§ The Chancellor of the Exchequer (Mr. Kenneth Clarke)With permission, Madam Speaker, I should like to make a statement about the insolvency of the merchant bank Barings. The Bank of England announced late last night, ahead of the opening of the far east financial markets, that Barings was unable to continue trading and was applying for administration.
Barings' problems have arisen from major losses caused by unauthorised dealings by the chief trader in its Singapore incorporated subsidiary. The losses arise from contracts on the Singapore, Osaka and Tokyo exchanges. At the close of business last week, total losses appear to have been in excess of £600 million. Crucially, those contracts have further to run, exposing Barings to further unquantifiable losses. As a result, Barings was unable to continue to trade without the injection of substantial new capital.
As the Bank of England announced last night, the British banks were prepared to supply all the capital needed to recapitalise Barings, but only if it were possible to cap the potential liability of the outstanding contracts. In the event, that did not prove possible. Other parties were not prepared to take on open-ended and therefore unlimited liabilities. The Governor did not recommend, and in any event, I would not have agreed, that public funds should take on those liabilities. Regrettably, in the circumstances, there was no alternative to Barings having to apply for administration.
Although it was not possible at the end of the day to recapitalise Barings, I would like to take this opportunity to pay tribute to the Governor and his staff and the London financial community for their commitment, which I followed closely over the weekend, to the search for a solution.
I stress to the House that these circumstances are unique to Barings and should not apply to other banks operating in London. The Bank of England is ready to provide liquidity to the banking system to ensure that it continues to function normally. Deposits at Barings are, of course, at the moment frozen, and the extent of any losses on them will not become clear for some time. The Deposit Protection Board will be writing to all Barings' depositors who are potentially eligible for assistance.
The House will be rightly concerned about how such huge unauthorised exposures could be allowed to happen and build up so quickly without the knowledge of the company, the exchanges or the regulators. I am determined to address that question rigorously and to review the regulatory system thoroughly in the light of this collapse. However, before we come to any firm conclusions, it will be necessary to establish in detail the facts of the case. Those were transactions conducted on the far side of the world by overseas subsidiaries on overseas exchanges. [Interruption.] I should have thought that the Opposition's knowledge of geography at least would have enabled them to agree with that statement.
There may be some falsification of the relevant records within the subsidiaries concerned. It will therefore take some time to unearth the full and detailed catalogue of events and the methods employed to evade all the required management and regulatory controls.
694 I have asked the Board of Banking Supervision to investigate fully and urgently all aspects of this episode and to report back to me. The investigation will include the circumstances in which such unauthorised transactions were able to take place and to remain undetected until too late. The board will need to work closely both with Barings and with the Singapore, Osaka and Tokyo exchanges. The House will recall that the Board of Banking Supervision is chaired by the Governor of the Bank of England and comprises six independent members and three members appointed ex officio from the Bank.
I can assure the House that I am determined that, when the full facts are known, all the appropriate lessons will be drawn and any necessary corrective steps will be taken.
§ Mr. Dennis Skinner (Bolsover)The Government said that after Johnson Matthey.
§ Mr. ClarkeThat is when we set up the Board of Banking Supervision, as the hon. Gentleman will recall.
In today's global markets, the regulatory tasks are international and they must be tackled internationally. Over the past two years, with other Finance Ministers in the G7, the G10 and the International Monetary Fund, I have taken part in several discussions on the need to ensure effective regulation of international dealings in derivatives and other instruments in high-technology 24-hour trading conditions. The problems are obvious, but practicable solutions are less self-evident. No system of regulation can ever guarantee total security. There is always the chance of unwise or fraudulent dealing by one or a group of individuals. The better a bank's systems and controls, the less likely that is to happen. Every regulatory authority and every bank must now be considering what further steps it can take to protect itself against such risk.
I shall report back to the House at the earliest opportunity on our analysis of this case, the lessons to be drawn, and any proposals to strengthen security in highly complex financial markets. I would expect to publish the full report of the Board of Banking Supervision subject only to the need to protect the legitimate confidentiality of innocent third parties and any other legal constraints.
Meanwhile, we must also be concerned about the implications of the matter for the employees of what was, until a few days ago, a successful and highly respected firm. The administrator will no doubt take early steps to clarify the position of the 4,000 or so employees, some of whom will be needed to administer the assets of the business, and many of whom work for successful and profitable businesses for which purchasers will no doubt be found. Some redundancies will be inevitable, but the employees in this country will of course be able to rely on a measure of statutory protection in the event of their employer being so insolvent that difficulties arise in the payment of salaries and redundancy payments.
