the supervisory board, which at the time was chaired by the governor and the deputy governor who were present. On the way, that options paper was passed to a lawyer. The lawyer presumably commented--it is in the minutes of the supervisory board meeting--that what they were proposing to do was illegal. However, two weeks later that is exactly what they did.

In those circumstances the Bank of England can have no credit for banking supervision in this country. The sooner that that is taken into the arms of someone such as the noble Lord, Lord Stewartby, the better for everyone. I recommend the Bill wholeheartedly.

2.25 p.m.

Lord Thomas of Macclesfield: My Lords, I wish to make it clear right at the start that I very much support the Bill which seeks to modernise, to make more efficient, to make more accountable, and to improve the supervision of, the Bank of England. Indeed, until the noble Lord, Lord Spens, spoke a few moments ago I was surprised that earlier speakers had dismissed BICC and Barings as unfortunate accidents. In either case, we are talking about hundreds of millions of pounds.

The case of BICC brings another element of evidence to bear. I think that I am right in saying that no clearing bank lost a penny piece in that collapse. That was because we all made sure that we were never exposed to BICC on a daily basis--

Lord Boardman: BCCI.

Lord Thomas of Macclesfield: My Lords, I am sorry, I mean BCCI. We were not worried about the name. We were worried lest we were exposed to it. The club knew--we all knew--what the situation was, yet no action was taken. It is doubly damaging that many of those who lost money in the United Kingdom were members of a minority ethnic group.

Talking of the club again, now in terms of Barings, that bank, its institutions and people were undoubtedly held in too high a regard by the supervisors. I cannot believe that any other small and unfashionable financial institution would have been allowed to behave as Barings had been behaving for some considerable time. As someone who has been supervised personally for the past 20 years and come away with a completely clean bill of health, I totally support improving the supervision.

However, that is not my main point. I want to remind my noble friend on the Front Bench that there have been three major changes already. First, we have seen some of the larger building societies--some of the largest of their kind in the world--move to become banks. Secondly, we have seen the introduction of a new

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liquidity ruling, which we never had previously. Only in recent years has every financial institution had its own matrix to which it has to respond.

My third point relates to supervision being moved from the Bank of England. Since time immemorial, the tax--that is what it really is--on financial institutions has been that misnomer, cash ratio deposits (CRD). It has been calculated on eligible liabilities. I would not have made a big song and dance about it previously, but as the law is now changing, now is the time to reconsider it. That is despite the introduction of the new liquidity matrix under which all banks and building societies have to work.

It has very little to do with supervision; it is more a simple way to tax banks to pay for the Bank of England. However, it has now become a perverse action as well as inefficient. A prudent financial institution, particularly a smaller one, will always ensure that it has more retail deposits than retail lendings. In that way it is not dependent on the wholesale money market; it can act more prudently and it will not be banner headlines in the press or cause concern to the Bank of England.

By calculating on the basis of eligible deposits one is penalising banks that run their affairs in a more prudent way. I believe that the time has come to examine the matter again. The calculation has been made in that way for a very long time because it is regarded as neat and easy. It will not necessarily be in the interests of the big banks who are substantial borrowers in the wholesale money market but it will be a test to see whether the cartel among the big banks still operates.

The Bank of England has been a public sector organisation since 1947. Why does it require the tax on banks to be inflation proof? Effectively, it is inflation proof because as deposits increase as a result of inflation the tax collected goes up proportionately. Some noble Lords may have noticed a radical change--probably a revolution--in banking. One looks for enormous changes in productivity year on year. Should the Bank of England be exempt from that discipline? I ask my noble friend to consider how a provision can be written into the Bill to ensure that the Bank of England continues to improve its productivity and efficiency.

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