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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
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 basismonthly, prior to the collapsetables 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:
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 Statementthe combining of the capital base of the banking operation and the capital base of the securities housewhich 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 alonenot overseas, not in Singaporewhile 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 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:
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 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
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 bondholdersmany of them elderlyhave 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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