Barings

HL Deb 18 July 1995 vol 566 cc142-56

4.51 p.m.

Lord Mackay of Ardbrecknish

My Lords, with the leave of the House I should like to repeat a Statement made earlier today in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

"With permission, I should like to make a Statement about the Board of Banking Supervision's inquiry into the collapse of Barings. I set up the inquiry in my Statement to the House on 27th February, and I have recently received this report from the Bank of England.

"Since receiving the report, I have had to consider very carefully the legal considerations relevant to publication. I am sure that it is right for Parliament to have this report in all its detail, so that its consideration of the Board of Banking Supervision's conclusions, and the lessons to be learned, can be properly informed. I have concluded that the balance of the public interest lies firmly in favour of publishing the full report. The report is being published without any deletions today, and copies are available in the Vote Office.

"I am very grateful to the board and the investigating team for the huge effort they have put into the report. They have done a thorough and speedy job.

"The report's main findings are that: the losses were incurred by unauthorised and concealed trading activities within Barings Futures Singapore; the true position was not noticed earlier because of serious failures of controls and managerial confusion within the Barings Group; and the true position had not been detected prior to the collapse by the external auditors, supervisors or regulators of Barings.

"The board was not able to gain access to all the information it would have liked. In particular, it was unable to determine Nick Leeson's motives, or whether he was acting alone, because of serious difficulties in obtaining information from Singapore. The obstacles were, I understand, legal ones, and there were some problems in providing the Singapore investigators with all the information which they in turn sought from London. However, it was clearly important to ensure as complete an exchange of information as possible, and I myself wrote twice to the Finance Minister in Singapore seeking his help in obtaining the co-operation of the authorities there. It is regrettable that there remained serious legal obstacles which prevented all the relevant documents being provided to the board.

"Leeson himself was invited to co-operate with the inquiry, but declined to do so. Through his solicitors, he has been informed of the conclusions the board have reached about his part in the collapse. His solicitors wrote to the board on 22nd June saying that the report's conclusions were inaccurate in various respects, but they did not provide any further details of his response.

"The report describes how the concealment of the true nature of dealings in Singapore and the build-up of losses from unauthorised trading began almost as soon as Nick Leeson joined Barings Futures Singapore as general manager and head trader in 1992. By the end of 1993 the cumulative loss was over £20 million, and by the end of 1994 it was over £200 million. Losses leapt spectacularly in the first few weeks of 1995, and after the collapse on 26th February the cumulative loss was a staggering £827 million. Leeson successfully sought to conceal those huge losses throughout by a complex and systematic process of deception and false reporting.

"Such a massive unauthorised position could not have been established if there had been an effective system of management, financial and operating controls within Barings. The report details a great number of failings. I will give the House some examples.

"The money required to fund the losses came primarily from London. It was advanced to Singapore with no independent check on the validity of the requests or any attempt to reconcile them to any known trading position. If management in London had sought to examine the information from Singapore to support the requests for funds, it should have discovered that the information was meaningless.

"Barings management in London seem generally to have believed that the money being sent to Singapore was being lent to clients to facilitate their trading. However, the credit aspects of these advances were never formally reviewed or considered by the credit committee. Barings' management did not question why it was apparently lending over £300 million to clients to trade when it had collateral of only some £31 million from clients for those trades.

"The management of Barings did not question the extraordinarily high levels of apparent profitability of supposed arbitrage dealings in Singapore, which were regarded as being without risk. In the Board of Banking Supervision's view these profits should have been viewed as abnormal and questionable, and the extraordinary profitability reported in 1994 should have attracted the close and thorough attention of the management long before the collapse.

"Despite Leeson's efforts at concealment, some information on the account he used to hide his losses was available to London, but it was never analysed. No one within Barings accepted responsibility for Leeson's activities for the whole of 1994. Leeson's deception was made easier as he was not only a trader but also in charge of the so-called 'back office' which processed the paperwork associated with trading. In 1994 Barings' internal auditors recommended that as a trader he should not have this responsibility for the back office. Barings failed to implement this recommendation.

"There were also serious and consistent failures and errors in its exposure reports to the Bank, and other reports to the Securities and Futures Authority, which made it less likely that they would be alerted to evidence of a problem.

