Banking Supervision

HL Deb 21 July 1995 vol 566 cc527-62

2.4 p.m.

Lord Eatwell rose to call attention to the need for improved banking supervision, in the light of the collapse of Barings; and to move for Papers.

The noble Lord said: My Lords, it is traditional for Motions to resolve in your Lordships' House to end with the words, "and to move for Papers". In the circumstances of our debate today, that Motion is even more than usually appropriate: Papers are certainly needed. We have all now had the opportunity to study the report of the inquiry into the collapse of Barings. It makes it abundantly clear that the collapse was brought about by the three factors listed in paragraph 13.4: first, unauthorised and concealed trading by Mr. Leeson; secondly, a total management failure at Barings; and, thirdly, a serious regulatory failure by the Bank of England. The collapse would not have occurred without each of those three ingredients to the fatal brew. The report demonstrates that this unbelievable mess was brought about not just, as the Chancellor of the Exchequer originally asserted, by a rogue trader, but also by a rogue management and a rogue regulatory system. All three were necessary for the collapse; only one of them is still in place.

That is why a responsible government, mindful of the importance of the integrity and long-term profitability of the City of London for our national economy, would now set up a proper independent review to consider what should be the structure of a modern supervisory system for British banking. That review should consider both what are the tasks of financial regulation in a fast-changing world and whether the Bank of England should continue to perform those tasks or whether they should pass to a new banking commission. In other words, its terms of reference should be drawn far more broadly than the Board of Banking Supervision's terms of reference in the investigation into Barings.

The Barings report, like the report on the Johnson Matthey affair and the Bingham report, provides a number of detailed recommendations for changes in the Bank of England's regulatory system. Famously, these include the recommendations in paragraphs 14.35 and 14.37 that the Bank should understand the business it is supposed to be regulating—an argument the implications of which are not particularly reassuring. Indeed, as with the Johnson Matthey and the BCCI reports, this report leaves us with the distinct impression of a regulatory system which is always catching up with yesterday's problems, and in the case of Barings a problem which the Governor of the Bank of England believes is an aberration. Therefore, the recommendations, sensible though they undoubtedly are, are also reactions to yesterday's problems.

In the succession of regulatory failures suffered over the past 10 years, we always seem to be playing catch-up. It is time that we designed a regulatory system which could provide Britain with a competitive lead. The need to take a lead has been created by the speed of global financial deregulation and innovation which is sweeping away the old boundaries between deposit-taking banks, on the one hand, and investment and securities houses, on the other hand. Competition in global markets is forcing the development of larger, more diverse financial conglomerates in place of the segmented, fragmented markets of old. New markets in derivatives and other financial products have blurred the lines between prudent hedging and reckless gambling. It was precisely those changes which resulted in the Bank of England's regulators confessing in 1993 that they did not understand the business that they were supposed to be regulating.

Of course, the development of global markets also poses new problems of international regulatory co-operation and co-ordination, but the traditional tasks of an effective supervisory system remain essentially the same. First, the banking system must be protected from systemic risk—that is, the possibility of a catastrophic financial failure which spreads from one financial institution to another. The funds of depositors, small and large, in banks and near-banks must be protected. Secondly, while in securities markets investors do not receive the same protection as depositors—investments are necessarily risky—regulators must nonetheless ensure that investors are fairly and honestly treated. As the Barings case shows, the difficulty is that in a world in which banks and securities traders are one and the same, the risks of a securities business can overwhelm prudential banking.

That problem has been considered recently by the so-called "tripartite group" of international banking, securities and insurance regulators, which produced a report entitled The Supervision of Financial Conglomerates. The tripartite group attempts to gain a picture of the entire regulatory framework of the global financial markets. It would be helpful if the Minister could tell us what contribution the Bank of England made to the tripartite group's work on the supervision of conglomerates. After all, the Bank certainly has a lot of experience of what can go wrong.

In its report, the tripartite group identifies a number of possible approaches to the problem of conglomerate regulation. It contrasts, on the one hand, consolidated supervision by a lead regulator who has responsibility for an entire conglomerate with, on the other hand, solo supervision in which different parts of the conglomerate are the responsibility of different regulators. The report also assesses the advantages of the isolation of banking activities from investment activities. Noble Lords will remember that that was an important issue at Barings where banking and securities operations were combined. That form of isolation has been enforced in the United States since the 1930s under the Glass-Steagll Act. Finally, the report assesses the benefits of New Zealand's approach to regulation, which involves far greater transparency, with the enforced publication of exhaustive information.

Whichever of those approaches is adopted, it is clear that banking supervisors have great difficulty handling the new world of conglomerates. Co-operation between different supervisors is difficult enough in one country, let alone between countries. Moreover, it is clear that there will always be a tendency to exploit the soft restrictions which may be found in the cracks between different regulators. All in all, what is most important in any complex financial group is the development of powerful internal controls and methods which are internationally agreed.

It is all those issues and problems—the problems of the modern world—which a thorough review of Britain's supervisory structures should address. In principle, the content and flexibility of the supervisory system is far more important than who actually runs it, whether it be the Bank of England or an independent banking commission. The structure of a modern supervisory system should be the major part of the terms of reference of a thorough review.

Although the content of a modern supervisory system is the main question to be tackled, the issue of the role of the Bank of England cannot be left out of the equation. Is the Bank part of the solution or part of the problem? What is most disturbing in the light of the events of the past decade is the increasing evidence that, despite numerous attempts which have led to some significant changes, the Bank cannot adequately reform itself from within. Why not? First, there is the culture which seems to suggest that the Bank knows best. That breeds complacency. The words "informal" and "lack of rigour" echo down through the Johnson Matthey report, the Bingham report and now the report on Barings. The same words appear again and again.

It was that culture of complacency which decreed that there should be no site visit to Barings in three years. It was that culture of complacency which resulted in warnings from Singapore and from the Bank for International Settlement in Basel being ignored. It was that culture of complacency which led the Governor to argue just a year ago: We now have an expert team monitoring derivatives who are getting even better every time that they go to see a firm. These people know what they are doing whether it is at director level or the chaps on the desk". it is that same culture—the belief that the Bank knows best—which results in the Governor of the Bank, a public official, describing parliamentary investigations of a clearly flawed regulatory system as a witch-hunt. Does the Minister consider that rigorous parliamentary oversight of such important matters amounts to a witch-hunt?

The second reason why we must doubt the Bank's ability to reform itself from within is that it appears to have a disturbingly casual attitude to those people at Barings who have managed other people's money so incompetently. On Wednesday, the Governor was notably reticent in his answers to the Treasury and Civil Service Select Committee of another place as to whether those people will be allowed to run a bank again. If they were doctors, they would have been struck off; if they were clergymen, they would have been hauled before a consistory court. What will happen to the people who ran Barings, who clearly could not be entrusted with a whelk stall? Does the Minister think that those people should ever be allowed to run a bank again?

Thirdly, there is a persistent tendency in the Bank's approach to its supervisory role to regard regulation as an unfortunate cost rather than as a competitive benefit. Whenever the Governor is asked to compare the British arm's length approach to regulation with the American aggressive and intrusive tradition of on-site visits, he refers to the extra costs of the American-style regulation and the necessity of not stifling enterprise, if that is what American regulators are trying to do.

The bank seems to believe that regulation should be minimal and best undertaken by those who can be relied upon to put the interests of the City practitioners whom the bank represents before those of clients and depositors. But our informally regulated market has not proved a source of competitive advantage for Britain in the long run. Instead, it has been an important factor in the decline of the British merchant banking community. The regulatory failure that hastened the collapse of Barings led to a sharp increase in the cost to all British merchant banks of borrowing money. That money is their essential raw material, and its cost is a major determinant of their competitiveness.

So it is no accident that famous names in British merchant banking—Warburgs and Kleinwort Benson—have surrendered their independence to foreign buyers: the Swiss Bank Corporation and Dresdner Bank respectively. Barings is now owned by the Dutch Company ING and of course Morgan Grenfell is owned by the Deutsche Bank.

In each and every case the stronger purchasing bank has come from financial markets that are considerably more tightly regulated than London. The weaker banks are in London. That has been the particular form of systemic risk which the Bank has itself created: the risk to the entire system of British merchant banking. It is clear that the Conservative Party does not care who owns Britain's banks, but the Labour Party wants there to be a decent number of world-class British companies competing in London and sustaining London as the centre of the world's financial system. The strength of London will not be sustained by informal regulation lacking in rigour. It will be enhanced by a modern supervisory system with transparent, firm controls which encourage creative enterprise. Creating such a system should be the key elements in the terms of reference of a proper review.

It will not happen—not under this Government. What the events of the past few days have illustrated beyond all reasonable doubt is that the true source of the rogue complacency in the British financial system is not to be found in Threadneedle Street but in 11 Downing Street. It has been the Chancellor of the Exchequer who has sought to impede change by deploying the bogus argument that because no regulatory system is absolutely perfect nothing fundamental can be done. It has been the Chancellor of the Exchequer who, by continuously repeating that there can be no guarantee of regulatory perfection, has ensured that the necessary changes can be headed off. It has been the Chancellor of the Exchequer who has declared, in the face of all the evidence in the report to the contrary, 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.

For the past decade it has been Conservative Chancellors of the Exchequer who have moved their brass plates around from one financial crisis to another. So a complacent Chancellor will not institute the wide-ranging review that the Barings Report so clearly reveals to be necessary. He will not respond to the call made just this week by Mr. Andrew Large, chairman of the SIB for: A new business plan for financial regulation".

Mr. Large argued: It would be ironic if the end of deregulation was that we had to re-regulate financial markets because the regulators cannot cope with the effects of deregulation".

Mr. Large is absolutely right. It is clear that, despite a series of sticking-plaster reforms, Britain's regulatory system cannot cope. A fundamental review is necessary. That review will be undertaken shortly by a Labour Government.

2.20 p.m.

