HL Deb 17 December 1984 vol 458 cc444-7

3.41 p.m.

Lord Brabazon of Tara

My Lords, with the leave of the House I shall now repeat a statement on banking supervision which is being made in another place by my right honourable friend the Chancellor of the Exchequer.

"I have now considered with the Governor of the Bank of England the events leading up to the rescue operation conducted by the Bank on 1st October. It is clear that the case raises important issues about our present procedures of banking supervision, and the legislative framework within which it is conducted.

"The Governor and I have therefore agreed to a full review of the present supervisory arrangements, and to consider whether any early changes in present supervisory procedures are needed. Issues to which particular attention will be given are the relationship between auditors and supervisors; staff experience and training; the handling of concentrations of risk and the assessment of quality of assets; notification and collection of statistics; and the adequacy and deployment of staff resources in the Banking Supervision Department.

"The review will also consider whether a more effective framework is required than that provided by the 1979 Banking Act.

"I shall be placing a copy of the terms of reference of the review in the House Library.

"I shall of course inform the House as early as possible of the results of the review, including any legislative changes I think necessary."

My Lords, that concludes the Statement.

Lord Stoddart of Swindon

My Lords, may I first thank the noble Lord for repeating to your Lordships the Statement which was made by the Chancellor of the Exchequer. It seems to me that the most significant point about the Statement is that it is being made at all after 10 weeks have elapsed since the rescue operation. Is he aware that, although his Statement is meant to be reassuring, it may instead lead to an intensification of fears rather than allaying them?

Does he also accept that the City has been anxious about the whole affair for the past 10 weeks and does the delay in making the Statement reflect disagreement between the Treasury and the Bank of England over the actions of the Bank in mounting the rescue operation? We should like to know that.

With regard to the Banking Act 1979, why did we have to wait for a collapse of this sort before a review of the Act was put in hand? There have surely been many instances and many fears expressed before this particular collapse which should have ensured that a review of the Banking Act was put in hand well before this serious event.

May I also ask the noble Lord about the position of the auditors, Arthur Young McLelland and Moores, who gave Johnson Matthey a clean bill of health? Are they to be the subject of an examination by their own profession, for many fears and many doubts have been expressed about their rôle in this particular affair? I should like the noble Lord's comments about whether this particular firm of auditors is to be the subject of examination, at least by the profession.

Finally, may I ask the noble Lord whether the Robin Leigh-Pemberton doctrine of firms standing on their own two feet applies only to manufacturing industry? Does it not extend to financial and City institutions, as seems to be the case? There seems to be one rule for manufacturing industry and one rule for financial institutions.

Lord Ezra

My Lords, I also should like to thank the noble Lord for repeating the Statement. I should like to say, first, that we on these Benches fully support the intention of the Government to review the banking supervisory arrangements. We possess in Britain one of the most efficient and reliable banking establishments in the world and, as necessary, we need to ensure that that continues whenever weaknesses arise. Having said that, however, in the case of the particular rescue operation that has given rise to this review I think it is permissible to ask a few questions.

The first question must surely be why was it necessary, even under the present supervisory arrangements, for such precipitate and apparently costly action to be taken to solve this problem? Had the difficulties emerged earlier, the costs of the rescue would presumably have been less.

Secondly, in dealing with this issue, what were the relations between the Bank of England and the Treasury? Was the Treasury made fully aware of the situation from the start and did it concur in what was done, or was this purely a Bank of England operation?

Thirdly, and relating to that issue, have public monies been used in this rescue operation? If they have been used, surely the consent of the Treasury should have been obtained. It would be helpful if the noble Lord would answer those questions.

Lord Brabazon of Tara

My Lords, I thank both noble Lords for receiving the Statement. Regarding the questions of the noble Lord, Lord Stoddart, as to why we should need to have the review now, the Chancellor has considered the issues and thinks that it is sensible to make a Statement. There are no sinister reasons whatsoever for this. There is no disagreement whatsoever between the Bank and the Treasury. The Banking Act 1979 has only been in force since 1980 so there have been no grounds for an earlier review.

The noble Lord also asked about Johnson Matthey's auditors and whether they would be examined by their own authorities. That is a matter for them, not for us. This could be something which the review might look at in general terms, but not specifically.

The noble Lord, Lord Ezra, asked why we do not use the same sort of funds to save manufacturing industry—

Lord Stoddart of Swindon

I asked that, my Lords.

Lord Brabazon of Tara

My Lords, I beg your Lordships' pardon. This was a decision made by the Governor of the Bank, not by the Government. It is, however, the Government's view that the main part of Johnson Matthey's business was viable and that the consequences of the failure would have spread well beyond Johnson Matthey itself. I should say that it is the Bank's money being used, not Government money in this case.

The noble Lord, Lord Ezra, asked whether the Treasury had been told. Yes, the Chancellor was told a short time before the operation took place, but, as I say, the Bank of England looks after these things and it was its decision to carry out this operation.

I hope that I have answered all the questions put to me.

Lord Kilmarnock

My Lords, does this not raise serious questions as to liaison between the Treasury and the Bank of England? Is the noble Lord aware that on 12th November, Mr. Nigel Lawson, the Chancellor, wrote to my right honourable friend Dr. David Owen saying that the decision was entirely the Bank's, and that three days prior to that, on the 9th, the Governor of the Bank of England had also written to my right honourable friend saying that the Chancellor was informed before the decision was implemented? What is the true position?

Is it not the case that the Treasury ought to be involved if it is a question of public funds? I think that the noble Lord said that the funds were not considered to be public money as they came from the Bank's reserves. Is it not the case that the Bank's reserves are public money? If the reserves are depleted, will they not have to be replenished? And is it not the case that the Bank might have to cut its dividends to the Treasury so that there might be an indirect loss to the Treasury? How is it possible to say that public money was not involved in this case?

Lord Brabazon of Tara

My Lords, it is possible that the Bank might have to cut its dividends to the Treasury, but this is the Bank of England's money. As I have said, the Governor informed the Chancellor. That is all that he is obliged to do. It is the Governor of the Bank of England who is responsible for making these decisions; and he uses the Governor's funds if they are necessary to make up the losses.

Lord Kilmarnock

My Lords, will the noble Lord undertake that the review, when it is put into operation, will look seriously into this matter of liaison between the Bank and the Treasury?

Lord Brabazon of Tara

My Lords, that undertaking I think I can definitely give.