"Coopers & Lybrand Singapore were the auditors for Barings Futures Singapore for 1994. In preparing those accounts, they expressed the view that the controls of BFS were satisfactory. This conclusion is not easy to reconcile with the lack of segregation of duties within the Singapore subsidiary which I have just described. For both 1993 and 1994, the auditors of the London operations were Coopers & Lybrand London. The report also raises doubts over the effectiveness of their testing of Barings' internal controls. The board considers that more thorough tests would have been likely to reveal the inadequate support for the funding requests from Singapore. However, the 1994 audit had not been fully completed, and it will never be known whether Coopers would have raised with management the important issues which had not apparently been identified or addressed by the time of the collapse.

"The independent members of the Board of Banking Supervision were separately asked by me to review the role of the UK regulators, particularly the Bank of England, in the events leading to the collapse. They were assisted in this inquiry by a team of accountants, lawyers and derivatives experts all drawn from outside the Bank of England. The board does not consider that the events leading up to the collapse point to the need for any fundamental change to the framework of regulation in the UK. But there is, it concludes, a need for improvements in the implementation of the existing arrangements.

"The board considers that the Bank of England reasonably placed reliance on local regulators of the overseas operations, and was also entitled to place reliance on the explanations of the management for the profitability of those operations and on the other information provided by Barings. Though the regulatory reports from Barings to regulators did contain information that was relevant to the collapse, they did not contain material information which could have alerted the regulators to the existence of the unauthorised positions that had been taken.

"The board identified a number of shortcomings in implementation by the Bank of England. It considers that an error of judgment was made in 1993 in giving Barings Brothers & Co an 'informal concession' in relation to the normal obligation of a bank to notify in advance exposures representing over 25 per cent. of its capital base. The time taken by the Bank of England to address the policy issues involved resulted in what the board judged to be an unacceptable delay of almost two years in reimposing the 25 per cent. limit. The Board of Banking Supervision was unable to determine whether or not this delay on the part of the Bank in imposing this limit was a contributing factor in Barings' collapse.

"The board also considers that the Bank of England displayed a lack of rigour in the analysis leading to the decision to permit Barings Securities Limited and Barings Brothers to be supervised on a joint, or so-called 'solo consolidation' basis, and in failing to review the decision. Solo consolidation of the two companies need not have resulted in a reduction in control over the advance of funds to the Singapore subsidiary, but in the case of Barings that was the practical effect.

"The report draws lessons for the management of banks like Barings, and for regulators and auditors. The Bank of England has accepted all of the recommendations relevant to it and I am placing copies of the Bank's detailed response in the Library of the House. The only other regulator for whom the Board of Banking Supervision draws lessons is the Securities and Futures Authority, which will respond once it has studied the report.

"The collapse of the Barings Group was clearly a very serious matter and caused damage to the reputation of the City of London. It has led to loss for a number of investors in Barings. However, the takeover by ING has stabilised the group and averted the prospect of far greater loss. Nothing has happened since my earlier Statement and there is nothing in the report to make me doubt my view that it would have been wrong to have used public funds to rescue Barings.

"Finally, I should like to remind the House of an important point. No regulatory system can provide a 100 per cent. guarantee against a bank failure, especially where there is a deliberate intention on the part of individual traders to conceal or deceive, combined with inadequate management controls. In cases such as this it is important that lessons are learnt quickly and promulgated widely so that all parties, including the management of other financial institutions, can learn from the unfortunate example. The speed and openness of the process is the best way to give confidence to the public and to the City. The Bank of England has already responded positively to the report. It is essential that management of all financial firms do the same".

My Lords, that concludes the Statement.

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 question which the Barings' failure posed. That was the question which this report has again exposed and has again failed to answer.

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 basis—monthly, prior to the collapse—tables 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: Queries were raised at a high level from reputable sources, and even included a query on 27 January 1995 from the Bank for International Settlements". Why, then, did the collapse at the end of February come as a surprise to the Bank of England?