The Viscount of Falkland

My Lords, I thank the noble Lord, Lord Eatwell, for his persistence in requesting and securing a debate on this important subject. I speak from these Benches as a substitute for my noble friend Lord Ezra. He would have spoken not quite in the swingeing and eloquent terms of the noble Lord, Lord Eatwell, but, nevertheless, would have supported fundamentally the points that the noble Lord made following his remarks after the Minister repeated the Statement that was made in another place a few days ago.

In discharging my duty to my noble friend, I begin by broadly agreeing with the main points, as I understood them, made by the noble Lord, Lord Eatwell. It is no good having an anodyne summary to an interesting and detailed report on which the Government Statement was based. We need a full inquiry and I am confident that, when the true facts emerge, a full inquiry will be before us.

The noble Lord, Lord Eatwell, pointed out various interesting aspects of the situation. For instance, should those within the Bank of England remain responsible for the increasingly complex and international world of securities dealing? In the light of the report, the Government's attitude to the situation appears to be extremely relaxed. I am sure that it is not in reality. The report was published surprisingly quickly and it is surprisingly detailed. However, some of its recommendations are, to say the least, facile. I refer to the first three recommendations, for instance, and I believe that my noble friend Lord Ezra made the point when speaking on the Statement. Some of the recommendations are so basic and obvious that they are rather like reading the instruction manual for a new Japanese car; that in order to start the car one must get the key and put it in the ignition. I believe that in respect of such a serious matter the recommendations should have been more serious and have dealt with the problems to which the noble Lord, Lord Eatwell, referred.

It is some years since I was in the City; indeed, since 1986 when what is popularly known as "Big Bang" took place. At that time I listened to the debates in your Lordships' House and was sceptical about the arrangements that were passed by both Houses. I believe that basic flaws have resulted from what happened in 1986.

The City of London has changed enormously. It is an unhappy mixture of the remnants of the old-boy network, which worked quite well. In fact, the self-regulation of the City in the old days, albeit in a smaller world of operation and with its crooks, I agree— crooks always exist where there are large amounts of money—and with its ability to use rough justice and to deal with miscreants was quite impressive. If the situation with Barings had arisen 15 years ago, I do not believe that the old-boy network, for better or for worse, would have allowed such a bank to have disappeared off the scene quite so readily. I do not believe that the Bank of England would have considered it.

We should be in no doubt that the disappearance of Barings is as astonishing and surprising to people with any knowledge of the City as it would be to educationalists if Eton had to be closed because there was revealed an enormous teenage drug-trading ring; or if the Grenadier Guards were found to be trading in surplus military equipment. It is an astonishing business. To City people it would be as amazing as discovering that Cazenove's, the leading stockbrokers, had been cheating their private clients and was facing a similar scandal. In fact, just before the news of the scandal broke it was rumoured in some newspapers that a merger between Cazenove's and Barings was being discussed. That would have been an astonishingly powerful financial institution in this country.

However, we have seen revealed in not much detail a scandalous operation. We can only judge it from what we hear through gossip and from what we read in the newspapers. But the damage to the reputation of the City of London as the leading financial centre of Europe, which is often claimed in your Lordships' House and elsewhere, has been immeasurable. There has been the immediate fall-out from this scandal where deposits have been removed from Barings and other banks to foreign centres. Moreover, as the noble Lord, Lord Eatwell, rightly pointed out, the cost of money has become appreciably greater, thereby making the operation of banks in the competitive world increasingly difficult.

The City of London today is a mixture of the old-boy network, with some of the good things and some of the bad things, and the new state of affairs where there are compliance officers, who are sometimes good and sometimes bad. But, generally, they concentrate on the lesser and minor matters of every-day dealing and miss the bigger fish. The bigger crooks will always find a way round that.

Not that I think that Mr. Leeson was a bigger crook. Not many people have bothered to explain, either in the press or elsewhere, exactly what he was doing. My reading of the situation is that he was doing something which is broadly covered under the name of derivative trading. That is an American term which covers all kinds of sophisticated dealings in options right down to what Mr. Leeson was doing. He was punting on behalf of clients and persons unknown on the rise and fall of the Nikkei index.

The Earl of Longford

My Lords, is derivative trading another term for speculation or gambling?

The Viscount of Falkland

My Lords, as I understand it—and others better placed in this debate will correct me if I am wrong—derivative trading is a cover-all term for sophisticated products, as they are now called, although there is no product; that is the jargon. Sophisticated markets are made in order that institutions, rich individuals and international banks can look at their portfolios and decide that, in order to spice them up, they will involve themselves in such dealings, whether it is in commodities, the rise and fall of indexes or the more complicated options. I hope that I have described that to the satisfaction of the noble Earl, but I am sure that others will amplify that explanation.

It seems that Mr. Leeson was doing that. As his statements have been published in the newspapers, they have been extremely interesting. A minor aspect of the affair is that I should like to know how is it that Mr. Leeson ends up in Frankfurt? Apparently, he spent some time trying to cover his losses. He had the most extraordinary role in Singapore. Not only was he the principal trader; he was acting as the accountant and compliance officer. It was a one-man band of the most extraordinary kind. He was sending back information as regards the true situation to a very small group in London. But he stuck it out, trying to create margins in order to continue trading. It all became too much for him and I understand that he ran to Malaysia. We may never know whether he was acting on his own behalf, but I hope that that will come out at the inquiry, which I am sure will take place.

What worries me—and this must worry the Serious Fraud Office and other people in the banks—is what will happen if Mr. Leeson goes to Singapore. I should prefer that he came here. Many people may wish him to be tried in a country where the judges are not independent and the gaols are extremely uncomfortable. I should prefer him to go to Ford open prison so that we have proper declarations and revelations which will enable us to base our future decisions on how such dealings and rogue traders, if that is what Mr. Leeson is, should be dealt with.

I admit that I am raising trivial matters compared with the broader picture given by the noble Lord, Lord Eatwell. I believe that there are many unanswered questions which relate to the day-to-day business of the City of London. Investors, whether here or abroad, and financial institutions will be uneasy until all those questions are answered.

The Bank of England and the Government have successfully bailed out two secondary banks in recent years, after a good deal of discussion in your Lordships' House and elsewhere. But this bank, a primary bank—indeed, one of the leading acceptance banks in the world and one of the blue chip operators in the field—has disappeared and is now in the ownership of a Dutch company. There are many questions to be answered.

I shall not bore your Lordships any longer with any of the gossip which I have managed to pick up during my investigations for today's end-of-term debate.

Noble Lords

Oh!

The Viscount of Falkland

My Lords, I shall, however, give the House one piece of gossip because it is the end of term. Apparently there was a very brilliant operator in Barings. Although I had met him, I did not know that he was that brilliant; but I did know that he was very rich. He made a lot of money and many bonuses for Barings, but he fell out with his fellow directors for reasons about which I am not quite clear—some financial and some personal, as I understand it. His departure from the bank left a great gap, so that people less expert than he was stepped into his position.

Mr. Leeson was a lucky young man. Indeed, the City of London now depends upon variably competent or incompetent compliance officers—bright young men, often from what we call the "estuary" part of England, who are quick, ambitious and hard working. Mr. Leeson made a good deal of money and great bonuses for his employers; in fact, we are talking in lottery figures of an enormous kind. When someone becomes used to such luck, not only does he want it to continue, but, he who creates that luck begins to think that he is immortal. Of course, the fall inevitably comes and that is what happened to Mr. Leeson. I believe that that will be revealed when the full inquiry takes place.

Seriously, it is a shabby business and one which is damaging to our country and to the City of London. We shall not get over it easily. It needs to be dealt with in a serious manner by an independent inquiry as the noble Lord, Lord Eatwell, said. I hope that it happens in short order and that we do not have any more bland statements, either from the Bank of England or the Government, on the matter.

Moreover, as we are at the end of term and we can be naughty because we will be away for a few weeks—or, indeed, for a few months—I must say that I think the behaviour of the Governor of the Bank of England has been extraordinary by the standards of normal, government servants at a high level. If I may put it this way, he seems to have taken an aggressively defensive stance, lashing out at any criticism from anywhere—whether it be from an MP, a Treasury Select Committee or the press. If I may say so, and although I do not know the gentleman personally, his attitude has certainly been lacking in grace and has not been appropriate to the gravity of the situation in which the Bank of England now finds itself. I hope that his tone will change in the coming weeks. I am quite sure that, if we have an independent inquiry, he will be forced to change his attitude.

I have finished my speech. However, I should just like to wish all noble Lords, including the Minister who is to reply to the debate, a very happy summer.

2.33 p.m.

Lord Spens

My Lords, as regards the comments of the noble Lord, Lord Eatwell, about complacency in the structure of the Bank of England, I believe that he is probably slightly wrong. The structure of the Bank of England suffers from a different form of problem; namely, the problem of papal infallibility. Every day I cannot help but feel that my old friend Mr. George looks more and more like some sort of Pope who is not subject to any form of criticism and is finding it very difficult to take.

I want to talk a little about the structure of the supervisory function in the Bank of England as it stands today and say why I consider it wholly wrong for it to continue into the future. I first met the supervisory structure—best summed up on page 269 of the report— and the individuals in it in 1982. Without exception, they were all one rung lower then but they seem to have moved up in tandem.

When I first joined a small merchant bank it became clear to me that it was to all intents and purposes broke. It had a loan portfolio which did not pay for itself in interest costs; it had an overhead that was too big; it had a bad debt problem on a scale to its portfolio that represented something like 30 per cent.; and it had no share capital. In discussion with this team, from top to bottom, it became clear that they had no idea how a small commercial bank operated, the business it did, or how it conducted life at all. While we went out to find new share capital, they made great efforts to obstruct what was going on.

Eventually we found new share capital and we brought some £70 million of new share capital into that small bank and wrote off £30 million of loans. These were loans which were shown on the balance sheet as on overdraft and therefore money at call. They were all to small furriers and people like that in the City who were also going out of business. It was therefore quite clear that the balance sheet was not showing the truth. None of these loans was likely ever to be repaid on call, if they were to be repaid at all. The supervisory department had no idea of this problem.