This failure is, of course, a blow to the City of London. But it appears to be a specific incident unique to Barings, centred on one rogue trader in Singapore. Inevitably, there has been some turbulence in the markets since the announcement, but global markets should be quite strong enough to absorb it without lasting damage, since the events have not changed any of the fundamentals that underlie foreign exchange, equity and bond markets.
§ Mr. Gordon Brown (Dunfermline, East)I thank the Chancellor for making his statement, and for accepting the need for an inquiry and for the report of that inquiry 695 to be published. May I ask him to tell us in more detail what action is being taken to save as many of Barings' businesses, and as many of its 2,000 United Kingdom and 2,000 overseas jobs, as possible? Will he assure us that he and the Bank of England will continue those efforts?
As for the immediate event, will the Chancellor tell us the extent to which depositors are protected so that they do not fall victim to other people's mistakes? Will he tell us the total scale of the losses involved? Will he confirm that the inquiry will examine why there appear to have been warning signals in the far east as many as 10 days ago, which were apparently not acted on?
Does the Chancellor agree that the public will also want to know in some detail from the inquiry why a single trader operating from one desk in Singapore could not just lose £500 million last week and another £200 million last night, but—unknown to his superiors, and without the knowledge of his company—enter into between 15,000 and 40,000 contracts, threatening losses that are still open ended?
The Chancellor said in his statement that the issue was simply the evasion of existing managerial and regulatory controls by a rogue trader—controls that were already in existence. Does he accept, however, that the inquiry must examine whether there were sufficient regulatory and managerial controls in the first place? Will he assure us that the inquiry will examine what the internal control systems at Barings were, why they failed to detect the huge operations of just one trader before it was too late, and what supervisory requirements were imposed on Barings and the other banks by the Bank of England to ensure the existence of adequate controls to detect excessive exposure on a daily basis? The Bank of England, as a supervisory organisation in the United Kingdom, should be the first to find out, rather than just about the last to be told. What changes does the Bank now propose to ensure that there are adequate safeguards to minimise this type of risk?
We join the Chancellor in praising the Bank of England for its efforts over the weekend. Will he, however, continue to agree with the Governor of the Bank of England, whose considered views we examined last summer? He felt that there was no need to worry about the derivatives market, and commented that American legislators were wrong to become
excited at the need for regulation".Of Barings and others in the derivatives market, he said:These people know what they are doing whether it's at director level or the chaps on the desk.Of the Bank of England's role, he said:We now have an expert team monitoring derivatives. getting better every time".All that, he said, was "reassuring".In the light of what I consider to be a culture of complacency, is not a fully independent inquiry necessary, rather than simply a Board of Banking Supervision inquiry chaired by the Governor, so that—among other things—the actions of the Bank of England and regulatory authorities can be examined objectively? Is not it also clear that an analysis of not just the events of the past few days but the wider policy implications involved will be necessary in the inquiry?
696 Given the calls from the Bank of International Settlements, the proposals of the G30 think tank, the requirements of the United States Congress general accounting officer and the call by the Basle committee and other international organisations for much greater transparency, tighter codes of practice, consistent adequacy standards for derivatives dealers and daily accurate risk evaluations by banks, along with the identification by them of concentrations of risk—and given the concern expressed by the Securities and Investments Board and the Securities and Exchange Commission about the need for greater co-ordination among the international regulators—does the Chancellor agree not only that the inquiry should examine those issues, but that he should explain why until now he has refused to act on the recommendations that have been made?
While we recognise that no system can be foolproof, do not the weekend's events demonstrate the clear public interest in better supervision, stronger safeguards and more adequate investor protection, both in the United Kingdom and through international co-operation, so that we can maintain confidence in the integrity of the financial system?
§ Mr. ClarkeThe hon. Gentleman rightly asked what action was being taken today to examine the interests of both employees and depositors involved with the bank. I assure him and the House that a great deal of work is going on today. The administrator has moved in, and continued inquiries are being made to discover how many depositors are affected, to identify them and to see what can be done to protect them and also to prepare for the management of assets and the disposal of profitable parts of the business in order to restore the position to some stability. A great many people are working on that at this moment. I am updated at regular intervals, but it is a rapidly moving scene.