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 Statement—the combining of the capital base of the banking operation and the capital base of the securities house—which 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 alone—not overseas, not in Singapore—while 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 now have an expert team monitoring derivatives who are getting even better every time they go in to see a firm. What they are reporting back from the most active players in the market is very reassuring. These people know what they are doing, whether it is at director level or the chaps on the desk"? Does the Minister further recall that Mr. Brian Quinn wrote in the Bank of England quarterly bulletin in August 1994: I believe both the market participants and the regulatory authorities have come a considerable way in identifying the capital needed for derivatives and all other instruments carrying market risk"? No wonder the Bank did not know what was happening. It thought it knew already. But what has the report to say about the bank's complacency? In paragraph 13.58 we are told: The Bank regarded the controls in Barings as informal but effective". The Chancellor's Statement says: The Bank … reasonably placed reliance on local regulators"— regulators who, according to the Chancellor's Statement, are now refusing to co-operate with the British authorities. The report continues that the Bank, was … entitled to place reliance on the explanations given by management as to the profitability of these operations and on the other information provided by Barings to the Bank". Paragraph 13.61 states: Had the Bank had a greater understanding of Barings' Far Eastern operations and a greater awareness of the degree of control of these operations as exercised by Barings in London it would have been better placed to supervise the consolidated group. There does not appear to have been any guideline or system in place within the Bank for determining whether the situation with regard to a member of the banking group for which the Bank was responsible for consolidated supervision was material such that it could affect the well-being of the bank". Complacent and gullible, no guideline or system in place.

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: We believe the Bank should explore ways of increasing its understanding of the non-banking businesses (particularly financial services businesses) undertaken by those banking groups for which it is responsible". It should increase its understanding of the job that it is supposed to be doing. Paragraph 14.37 states: The Bank should ensure that it understands the key elements of the management and control structures of those banking groups where it is responsible for consolidated supervision". 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 the events leading up to the collapse [do not] point to the need for any fundamental change to the framework of regulation in the UK". 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 effective and competitive supervision of a modern deregulated financial system? In the light of the increasing integration of banking and securities operations and the development of global markets, that review should consider whether the Bank should continue with its supervisory role or whether that role should pass to a new banking commission, better attuned to the supervisory demands of the modern world.

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 bondholders—many of them elderly—have 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?

Lord Ezra

My Lords, I too wish to express appreciation to the noble Lord for repeating the Statement. The noble Lord, Lord Eatwell, pointed out that there have in recent times been three significant banking crises. I consider that the Barings crisis is the worst of the three because it was at the heart of the City of London. It was the longest established merchant banking organisation in Britain. Of the other two, Johnson Matthey represented a bank which was a subsidiary of a firm which dealt mainly in trading precious metals. BCCI was a firm of enormous proportions but it largely traded abroad. This crisis hits at the heart of the City of London. It is fitting, therefore, that we should have this long and detailed report on it.

From what I have been able to read in the short time I have had the report in my hands, the analysis is extremely detailed and, I regret, highly critical of all involved. With the noble Lord, Lord Eatwell, I find that the recommendations and the lessons learnt do not seem to me to go nearly far enough.

Let us consider what is said about management. What should be done about management in other banking concerns? The first heading on page 252 is that: Management teams have the duty to understand fully the businesses they manage". Did we really need a report of this size to comment in that way, over 200 years after the City of London established itself as the main financial centre in the world?

Let us look at the second main recommendation as regards management: Responsibility for each business activity has to be clearly established and communicated". In other words, the management has to know what various business activities are being performed. The third recommendation is that there should be: Clear segregation of duties [in] … any effective control system". The noble Lord, Lord Eatwell, has already referred to the limited nature of the proposals that are made about the supervisory role of the Bank of England. So I very much fear that, although this is an excellent report in analysis, what it comes out with at the end gives little reassurance to those—they represent everyone in this House, and indeed in the country—who fear that this might occur again.

I wish to ask the Minister whether, even in the light of the limited recommendations, there is to be a further report by the Board of Banking Supervision to find out whether the various banking institutions are taking the necessary actions. Furthermore, in regard to the Bank of England's supervisory role, the noble Lord, Lord Eatwell, is perfectly right to draw attention to the alternative possibilities. We should have a major debate on whether the supervisory role should remain with the Bank or should be transferred. I have an open mind on the subject, but if it is to remain with the Bank, the whole thing needs to be sharpened up a good deal more than is suggested in the report.