Before I go any further I should confess to a slight passing interest in the Bank of England. It will come as no surprise to everyone in this House when I remind them that I am currently in action against the Bank of England for the tort of unlawful interference in contract. Therefore I am prohibited from continuing much further down the line while that is sub judice.

All I can say—I think this is not in dispute—is that the method of regulation and supervision that took place in those days in 1987 was by ultimatum; in other words, the bank was told, "If you do not get rid of Lord Spens by 11.30 this morning, you will lose your banking licence tomorrow". Indeed, 10 directors of Morgan Grenfell went like that. I suspect that one of the reasons that no director of Barings has gone like that is my action against the Bank of England where I stated that this was unlawful behaviour by the Bank.

We shall not know for some time whether that is the case, and it is unfortunate that my case has taken such a long time to come to court. However, it will come to court in due course. I class this as a form of blackmail supervision. If one looks at the record of the Bank of England in its supervisory capacity, apart from the three big ones, Johnson Matthey, BCCI and Barings, there are some 20 to 30 other major failures. There is, for example, the Bank of Wallace Smith and Co. which went under for some £100 million three years ago. The chairman of that bank is currently a guest at Ford Open Prison. What is interesting about that case is that the Bank of England was informed by the auditors that they were unhappy with the fee income as shown in the accounts of that bank and they thought it was bogus.

The Bank of England, under its powers given by the Banking Act 1987, commissioned a Section 41 report, which it is entitled to do, which showed that the income was indeed bogus and did not exist. Did the Bank do anything about that? No, it did not. A year later the chairman of Wallace Smith, Mr. Duncan Smith, walked into the Bank of England one weekend and said, "I am bust to the tune of £100 million". Admittedly it was a wholesale bank and therefore there was no great fuss about it.

The Earl of Longford

My Lords, I hope I may interrupt the noble Lord for just one moment. I am naturally following him dispassionately, but I am anxious to know whether he thinks this whole idea of the Bank of England exercising a supervisory role is nonsense, or does he think it could be done better?

Lord Spens

My Lords, if I may, I shall come to that point in a moment. I should like first to put the background in place.

When Mr. Duncan Smith walked into the Bank of England they were aghast. They locked him in a room and called for the police, and he was arrested on the spot. That is all the supervisory department knew about that bank. There are other banks like that. There is Authority Bank and various other banks, including some ethnic banks, where there are problems because many of the people involved do not think that there is a problem for the Bank of England to deal with. What would happen if some 20 or 30 banks went under in one form or another?

Incidentally, there was another major trading transaction at the same time as that of Mr. Leeson. The Midland Bank lost some £500 million in the same period as Mr. Leeson lost £800 million. The difference between the two banks was that the Midland Bank had a shareholder—the Hong Kong and Shanghai Bank—which was capable of absorbing those losses and therefore the bank did not go under. It very nearly went under and it would have done so had it not had a large shareholder.

All of those events took place with the present supervisory structure and team in place. In the case of Barings and the problems which arose when it went under, there were two fundamental problems. The first was the breach of the 25 per cent. rule. That 25 per cent. rule was introduced in the middle of the Guinness/Distillers takeover battle. It was introduced because the Bank of England failed to understand the risks that Morgan Grenfell was taking in underwriting primary issues in the stockmarket some seven or eight times its share capital and reserves, which was the value of the Distillers bid and the Imperial bid at the same time. That 25 per cent. rule was introduced at that time for that reason, not at the instigation of the Bank of England and the supervisory department but of the press, who asked why such a rule did not exist.

That 25 per cent. rule has been improved over the years to how it stands today. However, while Mr. Chris Thompson of the Bank of England resigned because he allowed Barings to go above that 25 per cent. limit, I find it very difficult to believe that he was the only person who knew. I know the Bank of England. I have seen volumes of documents pass from pillar to post, upstairs, downstairs, everywhere in the Bank. They write notes to each other like there is no tomorrow, nearly always passing a decision up and down the line. I simply do not accept that Mr. Thompson did not inform his superiors that Barings was going to be in breach of one of the principal obligations of the Bank. It is unheard of for anyone in the Bank of England to be in that position. Yet no one else has resigned. No one else resigned over BCCI when £10 billion was lost. God knows what this Government need to get people to resign at the top.

The second problem at the Bank of England is referred to on page 37 of the report. That problem is the bonuses. In Barings they were getting bonuses of three to one—a multiple of three times their salary. That was paid to 50 or so directors. That makes the bonuses in privatised companies look tiny compared with what is going on in the merchant banking system. That is plain, ordinary greed. Where you have 50 directors receiving bonuses of over £½ million pounds each no command and control system will ever work. Inevitably, they will not look under the stones when they stand to lose that kind of money.

Therefore, to answer the question of the noble Earl, Lord Longford, it does not matter whether supervision and regulation are carried out within the Bank of England or within some other body if the people who do the regulating are incompetent, uncommercial and unprofessional. It will be just as bad. I have this appalling sense of déjà vu; that in a few years time we shall be considering another banking scandal, with the same people in charge and the same people not taking responsibility for what is undoubtedly their own responsibility. As night follows day, we shall have another banking scandal if this team is left in place.

2.44 p.m.

Lord Hollick

My Lords, I too must thank the noble Lord, Lord Eatwell, for introducing this matter while it is fresh in our minds. He has given us a few days to absorb a full report, although there are obvious gaps in it.

The report has been drawn up by the Board of Banking Supervision. It is unfortunate in the extreme that it was not an independent report. There is an undue fondness in the City for self-regulation and there is now a widespread feeling that self-regulation, marking your own card and writing your own report is no longer adequate or satisfactory. The inquiry should have been carried out by an independent body. The report would have had greater credibility, and credibility is at the heart of the integrity of the financial system. That is not to say that an independent body would have discovered anything that the current report has not touched upon; it would simply have had much greater credibility and authority.

I speak as one who has worked in the City since 1968. The report paints an incredible picture of incompetence: reckless, uncontrolled trading, surrounded by a series of breathtaking management failures, underpinned by a universal ignorance of what was going on. I am afraid that the regulator, the Bank of England, shares in it. The report provides a valuable glimpse of how a financial institution operates, particularly one which has businesses throughout the world; and how a regulator also operates in that environment.

The first point that concerns me is that the management of an organisation should at the least have some knowledge and understanding of the product that it is selling and the service it offers. Running through the report is the fact that no one at Barings had any idea of the business they were in. Apparently, as long as the profits continued to roll in, they were happy. They were unconcerned about the true nature of the product or of the risk. There are touchingly naive pieces in the report. In paragraph 3.57 the chairman of Barings talks about how he found the earnings "pleasantly surprising". Another person questioned said:

Yes … people talked about it almost incessantly … I have to say that a load of people—all of us, really—found it very puzzling. But I have to say equally, and maybe you will say naively, we accepted it". As we have already heard, what they accepted was very substantial bonuses. In the case of Mr. Baring, the bonus would be £1 million for the year in question. In the case of the chief executive, Mr. Tuckey, it would be £1.6 million. So, take a big bonus and walk on the other side of the street and close your eyes.

That is extraordinary. I speak as someone who has worked in the City. We have our fair share of crooks and what I believe the noble Viscount described as "estuarial" employees and colleagues. However, I have never seen incompetence, ignorance and naivety on that scale before. They believed that trading was risk free. An organisation which has been established for 200 years should know one thing: nothing is risk free. There is no such thing as risk free. If there is, then please let me know of it first. There is no such thing as a risk-free financial transaction.

The puzzlement of people at Barings did not lead to curiosity. That absence of curiosity was the fundamental flaw; people did not inquire about what had happened. The report suggests a massive failure in management, operating and financial controls. That is wrong. There were no management, operating or financial controls. It was the absence of basic management, operational and financial controls that we see throughout the whole saga.

The control of the financial services business, the control of the bank and particularly the control of the securities trade business require careful and strict supervision, both within the bank, the institution itself, and outside. At the least, there must be a division of responsibility. Fundamentally, there must be a segregation of funds: clients' funds and proprietorial trading funds. There must be arm's length funding of the whole system, otherwise the system itself becomes contaminated.

The whole control of a financial institution is predicated on the basis that out there somewhere—you do not know who it is or when he will turn up—there is a rogue trader. There is always a rogue trader and you have to plan on that basis. Simply shrugging your shoulders and saying, "There's a rogue trader and we got knocked over" is not good enough. He should not have been there and Barings should have had controls in place which would have contained that rogue trader and found out at a much earlier stage what was going on. Rogue traders are not unique to the London market and these problems are not unique to the London market, although we seem to have had more than our fair share of such problems in recent years. This report will provide the other institutions in the City, and in other financial centres, with a very useful text about how not to run the securities business. Looking on the brighter side, one of the effects of the Barings débâcle, the Barings disaster, is that it has "sharpened up" many other people. They have suddenly been shaken out of their complacency.

I turn now to the role of the regulator. Speaking generally, this role must in the first instance be to protect the interest of the general public, particularly those members who are not, to use the City expression, financial sophisticated. I guess that in this case that would include everybody who worked at Barings! The need to protect the general public then leads to a need to avoid systemic risk; that is to say, a domino effect, with one institution toppling over another. The third aspect of regulation is to provide comfort in the professional markets; that is, the non-retail markets. It is important that we look at regulation in these two lights: the retail (consumer) side and the professional side.

It is true that on the professional side there are financial institutions which compete with one another and seek to profit out of one another's mistakes. There is a view, which I think is correct, that they can look after themselves to quite a large extent. They do not need to be protected to the same extent. Nevertheless, they need to know that there is a regulatory environment which works, which is effective and which ensures that the worst excesses—as we saw in the case of Barings—are properly regulated and do not continue to put the financial system at risk.