As for depositors, their deposits are frozen at the moment while work is done to discover to what extent losses will lead to less than a full pound in the pound eventually being distributed. That may take some time. Eventually, we shall no doubt discover the extent of any losses incurred by the depositors. Such money as remains, which may be a substantial proportion of the full amount, will be distributed.
As far as we are aware, although I do not yet know, the bank did not have small retail depositors in any great numbers. The depositors tend to be other banks and institutions. So far, we have not discovered any other bank or institution that is subject to dangerous exposure, given that in any event the assets are frozen, but not necessarily lost. They are almost certainly not totally lost.
I said in my statement that by the end of last week more than £600 million of losses had been incurred. The extent to which the losses continue to build up has yet to he finalised. It depends on the closing of the contracts in Singapore, Osaka and Tokyo. That will become clear in the next few days. Obviously, no further liabilities could possibly be financed by Barings.
I have heard the rumours about warning signals from the far east. I think that they are rather wise after the event. Of course, we still do not have the complete picture of what was going on in the dealings conducted by the trader in Singapore, but the positions that he took, which exposed the bank so fatally, were taken in the 697 comparatively recent past. They built up in the end in a matter of days. So people who claim that there were warnings of those positions some time in advance exaggerate the situation.
The whole point of what I have said is that, of course it is necessary to answer the question that the hon. Gentleman asked. How could activities centred on this one man in Singapore allow such heavy liabilities to build up so quickly to the destruction of the total bank? That is what will be investigated. It will be investigated by the Board of Banking Supervision, because that body was set up in the aftermath of the Johnson Matthey scandal precisely to exercise supervision of the Bank of England's supervisory role and to audit its performance. It is plainly the right body not only to take part in the investigation of the facts of the incident, but to produce a proper analysis and make recommendations, which I shall implement.
The difficulty in this case may well not be the controls and regulatory systems, or even the internal control systems of Barings. We do not yet know. We shall act if we discover that they played a significant part. The fact is that there was undoubtedly falsification of records inside the bank. The controls in place within the bank were avoided. Hence the regulatory controls of the Bank of England were avoided again. It is essential that we first discover the facts of the case, then we can consider whether changes in the regulatory laws could have touched this case or any case in which such fisk might occur in other ways. That is by far the most sensible way of proceeding.
Wild talk of derivatives can also mislead people. It is certainly the case that derivatives are a new and in some ways dangerous development in the financial market, but such problems could have occurred in cash markets, futures and options. It is undoubtedly easier and quicker for them to arise now that we have derivatives. We must discover whether the problems in derivatives were at the heart of the problem.
We have not failed to act on any of the reports that have been produced by the Basle Group of Bankers, the G10 central bank governors and the like. Many of them deal with data and supervision. A great deal of analysis of those problems is taking place. It is nonsense for the hon. Gentleman to give a great list of bodies as if he had some authoritative knowledge of proposals made around the world and to claim that we have failed to act on them. No regulatory body has made proposals on which we have failed to act.
I very much hope that the lessons that we learn from this case, involving the activities in Barings' Singapore subsidiary, will enable us and other regulatory authorities to take steps forward in the international control of risks in that area.
§ Madam SpeakerAfter that initial exchange, I appeal to Back Benchers on both sides of the House to put their questions quickly and to the Chancellor of the Exchequer to respond briskly, so that I may call as many hon. Members as possible.
§ Mr. Peter Brooke (City of London and Westminster, South)Whatever the lessons of this bitter affair, will my right hon. and learned Friend be ever mindful of the fact that the pre-eminent position of the City of London derives from its skilful acceptance and management of 698 risk and that if there were excessive regulation to remove risk, along the lines that the shadow Chancellor hinted at, the principal casualty would be the strategic salience of the City of London?
§ Mr. ClarkeI entirely agree with my right hon. Friend. The City of London's reputation is paramount. It was impressive to see the British banks, as well as the Bank of England, mobilise this weekend to provide the necessary capital for Barings to keep going. In fact, an international effort was mobilised, involving overseas banks as well, because most of the major international banks are present in the City of London and have excellent contacts with the Bank of England. Of course, no one could take on those open-ended commitments, which might continue to pile up under the contracts. It is certainly absolutely essential that we protect the reputation of the City by proper regulation. I completely agree that to rush instantly into some wodge of further regulations before we even know where the fault lies in sufficient detail in this case, could lead to our imposing endless constraints on what is the most successful financial market in the world.