The third area of importance is co-operation with overseas supervisory bodies. As the noble Lord, Lord Eatwell, pointed out, the fact that the Singapore authorities were not prepared to co-operate in the inquiry does not bode well for the arrangements for co-ordination by the various authorities. Because of the global nature of financial operations in the world in which we live, unless there is much more effective co-operation with the various supervisory bodies, I do not suppose that we shall be able to avoid such crises occurring again.

I conclude by asking the Minister whether the report, which is good on analysis, is only the start of the story. Do we not need to take it a good deal further? Do we not need to be assured that when these and further measures are effectively taken, we avoid this kind of occurrence in the future?

Lord Mackay of Ardbrecknish

My Lords, I am grateful to both noble Lords for thanking me for repeating this Statement. I shall try to address some of the points that they raised, although I cannot promise to answer them all; this report is very detailed. Noble Lords who are interested can, I suspect, spend a few hours reading it, when they will perhaps receive a slightly broader view than that portrayed by the noble Lord, Lord Eatwell.

To reply first to the point raised by the noble Lord, Lord Ezra, as to what was happening in regard to the recommendations, so far as the Bank is concerned there are 17 recommendations for action by the Bank which have all been accepted. They include improving its understanding of the risks in the non-banking business in the groups for which it is responsible; various improvements to its internal guidelines; efforts to improve co-operation with other regulators; and other measures to improve its effectiveness. The board asked for—and the Bank indicated that it will provide—a report on the recommendations and what has been done about them by the end of the year. As I said in my Statement, I am absolutely certain that all the banks in the City and all the other financial institutions will read carefully what this report discovered about this incident in order to see whether there are any lessons to be learnt by them over the way that they control their operations.

Perhaps the major point raised by the noble Lord, Lord Eatwell, is the argument that he advanced, as did some others, in favour of separating the functions of banking supervision away from the Bank of England. There is nothing in this report that supports the need for that major change to the regulatory framework. What it points to is a failure of practice, not a failure of policy. The noble Lord, Lord Eatwell, will of course remember that Lord Justice Bingham concluded in his report on BCCI that there was nothing in the history of BCCI that argued against the Bank's dual role. The noble Lord will also be aware, and I remind him of it, that the Treasury and Civil Service Committee of another place, in its 1993 report into the role of the Bank, concluded that there was no overwhelming case for separating out banking supervision to a separate body; rather the balance of argument was in favour of maintaining the status quo.

The Treasury and Civil Service Committee is currently looking into derivatives and at the implications of the Barings collapse. I do not know whether it will revisit this issue, but that is what it said; and that is what Lord Justice Bingham said in previous investigations on this issue. I do not think that the noble Lord, Lord Eatwell, was quoting from the broad base of views on this matter, but from a rather narrower base, when he invited me to remember quotations from articles previously.

The Board of Banking Supervision was set up under the Banking Act 1987 to advise the Bank of England on the discharge of its supervisory responsibility. Apart from the Governor and one other Bank official, the other six members are all independent outsiders with considerable experience. They were appointed precisely to deal with and pursue thoroughly, under their powers in the Banking Act, the sorts of issue that arose in this incident.

The noble Lord, Lord Ezra, asked about Singapore and why there were problems in getting information from Singapore. One of the problems was that Barings Futures Singapore is in the hands of judicial managers in Singapore who have a similar role to UK administrators. An inquiry team sought a local court ruling to direct the managers to release information, but the court refused, principally because insufficient commercial benefit would, as they saw it, accrue to BFS. My right honourable friend the Chancellor wrote twice to the Singapore Minister of Finance seeking co-operation on information. Therefore the investigation team did not get all the information that it would have liked because of the legal difficulties, but the Singapore Government, after my right honourable friend had written, agreed with us on the need to co-operate so far as possible.

The noble Lord, Lord Eatwell, asked me about the bondholders and about the bonuses of those who left Barings as a result of this incident. So far as I understand, almost all of those who are criticised in this report have left Barings. Equally, my understanding is that they did not receive any of the bonuses about which the noble Lord asks.

On the general question of whether the Government or the Bank of England should stand behind shareholders and bondholders in these matters, there is no suggestion in the report that the Bank should do so. Of course, we very much regret the fact that people lost money in Barings. But the capital of any company is exposed to higher risks than ordinary creditors and will receive a return only after other creditors are paid. If the Bank or the Government were to stand behind all failed banks, this would lead to moral hazard. People could chase the highest returns, regardless of risk, knowing that someone else would pay the Bill if things went wrong. That would not be right.