It is important to remember that what a regulator cannot and does not, do is provide a financial guarantee. It would be quite wrong for a regulator to do that. When the Minister repeated the Statement, he talked about "moral hazard". By definition, risk cannot be eliminated in a financial system. Otherwise, it would require a public body, using public funds, to stand behind every single financial institution. However, there is another hazard. I would call it regulatory hazard: the absence of adequate regulation. If the supervision system does not work satisfactorily, that can weaken markets and can weaken the integrity of markets. In the case of the City of London, which is an extremely valuable national asset, it can undermine the smooth working and standing of that market. Credible regulation for professional markets is very important. There needs to be confidence in regulation. Otherwise, there will be a loss of competitiveness.

My noble friend Lord Eatwell referred to some events that have happened subsequently: the sale of one or two of our leading merchant banks to European banks. There is no question but that the failure of Barings has made the climate for medium sized financial institutions much colder and much more difficult. The cost of funds has gone up and their competitive place in the market place has been undermined.

We talk about systemic risk. There is a systemic consequence of a bank such as Barings failing. I do not say that that is the sole reason why Warburgs is now owned by a Swiss bank or why Kleinworts will shortly be owned by a German bank. However, the failure of Barings was a contributory factor. It made life far more difficult for those people.

The regulation of Barings, as the report explains at length, falls considerably short of the standard that is required by a regulator. I find that very surprising. I have been regulated by the Bank of England in various capacities for more than 20 years. I am not sure whether it is because of my estuarial background—I come from a different estuary; namely, the Test rather than the Thames—but I have found the Bank of England to be careful, methodical and inquisitive, taking a close interest in what I and my colleagues do. That seems to come as no surprise to my noble friends.

The Bank of England has had a good and continuing relationship with auditors. It does not simply rely, as it appears to have done in the case of Barings, on what the management tells it. If one is in the position of a regulator and relies solely on what the management says, one is on a loser. If the management do not know what is going on, one is in the dark. It is very important that the Bank of England uses its powers under Section 39 to ensure that it has a good working relationship with the auditors and the internal auditors. That appears not to have been the case so far as Barings were concerned.

The Earl of Longford

My Lords, perhaps I may ask the noble Lord for some information. When the auditors arc at fault also, does that let out the Bank, or not?

Lord Hollick

The report points out that the auditors—there are two firms concerned in this case because this sorry tale happened over a three-year period—certainly missed some glaring holes in the control system of the Barings securities businesses. They too do not come out of this affair with any credit.

I find a curious difference between the behaviour of the Bank of England in the case of Barings and the regulatory regime that I have experienced in a number of institutions. I am puzzled, surprised and not a little saddened by the different treatment that appears to have been meted out. It comes back to the words "formality" and "informality". There is a great deal of play made in the document about informal systems, as the informal management systems at work in Barings. And there is an informal regulatory regime. That is not good enough. We need to have formal codification and formal reporting. We need to have a harder edged regime if it is to cope with the complexities of financial institutions and, in particular, with the new products which are coining along and which carry a whole series of risks, both individual and systemic, which are extremely difficult to understand.

Understanding is a key point. One of the newspapers referred to a generation gap. That is quite a problem in financial institutions. When one goes through the Treasury side of a banking institution as a trainee, sitting on a desk, one is in one's twenties. When one rises to the lofty heights of a director or chief executive, it is some 20 years later. That is some 20 years of financial innovation that have been missed out on. Probably one will never get one's mind round some of the new products, let alone understand the extent of the risks involved. So there is a real generational problem both with the institutions themselves and also, I submit, with the regulators.

Another problem which arose in the case of Barings was the issue of consolidation. "Solo consolidation" is the term that is used. It means that everything is bundled together, the security side and the banking side. In the case of Barings, we can see that that masked huge movements. In the space of some six weeks, £500 million was shipped out to the Singapore subsidiary. In a disaggregated world, if there were fire walls put up between the various businesses that would have been spotted. At the end of the day, all of these weird and wonderful instruments, and the profits and losses that arise on trading them, show up in the cash flow. If an eye is kept on the cash flow and control kept of the cash, the problems will be found early. Solo consolidation manages to mask everything; it is all one big pot. The tremendous error of judgment made by the regulator of the Bank of England was to allow that informal exemption on a large exposure, on a large inter-group deposit. That was a major error compounded by the fact that it took two years before it was sorted out, which is quite extraordinary.

I feel uncomfortable that Mr. Thompson has been scapegoated, just as the original suggestion that Barings had been brought down by a regular trader is not true. It is the duty of a supervisor in a supervisory regime to work on a team basis; for difficult and awkward decisions to be cast up the line. The noble Lord, Lord Spens, spoke of the plethora of memoranda and minutes. I do not know what the facts are in this case but whatever they are or are not, what should happen is that these issues should be discussed at the highest possible level, otherwise the problems arise that arose in this case.

In summary, the problem for financial institution regulators is to keep pace with rapid changing innovation. Boardrooms do not always understand what is going on and with the aggregation of financial institutions operating in more than one market and operating in different types of product, there is a systemic risk within financial institutions themselves.

The Bank of England is surefooted and experienced in traditional banking. However, it is much less so in the area of securities. It needs to significantly increase its resources. I hope that the Minister will be able to tell us what plans the Treasury has to possibly release the purse strings a little to ensure that the Bank has the best and the brightest in those areas so that it can control and regulate properly. I fear that it does not do that at the moment. It needs to use companies' auditors far more widely and independent auditors. The US has a much harder-edged regime and it is one that I favour. We need less informality and more formality; more strict reporting. We need the concept of fire walls—that is, separation—within institutions. Where the regulator should reside—as a separate organisation or within the Bank—is an important issue and needs to be considered. It is difficult for the Bank to he concerned with the overall stability of the financial system and to take a particularly rigorous line with one institution which may upset that. Nevertheless, the real knowledge currently lies within the Bank of England, so whatever we build must be built on that existing base.

There is a need for fundamental change. I was unimpressed with the conclusion that there is no need for a fundamental change. There is need for change. Why? Because there has been a fundamental change in the financial markets, in the way they operate, and the complexity of those markets. There has been a fundamental globalisation of those markets. It is important that the regulatory regime changes in order to deal with it. I should like to see it toughened up and formalised. I should like to see our regulators properly equipped with the necessary resources and skills to deal with complex financial institutions.

As it is the end of term, I should like to finish on a slightly lighter note. On reading the report I discovered that Barings Financial Services was resident at 1 America Square. I recall that that is where a company called J.H. Vavasseur, which was brought low by an earlier banking crisis, was also resident. As it happens, that was the organisation of which, as a result of the lifeboat launch by the Bank of England in 1973, I became chief executive, so it has some memories for me. It is an interesting building. When I went there in 1973 one of the people who worked in the building told me the history of it. Apparently, it had an interesting and colourful history. In the last decade of the last century it thrived as a brothel, providing an excellent service, so rumour has it, to the sea captains of the Port of London. Here we have a site—No. 1 America Square—which has housed two financial collapses but one very successful business so perhaps the City elders, who were the lead regulators at the time the brothel was closed, should re-zone this as a recreational site rather than a site for financial services.

3.5 p.m.

Lord Bruce of Donington

My Lords, the House is most grateful to my noble friend Lord Eatwell for taking this opportunity at the end of term to ventilate further the subject matter of this very interesting and long interim report on the Barings affair. I say "interim" because I share the view of the noble Viscount, Lord Falkland, that there will have to be a full investigation. I sincerely hope that the Government will not use the fact that we are discussing it on this occasion this afternoon as a reason for avoiding either a further investigation or a further debate in this House on the ground, which he might conceivably put forward, that we have already discussed and disposed of it. I do not think that we are going to dispose of this matter for a long time.

For the past 50 years or more I have been0 a professional practising chartered accountant. My first impulse on reading through the report—I have spent only five hours so far, which barely makes any impact on it—was one of anger. But now it is one of sorrow. I am very sad indeed that such a thing could have happened in the United Kingdom, more particularly after the series of warnings that I together with my colleague Lord Williams of Elvel was able to deliver to this House some four or five years ago on the necessity to have some statutory control over these matters as distinct from relying on voluntary disciplines in the financial profession. Noble Lords will recall that at the time the Government decided that they preferred the voluntary approach. I do not think the time is far distant when we may have to consider taking rather stronger action.

Even the provisional conclusions of the report are interesting. I should like to give them to the House so that we may be reminded what the supervisory body itself decided at the end of such investigation as it was able to make. It stated on page 250: Barings' collapse was due to the unauthorised and ultimately catastrophic activities of, it appears, one individual (Leeson) that went undetected as a consequence of a failure of management and other internal controls of the most basic kind".

The words I venture to emphasise to your Lordships are these: as a consequence of a failure of management and other internal controls of the most basic kind".

Noble Lords who have read through paragraph 14.2 of the report will be aware that it specifies these deficiencies. The report states: Management teams have a duty to understand fully the businesses they manage". Really! They really have to understand the businesses! I would have thought that it was an elementary assumption to make that the controllers should understand the nature of the businesses they are trying to control.

The next requirement is this: Responsibility for each business activity has to be clearly established and communicated". Hooray for that! I wonder how businesses in this country manage in their generality to continue without that qualification.

The third requirement is: Clear segregation of duties is fundamental to any effective control system". Tut, tut! We are now treating the real elementum of the whole art and science of management, and it needs to be repeated here.

The report continues: Relevant internal controls, including independent risk management, have to be established for all business activities". Hooray for that! These are matters of plain, ordinary common sense. One does not need to be an accountant or a management consultant to be aware of that.

Finally: Top management and the Audit Committee have to ensure that significant weaknesses, identified to them by internal audit or otherwise, are resolved quickly". Well, well, well! These are all respects which this control body finds were absent from Barings. Do noble Lords really know what is being said? It is being said that Barings ought not to have been authorised bankers from the beginning, because any business—I do not care whether it is a whelk stall (one must not insult whelk stall owners in the context of this catastrophe) or what—knows that these are the basic conditions for the continuance of the business. It seems to me that the Bank of England ought never to have authorised this concern without verifying that all these conditions were in place.