§ Mr. Malcolm Bruce (Gordon)Does the Chancellor nevertheless accept that this is a black Monday for the City of London and that the implications are not as confined as he suggested? The fact that one trader in Singapore could achieve that scale of loss makes the situation worse and not better, as he tried to imply in his statement. Will he consider the announcement today of a £550 million plunge in the trading profits of the Midland bank as an indication that such gambling is not confined to banks of the character of Barings, but also takes place in the main clearing banks? What guarantee can he give that the Barings bank collapse today will not become a clearing bank catastrophe tomorrow?
§ Mr. ClarkeIt is important to realise that it is likely to turn out that what happened to Barings could have happened to a German, Swiss, French or American bank, if someone trading in derivatives falsified records and evaded the regulatory controls that the bank or the regulator had put in place. We shall have to wait to find out if that is the case. With the greatest of respect, it is a mistake to describe all trading of that type, in such things as derivatives, as pure gambling. There is a need for sophisticated financial instruments that can he used for hedging. They can be used in circumstances in which risk is minimal. It is a difficult and sophisticated world and it needs proper regulation and proper internal processes in banks. We need to discover what went wrong in this case. I do not deny that for one man to be at the centre of something that destroyed a whole bank is a very serious problem, which is why we anxiously await the report of the Board of Banking Supervision, to find out what can be done to reduce the risk of that recurring.
§ Sir Peter Tapsell (East Lindsey)Does my right hon. and learned Friend agree that there is a fundamental difference between futures markets in agricultural products, base metals and oil and a futures market that seeks to guess at the movements of stock exchange indices? That latter form of futures market is so speculative as to deserve the term "gambling" and should perhaps be banned by international law.
§ Mr. ClarkeAll derivatives have to be based on some market—in this case, they were based on dealings in a combination of things, including the Nikkei-Dow average, 699 Japanese Government bonds, Japanese short-term interest rates and futures. Most banks engage in some trading of that kind, including the major institutions. There can be occasions when it is necessary for hedging purposes of one type or another. As my hon. Friend says, we have to ensure that the regulations stop pure gambling or taking positions of a highly speculative and impossibly risky type, but that we nevertheless do not overregulate to destroy legitimate financial activity on behalf of clients. I shall bear my hon. Friend's strictures in mind and no doubt the Board of Banking Supervision will come back with some opinions on that type of trading.
§ Mr. Tony Benn (Chesterfield)Is the Chancellor aware that his statement will be seen as complacent? The problem is not unique—we have had Maxwell; Lloyd's; the Bank of Credit and Commerce International; Asil Nadir; and a man who made ․1 billion when the British pound fell out of the ERM. This is gambling and speculation, and it characterises the world financial community. Those people create no wealth, yet they play a dominant role in the world economy. To try to pin the responsibility on one man who apparently had the capacity to bring down a whole bank is to miss the point that the global economy is unstable and not run in the interests of those who create the world's wealth.
§ Mr. ClarkeThe financial services industry in this country is a great creator of wealth and employment. Invisibles account for some 15 or 16 per cent. of our gross domestic product. In the modern world, the fact that Britain is so successful in the financial services industry is one of the strengths of our economy, not one of its weaknesses. As the right hon. Gentleman says, it is impossible totally to eliminate fraud or incompetence in any system of trade, manufacture or commerce, but we have tight regulatory controls to try to minimise the risk. With respect, I advise the right hon. Gentleman, before reacting so predictably, to wait for more light to be thrown on the facts of this case and to see precisely what that trader and anyone in collusion with him were doing in Singapore. It would be absurd, on the back of all that, to sweep away every part of the financial services industry and the investment in industry at home and abroad that the British financial services industry provides.
§ Mr. Nigel Forman (Carshalton and Wallington)Is my right hon. and learned Friend aware that his measured and timely response to these events has been entirely appropriate? Conservative Members believe that he has approached the matter in the right way and that the Governor of the Bank of England is also to be congratulated on his response. Will my right hon. and learned Friend look carefully, however, at the aspect of fraud that may be involved? What jurisdiction, if any, would be relevant to deal with a possible conspiracy to defraud within Singapore?