I was asked why the Bank did not pick up the market rumours when others did. The Bank of International Settlements, one of the others quoted, has a substantial balance sheet which requires it to deal on a regular basis in all the world's major markets and with all the world's major banks. Therefore, it is not really surprising that its dealers picked up a rumour in talking to Tokyo business counterparts. Bank dealers have very many fewer regular links with the Far East, and they did not pick up that particular rumour.

On the question of solo consolidation, which is a tricky issue on its own, I was asked by the noble Lord if I thought that it should be ended. I believe that it is sometimes right for the Bank to regard very closely linked institutions as one. The report makes clear that solo consolidation was a problem only because it was combined with such inadequate internal controls and general misreporting. The point is not that we should rule out a potentially useful technique, but that we should ensure that it is employed only where appropriate. The Bank is reviewing its rules on that subject.

Another point concerned holding a debate on Friday. As noble Lords well know, that is not a matter for me but for the usual channels. It should be left to the usual channels to make these decisions.

5.27 p.m.

Lord Boyd-Carpenter

My Lords, I support the view of the noble Lord, Lord Eatwell, that it is very important that this matter should be debated by this House before we rise for the Recess. This House contains an enormous amount of expertise and knowledge on these subjects. The matter is obviously one of considerable urgency. The only extent to which I would perhaps differ from the noble Lord opposite is in so far as it might be better to defer our rising for the Recess and take the debate early next week. That would give rather more opportunity and time for those of us who are concerned about this matter—and there are many—to read and digest this report. There is no necessity, so far as I know, to rise on Friday. It is purely a matter of convenience. This House has always been prepared to subject questions of convenience to questions of real public duty. It seems to me that this House can do a great deal by debating this subject. I hope that my noble friend will not just pass us off with the usual formula about "the usual channels". Some of us have no undue confidence in the usual channels. We should have far more confidence in my noble friend the Minister were he to say that he would himself take steps to see that we have an opportunity to debate this subject.

The only other matter that I would raise with him is this. I did not understand from his Statement, although I endeavoured to follow it closely, whether he, the Government and the Treasury are satisfied that the steps so far taken are sufficient to prevent a similar early repetition of a ghastly episode of this sort.

Lord Mackay of Ardbrecknish

My Lords, as to my noble friend's last point, at the very end of my Statement I pointed out that in the real world no regulatory system can provide a 100 per cent. guarantee against a bank failure. Anybody who believes anything else lives in Cloud-cuckoo-land.

The lessons for the Bank, for the financial institutions and for other people involved in this issue are there in this report for them to read. The Bank certainly accepts the recommendations and has undertaken to give report accepting their adoption by the end of the year.

As to having a debate on Friday of next week or whenever, my noble friend has asked me that question quite often. He has seemed quite keen to shorten the Recess on a number of occasions. Yesterday it was about the Consolidated Fund and probably tomorrow it will be the Consolidated Fund again. I can only repeat, much as I should love to yield to the temptation and be his hero for the day, that these matters are better dealt with by the usual channels and I shall report the matter to my noble friend after this Statement.

Baroness Seear

My Lords, before the noble Lord sits down, perhaps I may say that we on these Benches would also very much like to see an early debate. It is not good enough to leave it until early October. Nor do we accept that the Government are in a position to decide that that should be done and so on this occasion to instruct the usual channels.

Lord Mackay of Ardbrecknish

My Lords, I have nothing to add to what I said. I believe that the usual channels are the appropriate way. It is a fairly hefty report to read and your Lordships may be the better for a few days in which to digest it before we even begin to think about debating it.

Lord Barnett

My Lords, my noble friend Lord Eatwell, in a devastating commentary this afternoon, covered most of the points. I do not want to repeat them.

However, as I am sure your Lordships generally will accept, we have heard an incredible Statement this afternoon. We have been told that there is no need for any fundamental change to the framework of regulation in the United Kingdom. That is hard to believe after just hearing the Statement, let alone reading the whole report. How can the Minister say that? He should not have repeated what the Chancellor said. He should be ashamed to repeat words of that description.