There are various other sections of the report I could mention, but because it is the end of term and there is the pressure of time through the usual channels, I shall not elaborate on them further. One has to be merciful at this time, particularly as regards government. I hope noble Lords opposite will accept that when we have the next inquiry we shall enter into the matter fully.

Let us consider the position. Out in Singapore we have Baring Futures (Singapore) Pte. It is out there engaged in what are called "derivative transactions". A rose by any other name would smell as sweet. Without in any way detracting from the very desirable activities which should be carried out by banks and others as a hedge against their future position due to possible currency movements, I venture to suggest that the population at large, after reading this report and the press comment on it, will realise that what has really been happening is massive gambling, and plain gambling at that.

Aside from the hedging purpose, which is quite legitimate in these situations, it was a mass gambling racket in betting on the movements of the Nikkei Index. It was pure gambling. No wealth or extra goods were created by it. No extra service was provided. It had no value whatsoever to society. But it had one advantage: it made massive sums—or they thought that it made massive sums—for the proprietors and directors of Barings. They made—or they thought that they had made—billions of pounds over the years. I shall not be so unkind as to read their remuneration to your Lordships because that might cause some discomfiture to the other side of the House where there is a sneaking sympathy for those characters who made vast sums of money.

However, it was their greed that lay at the root of the whole problem. They did not want to know about the internal structure of the firm. Appendix X of the report gives three organisational charts which look very much like a cat's cradle such as we used to make in our childhood days, with criss-crossings of the chart at various points without any controls or relevance whatsoever. So the directors allowed one Mr. Leeson to do something that they should never have allowed. They allowed him not only to originate transactions (whether by computer, telephone or in other ways; the "front-room" activities)—but to handle also the "back-room" activities relating to the settlement of accounts and the tracing of debtors and creditors. The directors allowed Mr. Leeson to have control of both in complete violation of their own rules on the subject, where such rules existed at all. So Mr. Leeson could continue with impunity.

It is not suggested anywhere in the report—not yet, at any rate—that Mr. Leeson diverted any funds for his own personal purposes. It is suggested that he was merely seeking to increase margins and profits for his employers at Barings, including the 50 directors to whom I have already referred. They were very grateful to him. In 1993 the same directors voted Mr. Leeson a £130,000 extra bonus and for 1994 they had it in Mind—this is on the record—to award him a bonus of £450,000, so satisfied were they with what he had done. The fact of the matter is that if you look at the organisational charts and read through the relevant parts of the report, you will find that there is no form of organised control at all.

There are four aspects to any business, even gambling—and that was done on a massive scale here. There is the business aspect itself—that is, the nature of the business and its expansion prospects. There is the trading function, which deals with the profitability or loss-making of the business. There is the technical aspect, which relates to the personnel, equipment and everything else involved. There is then the financial aspect, which deals with the firm's asset and liability position. No matter how much those aspects are made complicated in massive tomes of business analysis, anybody in responsible business who ignores those four factors, however much they may vary from firm to firm according to the nature of its goods or services, does so at their peril. That is what Barings did. The directors did not investigate Mr. Leeson further because he was delivering the goods. They did not want to do anything to disturb that in any way—even though there had been warning signals, as my noble friend and the noble Viscount mentioned. They simply did not want to know.

Moreover, there is some difficulty in determining how Mr. Leeson became engaged in the first place. It seems to be mentioned in the report—I do not want to cast any aspersions on him whatsoever—that his CV was not examined too carefully to see whether he was suitable to deal with this highly sophisticated form of gambling. Nevertheless, he was engaged, and did well.

I come now to another part which also unfortunately features in the report. Speaking as a professional accountant, I deeply regret it. I am glad that my good friend the late Lord Benson was not alive at the time the report was published because he would have been incandescent with rage at its contents—because we find that there were some auditing defects as well. I regret them. Auditors seem to have got into the position—I make no accusation against particular firms—where they rely excessively on computerised records, and in some cases now install systems of computerised auditing of computerised accounts. That is beginning to be carried to an extreme.

In this case, what happened was—it is clear from the report—that the famous account (Account 8888) that was operated by Mr. Leeson to carry through the bulk of his own transactions was not followed up by the auditors as it should have been. It is the function of an auditor always to verify the extent and the authenticity of those who owe the company money and those to whom the company owes money. It is part of the drill of reputable accountants that they seek by independent communication with debtors to verify that they do owe the money and with the principal creditors to check that the amounts are owing to them. Clearly that was not done in this case. It is greatly to be regretted that that should be the case.

It is all part, of course, of a deeper malaise. I can well recall, as can many of your Lordships who were fortunate to be alive about 25 years ago, that you could phone up someone in the City, enter into a contract, not even bother to verify it in writing and be sure that the person's word was his bond. You can no longer do that. Complete trust has gone. It has gone with the new Yuppic-dom, based on the new concept that there is no such thing as society and that it is every man for himself. So that now when you have contracts, not only do you have to have them in writing but you have to have your lawyers pour over the small print to be sure that you are not going to be taken for a ride. That is the state to which British commercial and financial life has now descended.

The irony of it in this case is that it has taken to the field of gambling. It has no relevance to the ordinary people of our country. Millions of people in this country play no part in these vast operations which produce such vast wealth for people. They do not benefit from them. They are irrelevant to them. They have developed into a kind of infernal game which those belonging to approximately the same social bracket and who mix together jest upon and enjoy. Unless they are careful, the edifice will come tumbling down.

My noble friend Lord Eatwell earlier made the observation that in the view of bankers, bankers know best. Perhaps I may respectfully suggest to him, to those in government and to others to whom it may be relevant that it may not be wise, in the light of these experiences and pending further inquiries, to allow our economy to be controlled by independent bankers and those who may have it in mind to have European matters at a macro-level entrusted to so-called independent bankers.

As a result of this, bankers do not have a good name. These particular banks are by no means unique; there are plenty more of them. For the moment, all that we can do is to ensure that these matters are investigated further and that justice is done.

I am not satisfied that all the endeavours have been made to bring Mr. Leeson back here for trial. Two or three days ago I read his wife's letter in the Guardian. She explained that her husband has already pleaded guilty to a specific series of offences under British law. Those seem to have been disregarded. As for the resignation of Mr. Thompson, I regret that too. Although there was a statement on behalf of the bank that it knew nothing about the diversion or swap of funds from the banking to the securities sector, it was also revealed in the press that the securities and futures authority was well aware of it two years ago and that it has been common currency since.

A good deal remains to be investigated. I trust that this House, with its own reputation on the line in these matters, will insist that a further investigation takes place.

3.26 p.m.

Lord Monkswell

My Lords, this is a very important debate on the last day of our "term". We have heard an impressive number of speakers and an impressive number have yet to come. I intend to make only three brief points.

First, we need to take particular note of paragraph 1.77 of the report. It appears that Mr. Leeson's solicitors have replied to the passing of a copy of the report to Mr. Leeson. They state: We note the preliminary conclusions reached by your enquiry relating to Mr. Leeson. These conclusions are inaccurate in various respects. Indeed, in relation to certain of the matters they betray a fundamental misunderstanding of the actual events". It is public knowledge that Mr. Leeson has declared that he is happy to give a full account of his understanding of the events, provided that he can do that in this country. The reasons are obvious. I understand that Mr. Leeson is held in a prison in Germany on the basis of an extradition warrant from Singapore. It would be reasonable that instead of residing in a German gaol he should reside in a British gaol under exactly the same terms, effectively awaiting extradition to Singapore. If the Singapore authorities can make a case for extradition, no doubt the British authorities will accede to that. In the meantime, the Government, the Bank of England and the British public can have a full explanation from Mr. Leeson of his understanding and knowledge of these events. That is very important and I hope that the British Government will take urgent steps to ensure that that is brought about.

My second point relates to paragraph 1.72 of the report. It refers to the investigating team's ability to interview all the relevant directors and employees of the Barings group. The team had all the significant documents and so forth but with the exception of certain electronic mail messages, which apparently have not been retained.

Elsewhere in the report we are advised that telephone conversations were recorded. With the prevalence of insider trading, one can understand the significance of that. The telephone is the best way of informing someone outside of the likely means of insider trading benefits. I suggest that the use of electronic mail is the mechanism nowadays by which most formal messages going between parties within firms and between different firms will be recorded, given the vagaries of the postal system.

Personally, I am astounded that those electronic mail messages have not been retained. I have been away from industry now for five or six years but in my experience—and it was only a multi-national engineering company—it was virtually impossible to corrupt, get rid of or even retrieve an electronic mail message. To think that a banking operation would have a system which allowed the corruption or loss of electronic mail messages seems to be utterly inconceivable. That is a major flaw in the whole system. It is a technical detail but it needs urgent investigation.

Finally, bearing in mind that it is the last day of term, we need to pay tribute to the staff who serve us in this House. I know that they will understand the importance of the debate. Some of them—particularly the Hansard writers—will be here for some hours after we have finished. I am sure that they will appreciate the part which they are playing in our effort, on the Floor of the House of Lords. to ensure that not only an individual British citizen receives justice—and we should remember that Mr. Leeson should be presumed innocent until proven guilty—but also that the good name of this country is preserved.

3.31 p. m.

Lord Haskel

My Lords, unlike many noble Lords speaking in this debate, I have had little experience of the financial services industry, but I have had plenty of experience of the manufacturing industry. That has taught me to recognise danger signals and this report is flashing a danger signal. We should be grateful to my noble friend Lord Eatwell for drawing our attention to it.

As many noble Lords have reminded us, the report blames a rogue trader and a rogue regulator for the collapse of Barings. The analysis tells us that the real culprit is a rogue system. It is the system which is wrong and which needs reform.

The task of reforming Barings now lies with the ING company. That is its task. My concern is with the Bank of England. Broadly, the report tells us that the events leading to the collapse of Barings indicates no need for fundamental change but makes 17 proposals which are designed to make the staff more alert, more knowledgeable and to be more efficient managers.

