Northern Rock was the big economic story of 2007. And it looks like being the big story of 2008.
All of us taxpayers are now bailing out the bank. And the Chancellor won’t even tell us how much we’re lending. But it’s well over £25 billion and rising. Will we get it all back ? In fact, Northern Rock can’t even pay the interest on the loan. The bank is effectively closed to new business, so it’s all down to the future strength of the housing market.
But imagine if the last conservative government had said: “Our friends at Lloyds have run out of money, we need to lend them around £25 billion but we may not get it all back.” You can picture the row in Parliament. But because Northern Rock is based in Labour’s north-east heartland, it’s being rescued. If it had been Southern Rock, based in Tunbridge Wells, do you think it would have been bailed out?
On the Treasury Committee we’ve been working to ensure that this fiasco never happens again. I’ve been to the Federal Reserve in Washington and the European Central Bank in Frankfurt. I’ve talked to bankers and regulators in Europe and America. And the lessons are clear.
Northern Rock got into trouble because its directors failed to consider the risk to its business model. But the system of supervision failed too. The Financial Services Authority which regulates banks didn’t do its job. There was no rescue service in place. And depositors were not fully protected.
We need to put this right. Not just to ensure that savers never again have to queue around the block to get their money out. But also to restore international confidence in British banking.
First, the Bank of England should be given back power to rescue banks in trouble or force their takeover by a stronger bank. Only the Bank has the authority and resources to do this. Second, we need a proper depositor protection scheme in place to reassure savers. In the United States your first $100,000 is guaranteed; that would be about £50,000 here. And when a bank gets into trouble there, depositors get their money back within a few days.
Third, we need to take all this out of the hands of the politicians. Sometimes a minor bank will fail. If banks are always rescued, their directors won’t have any incentive to borrow carefully and to lend wisely. The key is to make sure that savers are properly protected, and to leave the final decision to a fully independent Bank of England.