In his reply, the Minister said that there was nothing in the report which suggested that we should separate out the supervisory role from the Bank of England. Of course not—the report is from the Bank of England. Why should we expect the board to recommend that it should be separated out. He mentioned the 17 recommendations that have been accepted. I have not read the report. Does one of the recommendations cover the point made by my noble friend Lord Eatwell; namely, that the Bank would do better to understand its job? Is that one of the recommendations?

I should like answers to two basic questions. First, we have been told in the Statement this afternoon that what happened was a failure by Barings and above all by the Bank of England's lack of rigour. Despite that, it is proposed to leave the Bank of England in charge. Would the Minister kindly justify to us how he can propose to leave the Bank of England in charge when he has repeated all the criticisms made this afternoon?

Secondly, everything that the Minister said this afternoon implies alleged charges against a certain Mr. Nick Leeson. The charges imply an offence against Barings in London. Barings has lost the money—over £800 million. Barings in London lost that amount of money, we are told, through the efforts or lack of effort of Nick Leeson. Why do the Government refuse to bring him back and charge him in this country?

Lord Mackay of Ardbrecknish

My Lords, I do not need to remind the noble Lord that the independent members of the board were the ones who looked in particular at the role of the Bank. As I explained in my original answer, that is the role placed on it by the Banking Act. It was not the Bank of England but the independent members of the board who concluded that: The events leading to the collapse of Barings do not, in our view, of themselves point to the need for any fundamental change to the framework of regulation in the UK. There is, however, a need for improvements in the existing arrangements". That is a serious point which has to be taken on board.

There is a distinction between the fundamental arrangements and the way in which they are operated in a practical way. The one needs to be improved and not the other. As I explained to the noble Lord, Lord Eatwell, Lord Justice Bingham came to the same conclusion, as did the Treasury and Civil Service Committee in another place.

The noble Lord asked me about Mr. Leeson and the fact that the board in this report certainly indicates his major role in the affair. When noble Lords have had a chance to read the report, they will see that that was indeed the trigger point. Not only according to the board did he do the trading but he went to a great deal of trouble to make sure that it was not found out by his superiors.

As for the question about him being brought to face criminal offences in Britain, that is a matter for the Serious Fraud Office. It has stated that there is presently no evidence available to it which could form the basis for an application for extradition from Germany. Mr. Leeson's activities—it seems a statement of the obvious—were carried out in Singapore and it is in Singapore that these matters will have to be addressed.

Lord Clark of Kempston

My Lords, does my noble friend agree that my right honourable friend the Chancellor, as soon as he could possibly do so, asked the Board of Banking Supervision to make a report? The report has come out with remarkable rapidity when one considers other reports which are requested and take months and sometimes years to appear. My noble friend will no doubt agree that the report shows a chaotic state of management in Barings, and not only in Barings; there is also criticism of the auditors, Coopers & Lybrand.

Those are serious accusations against two institutions, as far as the City of London is concerned. So far as concerns the Bank of England, from my cursory scan of the report, it seems to me that the cardinal error there lay in giving a concession that meant that if 25 per cent. of its capital base were exposed, it need not report it. That is a derogation of monitoring by the Bank of England. I understand that that informal concession was not given by a top executive in the Bank. I should have thought that such a concession should only have been made by the Governor, or certainly the Deputy Governor. I am sure that my noble friend will agree.

We must be careful that we do not jeopardise the confidence of the City of London. The City of London is a major plank in our economy so far as concerns invisibles. It does not do us any good to talk down the regulatory authorities and so on. I am absolutely convinced that the 17 recommendations will be implemented and, as my noble friend said, that all the other regulatory bodies will read the report with great interest and make absolutely certain that their monitoring is good.

We keep on having reviews. I feel that we want action. I urge my noble friend to take action on this report, particularly with regard to the 17 recommendations for the Bank of England.

Lord Mackay of Ardbrecknish

My Lords, I thank my noble friend for making those points. Perhaps I may start at the end of them. As I indicated, the 17 recommendations have been accepted by the Bank of England and it has issued a press statement today on that.

In the report, the board says that it has asked the Bank to report back to it by the end of this year, saying what it has done about those recommendations. I hope that that helps my noble friend from that point of view.

My noble friend is right. One of the problems in the Bank was the matter of the advance of more than 25 per cent. of its capital to a single party. Clearly, that is a problem. It has been highlighted in the report. It is one of the issues that the Bank will have to address to ensure that there are no further breaches of the large exposures directive.