As other noble Lords have said, that is just tinkering. Does the Minister not understand that the report actually says that securities trading has moved on but the Bank of England has not? The succession of failures tells us that. The danger signals are telling us that a proper shake up is needed, and not just exhortations to do better next time.

The Bank of England is not alone in experiencing those problems, the problems of the modern world, as my noble friend Lord Eatwell called them. Over the past few years, because of tough international competition, many industrial companies have faced the same problems. A successful universal response has been, if your Lordships will excuse the jargon, re-engineering. That is a root and branch appraisal of a business's strengths and weaknesses and a careful analysis of the markets that it is in. Many of our major companies have been re-engineered in order to survive. Perhaps the best example is Rover. British Steel is another good example.

Those noble Lords who read company annual reports will have noticed that many chairmen have recently said that their company is being re-engineered so as better to meet the challenges of the global market and understand and serve its customers better. Is that not exactly what the analysis in the report is calling for? Is not the Bank of England being called upon to organise itself better to meet the challenges of the global market and the needs of its customers? If the Bank of England had been subjected to tough international competition, it would have been re-engineered years ago. But that would have required government action.

Despite the rhetoric, we know that the Government are soft on competition. Indeed, only today in the Financial Times Sir Bryan Carsberg, speaking about his time at the Office of Fair Trading, said that he had never got to the bottom of the Government's failure to be proactive on competition. Not so, my honourable friend the shadow Chancellor of the Exchequer, Dr. Gordon Brown who, I happen to know, is a great admirer of the Bank of England.

When speaking to the Labour Finance and Industry Group on 17th May this year about tightening up the Bank of England's monetary policy role, my honourable friend made four proposals: first, a new institutional structure and a monetary policy committee for the Bank; secondly, a new stress on openness and sharing of information; thirdly, new individuals to be added to the Bank's monetary committee; and, fourthly, reform of the Bank's court to oversee monetary policy and accountability of senior executives. This, in order to attract better people.

If those four reforms are needed for monetary policy, they are doubly needed to improve the Bank's supervisory role. Surely those proposals give us a framework for the review called for by my noble friend Lord Eatwell and for the re-engineering called for in the report. Those carrying out such work would look at the internal systems of the Bank—for example, its openness, its accountability, its relationships, whether the best qualified people are being promoted and, most important, whether such reforms can take place within the existing structure of the Bank or whether the supervisory role should be taken on by a new banking commission.

There is another reason for calling for this reform. Until this latest disaster, I was reasonably sympathetic to the idea of an independent Bank of England. However, now I am not so sure. Only a review and a gentle shake-up will restore my confidence in the independence of the Bank. I urge the Minister to listen to those arguments and learn from the experience of those who have re-engineered their companies. If he does not do so, it will not be the Bank of England that is criticised for its lack of alertness, its lack of knowledge and poor management: it will be the Government.

3.38 p.m.

Viscount Chandos

My Lords, perhaps I may begin by making an apology for arriving a little late for the start of today's debate and for the opening remarks of my noble friend Lord Eatwell. I should also declare an interest as a director of an SFA regulated merchant banking firm, a past director of a Bank-of-England-authorised merchant bank; and, indeed, a past director of the International Swaps and Derivatives Association.

I am delighted that the Government have acceded to the pressure that my noble friend Lord Eatwell put upon them to hold the debate today. I hope that the Minister does not feel too isolated in that it seems that every speaker comes from this side of the House. I think that that is quite striking. It makes me think back 13 long years ago to my maiden speech on the arcane subject, as my noble friend Lord Bruce of Donington may remember, of accounting for banks under a European directive. On that occasion, the Benches opposite were crowded with the representatives of merchant banks, arguing that they should continue to be able to disclose the profits that they chose rather than that which normal accounting procedures would require.

Even though the European directive has been adopted, reading this report there is a temptation to believe that in some merchant banks not much has changed. This report covers a saga of disasters which was a major blow to the UK financial markets as well as a significant direct financial blow to investors in the publicly-traded capital instruments of Barings plc. We should recognise the difference between the depositors who were in the end protected through the acquisition of the bank by ING and the investors in the capital instruments, the preferred shares and the subordinated bonds who have lost the largest part of their investment.

My noble friend Lord Eatwell has powerfully stated the case for fundamental change to the regulatory system in the UK financial markets and banking system. Therefore I shall restrict my comments to one or two points. I myself asked a Question on 23rd March of the Government in relation to the ownership of Barings Bank by a charitable foundation. The Minister who replied for the Government—it was not the Minister who is to reply today—said that, of course, prior to the publication of this report they could make no comment as to the appropriateness of the ownership of a bank by a charitable foundation. I argued—and I continue to believe—that whatever the secondary benefits that accrued from that of generous and substantial grants to charities, it created a structure where there was no accountability at all to outside shareholders. I refer to a charity, the majority of whose trustees were comprised of past and present directors of the bank. I was therefore disappointed to note that in this report there was no attempt by the Board of Banking Supervision to consider this aspect and the effect that it may have had on the culture of the bank and its attitude to risk. The management was not putting its money at risk and it had no outside shareholders to whom it was accountable.

The noble Viscount, Lord Falkland, referred to the "old boy network" and its continued prevalence in the City. If my background might qualify me for membership of that network, my presence on these Benches probably disqualifies me. However, there is truth in the suggestion that the old boy network and the complacency that my noble friend Lord Eatwell referred to are at the heart of this disaster. The report by the Board of Banking Supervision certainly does little to dispel the impression of this complacency. Section 13.58 states, The Bank was told of the intention of Barings' management to apply BB & Co's standards of control to BSL. The Bank regarded the controls in Barings as informal but effective. It had confidence in Barings' senior management, many of whom were longstanding Barings' employees". I believe that Mr. Al Capone was a long-standing employee of a family business, but I do not think that that was any reason to have particular trust in his competence. We should remember that one member of the Baring family and a past manager of the bank was a governor of the Bank of England. That incestuous relationship that exists between the Bank of England and the institutions it is responsible for regulating cannot ensure that there is rigorous supervision.

My noble friend Lord Hollick referred to the phrase "one rogue trader" and the impression that the report, and no doubt Barings' management, wishes to give that it was awfully bad luck to suffer this one rogue trader. That is fundamentally wrong. As my noble friend Lord Hollick argued, trading is all about the control of a collection of rogues—of strongly motivated, financially entrepreneurial dealers.

I turn to the question of the solo group and the central part that the concession that was granted to Barings played in the disaster that unfolded. The view that it was a central part is not mine but that of one of the people most intimately involved, Mr. Maclean, of Barings Bank. In section 11.27 of the report he is quoted as saying: I was involved in the setting up of the process which became known as 'solo consolidation', which in my view, is one of the factors at the heart of this problem, this crisis. I think, then, allowing solo consolidation as a technique to be applied, when we look at numbers we see it on the outside of Baring Securities in London but without having controls inside Baring Securities but inside that net, that is the weak link that we will never forgive ourselves for… It could not have happened without solo consolidation. That is the starting point, as far as I am concerned".

In section 11.29 the Board of Banking Supervision disagrees with that analysis. That is extremely hard to understand. As my noble friend Lord Hollick explained, solo consolidation allows the bank to lend to its subsidiaries an amount larger than it is permitted under the large exposure rules to lend to other entities. If those rules had been enforced and the concession that the unfortunate Mr. Thompson had granted to Barings had not been given, then this disaster could not have happened.

What has been learnt from this? In the conclusions, section 13.67 of the report reads: A lack of rigour was also displayed by the Bank in the context of the solo consolidation of BSL … This was a very significant step—since it would result in BSL … being included in the unconsolidated returns submitted by BB & Co.… and in BSL being, in effect, treated as one with BB & Co. for capital adequacy and large exposures purposes. It was also novel, being the first solo consolidation of such a kind which the Bank had experienced". The words "the Bank had experienced" makes it sound like a nasty bout of flu for which it was not responsible. This was something which the Bank, at whatever level, had specifically permitted.

I should like to ask the Minister, if the report says this was the first occasion of solo consolidation, how many other banks are currently being permitted to treat their securities and other trading activities as part of the solo group and create a structure which, as with Barings, removes a natural check on the excessive trading and speculative activities of such a subsidiary? Why should we not introduce regulation that simply says that there shall be no concessions under the rules of large exposure and the solo group regulations? That would replicate the kind of ring-fencing of securities activities which the US authorities are contemplating as they permit the gradual deregulation of the Glass Steagall Act and the merger of investment banks and commercial banks in the United States.

On Tuesday the Minister argued that the report and the Bingham Report on the BCCI collapse both concluded that there was no case and no need for the separation of the regulatory and supervisory role of the Bank of England from its other activities. Even if that were true, individually in each case, surely the Minister and his right honourable colleague, the Chancellor of the Exchequer, must be able to work out that the aggregation of the disasters suggests that something is not working right.

The setting up of the Board of Banking Supervision under the Banking Act 1987 must have been an acknowledgment of the need for an independent overview, but sadly only an overview and a typical feeble compromise of the kind that has created the system and structure that has led to further bank crashes.

Therefore, what is needed is a rigorous and independent body to supervise all financial markets, as my noble friend Lord Eatwell said, as did the chairman of the Securities and Investments Board. I therefore join my noble friend Lord Eatwell in calling not only for a further independent inquiry or at least an independent conclusion and recommendation, but also for the urgent separation of the regulatory and supervisory functions of the Bank of England from its proper role as a central bank.

3.52 p.m.

Lord Desai

My Lords, I join other noble Lords in thanking my noble friend Lord Eatwell for introducing the debate. I particularly thank him for being so quick in drawing our attention to the report because in the normal course of events such reports are published and never discussed. We did not discuss the report on the BCCI and it is only my noble friend's efforts through the normal channels that have given us the debate.