§ Mr. ClarkeWe do not know whether there has been fraud. The trader has not yet been found. When he is discovered, we must first see whether there was an element of fraud and to what extent he colluded with other people inside the bank or the Singapore stock exchange, or whether it was simply a case of misguided and panicky trading, which was concealed from his employers. I do not want to speculate on the facts as that would be not 700 only unfair to the individual concerned, but totally reckless until someone has done much more work to discover the actual sequence of events. In the event of criminal charges being brought, I assume that problems will arise as to which jurisdiction they will be in. I think that, in the first instance, they will be in the Singapore jurisdiction, but the problem of jurisdiction for financial crimes is not always that straightforward and one would need to take a more considered view.
§ Dr. Jeremy Bray (Motherwell, South)Is the Chancellor aware that most supervisors, regulators and managers of banks do not have the knowledge of mathematics needed to understand the technicalities of derivatives markets? Will he appoint an expert and experienced committee with knowledge of the moral hazards involved to advise both him and the City on how to proceed in order to restore public confidence in the banking system?
§ Mr. ClarkeIt is the responsibility of each bank and financial institution to ensure that it is properly informed about the exposure of its institution to whatever dealings in derivatives are taking place inside the organisation. I have no doubt that experiences such as this, and that of Orange County in the United States, are making every responsible chairman, chief executive and board of financial institutions throughout the world ensure that they are properly informed about their exposure in that area at any given moment. Numerous expert committees are looking at the evolution of the market in the light of the development of the derivatives market. As the hon. Gentleman probably knows, only today the G 10 central bank governors published a further report on the quality of the data and statistics required to give national regulators a better overall picture of what is happening in today's financial world.
Although they are extremely complicated and can be extremely risky investment in the hands of the less sophisticated, I. do not think that we should invest derivatives with this air of awe, as if they represented some new, magic and unintelligible form of investment compared with other forms. It is a question of making sure that our technology, management controls inside banks and national regulatory systems can keep abreast of continual developments.
§ Mr. Matthew Carrington (Fulham)Does my right hon. and learned Friend agree that financial futures, properly used, are a means of reducing risk for corporate entities and banks? Does he further agree that regulation of the financial futures markets in London is already close and effective? Does he accept that before we rush in with new regulations, we need to make certain whether the losses that Barings sustained were not caused by abuse of the existing regulations and flouting the existing internal controls in the bank?
§ Mr. ClarkeI agree. The reason why the futures markets, such as the highly successful London International Financial Futures Exchange—LIFFE—have developed so rapidly is that they fulfil a real financial need. They enable some of those participating in the market—not all of them—to hedge themselves against risk that they might otherwise face. I entirely agree with my hon. Friend that, first, we must discover to what extent this case depended on any deliberate 701 evasion of controls and systems that otherwise would have protected anyone against the disastrous risk that unfolded in this case.
§ Mr. Dennis Skinner (Bolsover)Why does not the Chancellor call a spade a spade? Derivatives and gambling on derivatives are based upon, in this case, betting on the Japanese stock exchange in another 12 months' time. What wealth creation is there in that? Why does not the Chancellor admit that this case has come about partly as a result of the total deregulation in the exchange markets and the rest of them, which the Government have supported? They have learnt no lessons whatever from Johnson Matthey. One of the top elite banks is going under because someone gambled and gambled, just like someone in a betting shop—one bet after another, trying to recoup his losses, when all those jobs were at stake. You cannot run a country with a betting shop mentality.
§ Mr. ClarkeAs my hon. Friend the Member for Fulham (Mr. Carrington) just said, people can invest in futures markets precisely to protect their firm and their jobs against movements in markets, which might otherwise jeopardise the business and the trade in which they are engaged.
One never listens to the hon. Member for Bolsover (Mr. Skinner) without sensing the warming touch of nostalgia about him. The hon. Gentleman belongs to that section of the Labour party that has always regarded all investment—the stock exchange and the process of capitalism and free markets—as gambling of which it disapproves. He knows no more about derivatives and he understands derivatives as little as he understands the rest of the process of financial markets in a free market economy. I do not think that his advice should be heeded in this case.