With regard to the auditors, it is fair to say that the report does not blame them for the collapse. However, it raises some significant questions about the effectiveness of their inquiries. I hope that professional bodies will pay close attention to the findings of the board in regard to auditors. It must be said that the board was not able to deal properly with issues relating to Coopers & Lybrand in Singapore because, as I said earlier, the company claimed client confidentiality and the Singapore court upheld that.

Lord Taylor of Gryfe

My Lords, first, I congratulate the Government on publishing this report in reasonable time. This is an extremely complex business. It covered international operations, which are difficult to follow. It required co-operation and information from a large number of sources and, unlike previous investigations on affairs in the City, this report was published in reasonable time. In other cases, such as those where the Serious Fraud Office were involved in City affairs, the inquiry sometimes took four or five years. The Government therefore should be congratulated on the expedition with which they have produced the report.

That is all I say in commendation of the report. I want to raise the question of the depositors and the people who lost money in this sad affair. After all, it is not a question of standing behind every bank that runs into difficulty. I would not expect the Government to assume that responsibility. But in this case, as is contained in the report, the Bank of England is responsible for a high degree of negligence and for that I assume the Government should bear some responsibility, it being their institution.

The other matter referred to is the case of the auditors. In the report the auditors are also deemed negligent. Is not there a case for a professional body to deal with auditors who are negligent—reputable firms as they are, as the bank too is a reputable firm? Also, as often happens in American courts, is not there a case for the people who lost money to sue the negligent individuals in order to recover some of that money?

Lord Mackay of Ardbrecknish

My Lords, I am grateful to the noble Lord, Lord Taylor of Gryfe, for his introductory points. He is absolutely right in saying that it is a complex report; it was produced speedily and my right honourable friend the Chancellor published it not only speedily, but in full. I am glad for the noble Lord's endorsement in that regard.

The noble Lord returned to the question of the people who lost money. If in this case, somebody—let us say the Government—were to pay back that money in some way, I fear that that may be taken by everybody else as meaning that when a similar eventuality happened in the future, the Government could be pushed into being morally obliged to pay out that money. That would have the result that I mentioned in my original answer to the noble Lord, Lord Eatwell; that is, that people would go into high risk strategies without any regard for the consequences, safe in the knowledge that the Government could be relied upon or bullied into bailing them out if it went wrong. That is the first point I want to make.

When the noble Lord reads the whole report he will not be able to come to the conclusion that the Bank was principally responsible. He will see that the responsibilities for this whole affair were largely in Barings and its management, and the way that they dealt with the situation. Also, when he reads the board's view on the part Mr. Leeson played, he will see that that was the key. I do not want to quote at too great a length, but in paragraph 5.3 the report points out, It appears, therefore, that Leeson intended to use Account '88888'"— which was the account into which he put the losses— for unauthorised activity from the outset"— that is, from the time that he went to Singapore— and that the action noted above"— that is, what he did in order to make sure that no information went from that account back to London— was designed to exclude the account from the books and records of Barings". The noble Lord, Lord Taylor of Gryfe, is being a little unkind therefore—I understand that because he has not had the chance to read the whole report—when he tries to finger the blame entirely on the Bank of England.

Lord Monson

My Lords, the noble Lord, Lord Eatwell, and others drew our attention to the disgraceful state of affairs whereby the new owners of Barings paid many tens of millions of pounds by way of bonuses to already well-paid employees at Barings at the expense of loan note holders, many of whom are not well off. While I accept that the Government are not in a position to bale out the loan note holders, does not the noble Lord, Lord Mackay, agree that the action of the new owners will make it more difficult and more expensive for solid, respectable, well-run British companies to raise fixed interest capital in the future?

Lord Mackay of Ardbrecknish

My Lords, I said earlier that my understanding is that those who left Barings did not receive bonuses. The bonuses' point is covered by ING Barings and relates to those people who continue to work for that company. To whom the bonuses should be paid is a matter for the new owners. Around 4,000 people worked in parts of Barings that had nothing to do with this matter in Singapore and nothing to do with these events. They were running a successful UK bank, and it is not right that we should confuse their position with that of the events in Singapore and the inability of the senior management of Barings to monitor those events properly.