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Lord Ezra: My Lords, this is a sad day for the banking system. It is an occasion when the matter should be dealt with responsibly, as has the Minister in presenting this matter and as has the noble Lord, Lord Peston, in responding to it. I was also impressed by the way in which the Governor of the Bank of England dealt with it in a radio interview this morning.
In my time in industry I have dealt with many merchant banks, Barings among them. I have always had the highest regard for the expertise and the great historical associations that Barings has had. It is sad that that great name in banking will, as far as we can tell, no longer be there. Having said that, I believe that we must ask some general questions about the trade in derivatives which seems to have caused this crisis.
Derivatives as such are a perfectly legitimate way of hedging against known risks. For example, a company which is trading in a big way overseas and wants to hedge against currency or interest rate fluctuations is perfectly entitled to use that form of trading. However, not only has it become extremely sophisticated; it has
Barings has taken up most of the space today in the newspapers but the Midland Bank has also announced its results. In the detail one can see that this year the profits from dealing have been reduced by over £550 million compared with last year. Midland Bank has great resources and was not prevented from making a substantial overall profit. Nevertheless, that is a further illustration of the massive fluctuations that can result from that form of trading.
We live in a global economy of high technical sophistication. Great deals can be made at great speed, emanating from any part of the world and moving to any other part of the world. Therefore, this issue is not one that we alone can resolve. The noble Lord, Lord Mackay, said that this subject had been raised several times at the level of the G7. I wonder whether the Government now intend to propose an emergency meeting of whatever grouping of the G7 is relevant in order to re-examine the issues.
It is satisfactory to note that the Government intend to conduct a very detailed inquiry and come forward with proposals. Like the noble Lord, Lord Peston, I too hope that we shall be able to debate them in this House.
The most worrying aspect of the affair is what will happen to the depositors. This case concerns a merchant bank with probably a limited number of depositors, many of them large companies. It must, however, also touch some individuals. But, as the noble Lord, Lord Peston said, if by some mischance or misfortune such a thing should ever happen to a clearing bank, then the situation with depositors would be much more serious. I entirely agree that we must tackle this matter cautiously and prudently. Nonetheless, we must consider the implications for the future.
We are justified in asking the Government, in their national and international role, to reassure us that they have looked again at the whole issue and have taken material, additional steps to try to prevent anything like this situation happening on this scale or possibly on an even greater scale in the future.
Lord Mackay of Ardbrecknish: My Lords, I am grateful to the noble Lords, Lord Peston and Lord Ezra, for the careful and responsible way in which they responded to the Statement of my right honourable friend the Chancellor. I am particularly grateful to the noble Lord, Lord Peston, for underlining the points made by my right honourable friend in the last sentence of his Statement.
I was asked a number of questions and shall try to respond as quickly and as briefly as I can. The Statement mentioned that the losses were in excess of £600 million. Indeed, I can confirm to the noble Lord, Lord Peston, that some of the contracts have some time to run and it will therefore be a little time before the full extent of the losses are quantified. The noble Lord quite rightly pointed out that taking part in high risk business means that there are minuses as well as pluses. There is little doubt about that.
Both the noble Lords asked what we would do if any other bank got into similar circumstances. It is not easy to respond to such a theoretical question. It depends greatly on the circumstances. As I said in the Statement, in this case the problem was the unlimited exposure on these outstanding contracts, which still had some time to run, and the very tight timescale in which the banks and the Bank of England had to manoeuvre and to put together a package. That had a lot of bearing on this particular matter. Clearly, other banks may have been and were prepared to come in and see whether they could help; but they were looking for some kind of cap on the unlimited liabilities and that was not available.
I was asked a question about the Board of Banking Supervision and what it will examine. Of course it will look at earlier transactions and indeed at every aspect of this case which it considers relevant. With regard to obtaining information, the Bank of England has extensive powers to glean information under the Banking Act 1987. Inevitably, it will have to rely on co-operation from overseas supervisors and exchanges. We have no reason to believe that the necessary information will not be forthcoming.
The noble Lord, Lord Ezra, suggested that my right honourable friend the Chancellor might ask for an emergency meeting of the G7. I am not sure what is in my right honourable friend's mind in that respect. I should have thought that the first step is for the inquiry by the Board of Banking Supervision to report. We shall then be in a position to know exactly what happened and the steps that we should take.
To answer both noble Lords, the facts are not known in detail but it is clear that the chief dealer in the overseas subsidiary broke all the firm's internal control procedures and limitations by collusion and deceit. It appears that there may have been wider collusion and fraud. Only a full investigation will determine the facts.
With regard to deposits, the Bank of England has indicated its willingness to provide liquidity to the market so that the banking system can continue to function normally. The Deposit Protection Board will be writing to all Barings' depositors eligible for assistance under its scheme.
The noble Lord, Lord Peston, asked whether any public funds were at risk. Some public funds were on deposit with Barings. It will not be known for some time whether any losses have been incurred in that regard.
Lord Barnett: My Lords, I very much agree with the Chancellor that there was no way that he could use public money, much as he may have wished to save a bank as large as Barings and as important to the City. The Bank of England could not have provided such public money. It would have been quite wrong to have provided money for an uncapped liability.
On the other hand, I find it incomprehensible that the main board of Barings did not sufficiently monitor the bank's employees around the world and allowed this kind of situation to arise. That is, however, an entirely different matter.
With regard to the Deposit Protection Board and its relationship to small depositorsI am sure that there will be such depositorsincluding public sector depositors, the noble Lord mentioned that they would be eligible for assistance. I am not quite sure what that means. Could he clarify that for me? Does it mean that if public sector bodies, which to a large extent might rely on government grant to survive, have lost some of that money, the Deposit Protection Board will provide resources to enable them to continue? Would it provide resources, which much as we may regret what has happenedwould be essential to keep those public sector bodies going?
Clearly, there will be some assets left in Barings and I imagine that they will be quite substantial assets. Can the noble Lord say, in the current circumstances in a bank of this size, what would be the order of priority for payment as between unsecured creditors, secured creditors, preferential creditors and depositors? I am sure that that information would be helpful to small depositors who have lostor believe that they have losta lot of money. Will the noble Lord clarify that situation?
Lord Mackay of Ardbrecknish: My Lords, I am grateful to the noble Lord, Lord Barnett, for the reaffirmation he made at the beginning of his question regarding the need to protect public funds and the fact that the taxpayer could not be asked to stand behind this problem, but I am not entirely sure that I am grateful for some of his further more detailed questions and comments. However, I shall take refuge in the response that I shall write to him about the priority for payments from secured and unsecured creditors in this instance.
As far as we can tell, no public sector body is in the position envisaged by the noble Lord. As I mentioned earlier, it will be some time before we can get a proper grasp on the quantity of money involved. Clearly we shall need to look at any specific problems that arise in that regard. The Deposit Protection Board will help small depositors to a limit of 75 per cent. of £20,000. Therefore, the maximum the protection board will help a single depositor will be to the tune of £15,000.
Lord Boyd-Carpenter: My Lords, perhaps my noble friend can clear up one point. The press generally has stated that the decisions taken on behalf of the bank in Singapore from which all this arose were taken by a very junior official, apparently without reference to his superiors. Can my noble friend confirm whether that is so? If so, is it not a reflection on the way in which the bank is administered?
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