However, I regret that it is the last day of term because something has prevented many noble Lords opposite from being present. We could have used their wisdom, with the many former Chancellors of the Exchequer, people in the City and heads of merchant banks. Unfortunately, all have other engagements. I do not know whether it is the hunting season, the boating season or the racing season. I am innocent as to that culture. But something has happened. Alternatively, they may be on mass strike. We would like to know whether there is an innovation on the other side to go on a mass strike when such a debate arises. But be that as it may, we would have liked the many fountains of wisdom on the other side to have contributed to the debate. Then we would at least have known whether there were any defenders of the Bank of England left in this House.

First, as regards the report, it will not do. I have always held that the Board of Banking Supervision is an inadequate body to have investigated Barings. I said so in the course of a Question which I asked a few weeks ago. The Board of Banking Supervision is not independent. If we look at its composition in the first few paragraphs of the report three people were from the Bank of England. One unfortunately had to resign—for reasons utterly unconnected with financial competence or incompetence, I hasten to add. We are left with the Governor and a person in charge of banking supervision. They were commenting on their own competence or incompetence. Another six people, who were of course "independent", were chosen by the Chancellor and the Governor of the Bank of England. I should have liked to see in an appendix to this report the connections of all those independent members. I should like to know where they came from and where they had been. I should like to have known what the interconnections, the old boys' networks, were before I judged the independence of this body. In that respect the report is not very good.

It is also not a very good report because by its own admission (in paragraph 1.78) there were problems of limited access. My noble friend Lord Monkswell has already pointed out that, as stated in paragraph 1.77, there was a failure to elicit a proper response from the lawyers of Mr. Leeson. Therefore, on its own admission, this report is inadequate and incomplete. It failed to examine all the relevant documents. Until we can have a body that looks at all the relevant documents, both here and abroad—and that is important—we cannot be sure that this report is the full story.

As the noble Lord, Lord Spens, pointed out, if it is the practice in the Bank of England that notes go backwards and forwards, perhaps the committee ought to have provided us with some of those documents. When was the 25 per cent. rule agreed to by Mr. Thompson? Who saw the notes? When did the notes criss-cross above and below? Did Mr. Quinn sign such and such a document? Why is Mr. Quinn not willing to resign? I believe that he should have resigned long ago in relation to BCCI; but that is another story. Since he wrote the report, he is clearly not going to resign. So this report is not a very good example of its kind.

Even judging by the standards of this report, there are lots of problems to discuss. It is not just for the sake of independence, but for the sake of completeness and full evidence, that one would like a better report, as again my noble friend Lord Monkswell pointed out. On the grounds of this report, one could not indict Mr. Leeson, since this is not the complete story. One would like to have something far better than this.

What the report does show, however, both in the constitution of the committee and in its authorship, as well as what it brings to light, as many other noble Lords pointed out, is that there is a cultural malaise. There is a culture of connivance, a culture in which people get into such jobs and cover for each other. If my noble friend Lord Hollick had been in his place (I know that he had to leave) I should have told him that perhaps the Bank of England supervised him very thoroughly because he was an estuary boy and had not been to a good public school. Perhaps he should have gone to a good public school; then he would have been part of the old boys' network and would have been let off with a light rap on the wrist and nothing else. That is a problem. Incompetent people get important jobs, and other incompetent people in other important jobs protect them. And none of them ever resigns. Those who resign are the people on the outskirts, those on the periphery who have not been to good schools, people who have been in one or other estuary around the country.

What will happen—and it is already apparent in the loss of many merchant banks to mainline European banks—is that, slowly and steadily, control of the City of London will be lost from British hands to European hands, because eventually competence tells. Competition and survival of the competent or the fittest will dictate that this kind of culture, in which people are not appointed for their competence but for their school tie, will eventually lose out to cultures that value competence in these matters. That will happen.

It is not only a question of people who are in banking and central banking. As my noble friend Lord Bruce pointed out, it is quite shocking that auditors seem to have behaved in a way that is spectacularly irresponsible. I am surprised that they have not come out with any confession of guilt. According to the newspapers, they took the view that this had nothing to do with them; it had to do with banking supervision and therefore they were not responsible. They should at least pay the money back to somebody or other. I also believe that all the directors should pay their bonuses back. If this had happened to any dole scrounger who had taken a £100 loan from the Government and misused it, he would be hounded. Those who did not pay their poll tax were sent to gaol over a fraction of this money. But here people got away with large bonuses and there were large fees for the auditors. They did an incompetent job but they will not pay back the money. Of course they will not pay it back. That is part of the problem.

The central problem concerns the Bank of England—many noble Lords have spoken about it. I have always held the view that before I can judge whether or not the Bank of England should be independent, I must be satisfied about its competence. Competence comes before independence. I have never understood the high reputation of the Bank of England. Through the years it has failed to be good at monetary policy. Through the ages it has failed to control money supply. That is on record. One can read the noble Lord, Lord Lawson, on that. It cannot control the money supply.

Obviously, it is no good at controlling inflation. One has only to look at what has happened to the present value of the pound. It is not any good at foreign exchange. The pound has depreciated in relation to every other currency in the world, including the dollar. It is not any good at banking supervision. There have not only been the three major failures; as the noble Lord, Lord Spens, pointed out, there have been many other failures which the Bank of England has failed to prevent.

So what is the Bank good at doing? It is good at preserving a facade of a grave reputation. When one hears the name of the Bank of England, one thinks of everything reputable. Perhaps that is as true as the infallibility of the Pope—and we know how true that is. So we know how true is the reputation for competence of the Bank of England.

There is another interesting aspect to this matter. When the crisis first took place, there was a weekend meeting when the Bank of England tried to find a buyer for Barings. Even at that late stage the Bank had not understood the nature of the crisis that Barings was undergoing. It took Barings' word for what had happened. But it had independent ways of finding out what had happened. Had it known anything about Barings' management, it would not have spent five minutes trying to find a buyer. Perhaps one should be thankful to Mr. Leeson and his ventures. Through him we found out just how incompetent was the management of Barings. The profits would have been high and the guilty would never have been caught. But it is quite clear that on that weekend the Bank of England did not know the nature of the problem that Barings faced; nor was it aware of the incompetence of Barings' management.

The reactions in the press later were interesting. They not only blamed it on a rogue trader but, because this happened out there in Singapore, it seemed that everything was all right. That betrayed not only a lack of understanding of globalised markets today but there was a kind of snobbishness about the matter. SIMEX and the Singapore authorities have been much more thorough and competent in investigating Mr. Leeson than anybody has been on this side of the affair.

Many noble Lords feel that Mr. Leeson should be brought to this country and tried properly. I hope that the investigation is not conducted by the SFO because that would guarantee his release even before the start. I do not feel that we should compound incompetence with incompetence on this.

On a more serious note, I feel that a case such as this needs to be dealt with by an international court—perhaps the international court. It needs a competency of that scope, which could take together the different jurisdictions in which these events happened. It needs something which can take in jointly both British and Singaporean law and come to a decision. These kinds of problems in which more than one competency is involved will increasingly be on the agenda. We shall have to fashion an international court—perhaps through the G7 or something like that—which can look into situations in which such multiple problems arise. Though this is not suggested in the report, we need to look at the international requirements, not merely co-ordinating the Bank of England with other regulators but also what happens when other regulators fail.

It is quite clear that what we now have in Chapter 14, laid out in very simple terms, is the story that the Bank of England does not know what it is doing. While the report is reluctant to say that it ought to change its ways fundamentally, certainly it needs much more by way of competent staff. It needs a completely different culture if it is going to be competent on supervision.

As one of my noble friends said earlier, it should not be a question of stinting on resources. If regulation is costly, let it be costly, but let it be properly done. If it requires paying a lot of money to people who know the business, let that be done also, but let us have decent, competent regulation. The story of the past 15 years in all the various financial markets in London has been a very sorry story. If that continues, London will lose its prime position as a financial centre. It would now seem that it would not go to Frankfurt, because Frankfurt has come here and taken over London. But the City will lose its reputation and a considerable amount of our invisible earnings.

4.6 p.m.

The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)

My Lords, the noble Lord, Lord Desai, complained that I do not have many of my noble friends present today. Yesterday he and his colleagues were complaining that I had too many. Obviously it is difficult to keep the Opposition happy.

On Tuesday, when I was asked whether we could have a debate and I indicated that the usual channels would discuss it, I did not anticipate that it would arise so quickly. To begin with, I was not too pleased to see my weekend plans unravel in front of my eyes. However, I have found it an interesting and stimulating debate. As somebody who has little knowledge of these difficult matters, and certainly I have never worked in a merchant bank in any shape or form, I found some of the contributions extremely interesting and useful, perhaps one in particular.

We welcome the opportunity to debate this important issue because only by being open—which we are—do we believe that we can restore confidence in the UK financial system. That is why my right honourable friend the Chancellor of the Exchequer decided to publish the report in full at the first available opportunity. I must say to the noble Lords, Lord Desai and Lord Monkswell, that if we had waited until all the pieces of the jigsaw could be brought together before publishing the report, the complaint against the Government would have been that we were involved in a cover-up and not bringing forward the information. That is far from the case. Here we have brought forward the information at the first available opportunity.

There are lessons to be learnt by many parties, most urgently by the regulators of the financial institutions. They will all need to study the report in depth to learn the lessons and put procedures in place to ensure that those lessons are instilled in all the people working in the relevant areas in those organisations. I might add that they should perhaps also read the speech of the noble Lord, Lord Hollick, who apologised to me that he had to leave due to a prior engagement. Speaking for myself, though I suspect for other noble Lords too, I was pleased that he came along and gave us the speech he did; I found it most interesting and significant.

Because many people have to read it and learn lessons from it, the report is important. It is encouraging that the Governor of the Bank of England announced on Tuesday that he accepted the board's recommendations in full and is determined to ensure that they are acted upon. Many noble Lords rehearsed in various degrees of language what the report tells us about Mr. Leeson and about Barings; but the third pillar, if I can call it that, is the position of the regulator. The policy part of this debate introduced by the noble Lord, Lord Eatwell, relates to that issue—whether the supervision of the banks should continue to be carried out by the Bank of England.