§ Mr. Richard Ottaway (Croydon, South)Is my right hon. and learned Friend aware that it is a fundamental principle of English and, I believe, Singaporean law that a principal is not responsible for the unauthorised acts of its agents, and in some cases, employees? I believe that my right hon. and learned Friend said that the acts were unauthorised dealings, so could he explain that inconsistency?
§ Mr. ClarkeI do not want to engage in a legal argument with my hon. Friend about whether an agent is acting within the apparent scope of his authority and so on, but there is no doubt that Barings is liable for the losses on the contracts. Those contracts were engaged upon as Barings' contracts or contracts of a subsidiary, and the group—certainly the subsidiary—has been left exposed to open-ended risks, which cannot be covered. When I say "unauthorised", I mean that we must discover how far the person, or people responsible, was evading the internal controls of the bank and exceeding or avoiding the restraints that the bank would otherwise have put upon him.
We must also consider the extent to which the Bank of England's regulatory requirements and investigations of Barings were being avoided. Although I use the word "unauthorised", I regret to say that I do not believe that there is any question but that Barings remains legally liable for the losses that are still piling up on those contracts, if they have not already been closed.
§ Ms Diane Abbott (Hackney, North and Stoke Newington)Does the Chancellor accept that one does not need to be an expert on financial markets to be worried 702 that thousands of British jobs and a major British company can be put at risk by an individual gambling on the movements of the Japanese stock exchange? If that transpires to have been the consequence of regulatory failure, and as the bank itself is the regulator, is not it true, as my hon. Friend the Member for Dunfermline, East (Mr. Brown) said, that there must be an objective consideration of what went on surrounding the collapse of Barings?
If it proves, as some of the press comment implies, that it is not possible properly to regulate speculation in those financial instruments offshore, perhaps, as other hon. Members have said, that type of activity should be banned altogether.
§ Mr. ClarkeI share the hon. Lady's concern for the people who work for Barings, including over 2,000 employees who work in this country. They worked for one of the most successful and respected banking groups in the City, and they turned in an extremely good performance. It is wrong to say that they were gamblers or that they were engaged in any improper activity; they were among the best in the financial services world in this country. I trust that the successful parts of the Barings Group will rapidly be sold by the administrator to people who will take on those successful businesses.
We need to discover the way in which operations in one subsidiary have brought the whole group to a state of financial collapse. There are regulators in both countries. One cannot ban international financial dealings; financial markets are moving on to a global basis extremely rapidly. It happens that the country at the other end, Singapore, is one of the most effectively regulated countries in the world. The Monetary Authority of Singapore is also highly regarded as a rather strict and severe regulatory authority, with which the Bank of England happens to be on very good terms.
The conclusion is that something happened in Barings' Singapore subsidiary that evaded the Bank of England's regulatory controls, evaded, through the counterparties, the Monetary Authority of Singapore's controls and evaded whatever controls were being applied by Barings. That is why we are all agreed that 2,500 jobs are at risk; we hope that soon that will all be resolved. We need to know the facts about the way in which it happened, instead of making broad-brush statements about gambling, the financial world, international dealing and so on.
§ Mr. Iain Duncan Smith (Chingford)When my right hon. and learned Friend considers all that, will he bear in mind the fact that, in the past year, the financial services of the City earned a £16 billion surplus in export trade for this country, so the fact that they do not produce anything goes by the by on that basis? Will he also consider the fact that industry here and abroad relies on access to capital, which is what that is all about, so by retaining a light touch and being very careful about what he does regarding future regulation, my right hon. and learned Friend serves both the City and industry well?
§ Mr. ClarkeI agree with my hon. Friend. The management of our investments overseas and the flow that that produces hack to this country is vital, not only to our economy, but to the well-being of pension funds and other institutional investments here, which are of extreme importance to the country.
703 In that area, as in every other area of commerce, regulation is essential to avoid fraud and mismanagement and to protect the depositor. Excessive regulation is destructive of a successful economy and destructive of jobs. When one investigates a matter of that type, one must get the balance right, so that there is no unnecessary risk, but so that one is not panicked into doing things that will damage the legitimate activities of the City of London.
§ Mr. D. N. Campbell-Savours (Workington)Is not it true that Mr. Leeson may well have a very different story to tell from the one that is being peddled in London by people who have an obvious motive to blame him? Is not the truth that it might well be that Mr. Leeson's life is at risk, and that he would do well to consider to whom he should give himself up? Will the Chancellor join me in asking Mr. Leeson to ensure that he gives himself up as soon as possible, and to authorities in which he can place his trust?