There has been debate both here and elsewhere on that issue. As I said on Tuesday, Lord Justice Bingham included in his report on BCCI that there was nothing in the history of BCCI which argued against the Bank's dual role. The Treasury and Civil Service Select Committee of another place, in its 1993 report into the role of the Bank, said: On balance, we conclude that there is no overwhelming case for separating out the responsibility for prudential supervision to a separate body". It is certainly possible that a separate body from the central bank can undertake the prudential supervision of banks, as this is done in several other countries. However, even in those countries there is clearly a need for very close co-operation between the supervisors and the lender of last resort. The real issue is therefore whether there is any benefit in the central hank not having this role or if any other organisation could perform it better.

Professor Goodhart, Professor of Banking and Finance at the London School of Economics—he is no doubt known to the noble Lord, Lord Desai—in his evidence to the same committee, put the case for maintaining the status quo rather well when he said: I doubt whether it is really feasible for the central banks to withdraw totally from their supervisory function because they are bound to have a concern with the payment system and … the operation of the payment system involves the possibility that one or other participant in the payment system might fail. If that was to happen the payment system would grind to a halt and that would certainly make the economy temporarily run into very severe difficulties. In order to prevent that, the central bank has got to be prepared to make loans or to guarantee payments in order to ensure the continuation of the payment system. That puts the central bank in a sense at risk against the possibility of banks involved in the payment system being in an illiquid and possibly insolvent situation and they have to protect themselves against that systemic instability".

Knowing of the passion of the noble Lord, Lord Eatwell, for all things American, and following his suggestion on Tuesday that we might follow the example of the Securities and Exchange Commission, I decided to discuss this point with my advisers. The noble Lord observed that the SEC is not the lender of last resort, but yet the issue of systemic risk does not arise. My understanding is that this is because the SEC is a securities regulator, not a banking regulator. The latter function is principally fulfilled by the Federal Reserve, which is, of course, the lender of last resort. This split of responsibilities is in fact very close to the one we have in the UK and reflects the fact that banks are uniquely prone to systemic risk because their business depends—

Lord Eatwell

My Lords, the noble Lord is misinformed. It is the Controller of the Currency who is the main regulator of the banking system in the United States, not the Federal Reserve.

Lord Mackay of Ardbrecknish

My Lords, the noble Lord has a habit of jumping in and stopping me continuing. Perhaps if he had shown a little patience, as I did during his speech, I might have come to that point. I was trying to build up a picture of the situation in America. As I was saying, this split of responsibilities is in fact very close to the one we have in the UK and reflects the fact that banks are uniquely prone to systemic risk because their business depends on a basic maturity mismatch—borrowing short-term and lending long-term. It is this function that simultaneously makes the banking sector so fragile and so critical to the well-being of the economy.

In the United States the Securities and Exchange Commission regulates only securities houses. Banks are regulated by the Federal Reserve—the bank holding company—by the Office of the Controller of Currency for national banks or by the states for state charter banks. Big banks are supervised by the Fed plus one of the others. So, as I said to the noble Lord, Lord Eatwell, a little patience and I would have made the point that he made for me. US banks often do their securities business through foreign subsidiaries which come within the responsibility of the Fed.

But I asked my advisers another question: how successful are other people at this job? Other countries have had major bank failures to deal with; for example, the Savings and Loans collapse in the United States in the 1980s, Banesto in Spain last year and the massive cash injection needed from the French taxpayer into Credit Lyonnais. An interesting article in the Financial Times compared the cost of banking failures in the UK and the US over the past 10 years. Total payouts from the UK Deposit Protection Fund was £144 million, of which £50 million has been recovered, leaving net costs of £94 million. The net cost in the United States over the same period is over 30 billion dollars. So perhaps the noble Lord, Lord Eatwell, and also the noble Lord, Lord Desai, might have listened to and also read the speech of their noble friend Lord Hollick who, from his own personal experience, looked on the Bank of England as a regulator. He indicated that it seemed careful, methodical and questioning. What puzzled him was the different treatment which appeared to be meted out to Barings. He made a very valid point in questioning that.

Lord Monkswell

My Lords, I query the Minister as regards the figures he gave for bank losses in the United Kingdom and the United States. It appears that he is talking about bank losses which have been made good by the authorities. Can he advise us of the figures for bank losses which have not been made good by the authorities?

Lord Mackay of Ardbrecknish

My Lords, I could not do that without notice. I was comparing like with like in the points I made quoting the article from the Financial Times.

I can do no better than to leave this subject with a quotation from an article in The Times of Wednesday, 19th July about this whole issue. It is by Mr. Alistair Darling who is a Member of Parliament. I believe that he is pretty influential in the Labour Party's policy-making in these matters. He said that the Labour Party would not be rushing into a decision. He added—and some noble Lords should listen to what their honourable friend said: The Bank of England is internationally recognised and before any change is made it has to be justified. For example, moving responsibility for supervision from the Bank, which arguably invented the function, to another body, could have an effect on the City's standing". Therefore, I do not believe that this is an issue about which we should move quickly and simply as a knee-jerk reaction. I have no doubt that we shall return to the issue at other times.

I do not want to say much about Mr. Leeson, although I was asked about him on a number of occasions. The position is quite simple. We do not have any charges against him. As my right honourable friend the Chancellor said very firmly, these are matters for the Serious Fraud Office and not for government Ministers. The question before the German authorities is extradition to Singapore where there are charges laid against him. His activities were carried out there. Unlike the party opposite, I do not have the same rather pessimistic view of the justice systems of all foreign countries. I am sure that the German authorities will be looking carefully at the position of Mr. Leeson's extradition.

The noble Lord, Lord Eatwell, asked whether the problem was not of weak United Kingdom merchant banks being taken over by stronger and bigger banks from abroad. He quoted some examples. Of course, some big UK banks own smaller banks in other countries. Why is one thing bad and the other good? Open financial markets are very important. He asked me specifically what role the bank was playing in the international tripartite group on financial conglomerates. Each participating country sends two representatives covering two of the three sectors: banking, securities and insurance. The UK seats were taken by the Department of Trade and Industry, the Insurance Supervisor and the Securities and Investment Board. The Bank was heavily involved in the discussion on the UK position.

The noble Lord, Lord Hollick, suggested that the failure of Barings would make the environment difficult for medium-sized banks. I believe he said that it made it "much cooler". If that means that markets are making a more sober assessment of the risks of the banking business—perhaps this covers points made by other noble Lords—that may not be a bad thing. It is important that market signals keep management up to the mark. They must be convinced that the market they are in is a sensible one and that their controls are in good order in that market.

The noble Lord, Lord Hollick, also asked an important question about the regulatory authority in the form of the Bank. He asked what the Treasury would do to ensure that the Bank of England has the resources it needs if it decides that it needs more to do its job. I can assure the noble Lord and your Lordships that the Bank has accepted the report's recommendations and if there are resource implications, these will no doubt form part of the discussions over the Bank of England's annual dividend. I believe I can give an assurance that lack of resources will not inhibit the Bank in its regulatory role.

I suggest that we should now look to the future. The report is there for all to see, in full, and it is now for all those people in key positions to heed the lessons. I shall not draw on them all because that has been done adequately by many of your Lordships and can be done by all those who will read the report. Provided they do that—and this collapse certainly provides a powerful incentive—we can look forward to the enhancement of the reputation of the UK financial system, which is something I think we can all agree is a desirable objective.

4.20 p.m.

Lord Eatwell

My Lords, I have been asked by my noble friend Lord Hollick to convey his apologies to the House for not being able to stay until the end of the debate. I agree wholeheartedly with the noble Lord, Lord Mackay, that we are very lucky that my noble friend Lord Hollick was here to make a most distinguished speech. This evening he is hosting a dinner in Devon for the touring Soweto Cricket Club. We all wish him well in that endeavour.

I am most grateful to all noble Lords, including the noble Lord, Lord Mackay—I am sorry that I have spoiled some of his weekend—who have been willing to spend this last afternoon of the parliamentary Session—and a notably sunny afternoon—in discussion of this Motion. It is a pity that the Minister could not find a single Conservative Peer to speak on his side. Perhaps they are not really interested in the future of the British financial industry or perhaps, more credibly, they are just too embarrassed by the Government's position to turn up.

We have enjoyed a colourful and powerful debate. Some contributions have been notably well informed and incisive. I attempted to argue in my introduction that we desperately need in this country a review of the entire process of banking supervision, a review which goes beyond the terms of reference of the specific investigations into the problems associated with BCCI and Barings. I also argued that finding the right structure for a regulatory system was more important than who was actually to carry out the regulating. Indeed, I have an open mind as to whether the Bank of England should be the basis of that regulation. Perhaps an independent review would conclude that it should be.

As many noble Lords have commented, the problem with the report is that it is not really an independent review. I was most disturbed to find what I believe is perhaps a sad explanation of the distinction which the noble Lord, Lord Ezra, identified in his remarks the other day—that between the analysis in the report and its conclusions as demonstrated in the evidence given by the Governor and Mr. Quinn to the Select Committee on the Treasury and Civil Service in another place on Wednesday. It turns out that, while the analysis of the Bank of England's position was indeed written entirely by the independent members of the Board of Banking Supervision, the writing of those conclusions was chaired by the Governor and by Mr. Quinn. That is unfortunate.

As has been said, any regulatory system will suffer failures, but we want Britain to have the best regulatory system and one which is up to date and capable of dealing with innovation in the modern world. Designing and creating that regulatory system is ultimately the responsibility of the Government and the Chancellor of the Exchequer. The Bank of England is just a division of the Government and the Governor is simply a public official. The future of supervision is essentially a political problem and a political responsibility. The Chancellor is shirking that responsibility. The Labour Party will not shirk that responsibility.

In the meantime, I thank all noble Lords who have contributed to an interesting, constructive and wide-ranging debate, and beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.