§ Mr. ClarkeThe hon. Gentleman dramatises matters—I hope, excessively. He is right to say that we cannot leap to the conclusion that fraud or criminal offences have been committed, as we have no idea. Mr. Leeson has left his desk, no doubt because he finds it, at the very least, embarrassing to describe his responsibility for a series of investments that have brought down a 250-year-old banking group. His explanation will be interesting when he emerges. I have been cautious about what I have said about the facts. It would be wrong for me to act on the best information that I have at the moment and find, as more and more investigations are done, that the picture becomes clearer. I fear that it appears to be clear that an accurate description of the transactions was not being fed back by those engaged in them in Singapore.
§ Sir Terence Higgins (Worthing)Will the Chancellor confirm that the previously open-ended contracts are now closed? What priority do the holders of those contracts have compared with depositors and other creditors?
§ Mr. ClarkeAgain, I shall check and give my right hon. Friend the most up-to-date information that I have. My belief, as I stand here, is that the Singapore contracts have been closed. I do not think that the Osaka contracts have been closed, and I do not know what has happened at the Tokyo stock exchange—it has been a moving picture all day. The issue of the various creditors is in the hands of the administrator. The capital of Barings Group has already been absorbed by the losses incurred on those particular contracts. That is why the deposits have been frozen and the depositors will doubtless, in due course, discover to what extent their deposits can be released without deduction or, if with deduction, the extent of that deduction. These are early days, and those are exactly the sort of matters that the administrator is meant to be sorting out.
§ Mr. Geoffrey Hoon (Ashfield)Does not today's significant fall in the value of the pound as a direct result of what has been described as unauthorised dealing on far eastern stock markets demonstrate the limitations of the concept of national sovereignty when it comes to international money markets?
§ Mr. ClarkeOther currencies have fallen today—the franc, lira and peseta are not having too good a day. We 704 live in a system of floating exchange rates, where such things move all the time. The hon. Gentleman's question did not have much bearing on dealings in Japanese futures and is not relevant to today's statement.
§ Mr. David Shaw (Dover)Can my right hon. and learned Friend assure the House that the Governor of the Bank of England has been able to give an assurance that other banks in the City of London have better and more efficient financial and internal controls? Will he also assure the House that recommendations are being put in place? Can he assure the House that when people deal in the derivatives markets, which operate on a minute-by-minute basis, financial controls are set up that also operate on a minute-by-minute basis? In this instance, there seems to have been an enormous delay between reporting what was going wrong in Singapore and reporting it in London. The information never seems to have got to London in the first place.
§ Mr. ClarkeThe Bank's responsibility is to regulate banks and obtain the information required, but that is not done minute by minute. It would be totally impractical to suggest that the Bank of England could possibly supervise every transaction carried out by every bank. The Bank of England has to ensure that a bank's internal systems are satisfactory, and that any controls on which the Bank of England has insisted are adhered to by the bank that it is supervising. The Bank keeps a regular check on banks' balance sheets and calls for audits of particular aspects of banks' performance about which it is concerned. All those issues must be addressed.
My most up-to-date information on the information coming back is that Barings in London first seemed to become aware of serious problems in Singapore the weekend before last. It sent someone out from London to investigate the position on about Monday of last week. By Wednesday or Thursday of last week, it had become obvious that there was a serious problem. The Bank of England was notified at about noon on Friday and the Treasury was notified during the afternoon. Although that sounds very late, most of the liabilities had piled up in a very short time. Most of the contracts that now give rise to Barings' exposure—as the market moves against the various options taken—were built up in a remarkably short time.
§ Mr. Peter Shore (Bethnal Green and Stepney)When a bank fails, the secondary effects are often the most grievous. In his statement, the Chancellor said that the Bank of England is ready to provide liquidity to the banking system. Does that give some assurance to major depositors with Barings that they will receive help if they are in difficulty?
§ Mr. ClarkeInevitably, some turbulence and uncertainty in the markets surrounds a blow of this kind to the financial system, which can give rise to liquidity problems within the banking system as a whole. If such problems arose, the Bank of England would fulfil its function as the central bank and ensure that liquidity problems were overcome and that the London banking system could operate normally. My reference does not relate to the depositors with Barings.
§ Madam SpeakerWe will now move on.