Andrea Leadsom won the newly drawn South Northamptonshire seat at the general election. She used her maiden speech during the Budget debate yesterday to speak about restoring health to the financial services sector, drawing on her personal experience:
“To me, it is absolutely key to restore the health of our financial services sector as a critical part of restoring our broken economy. There are two ways of doing that. First, I am glad that my right hon. Friend the Chancellor of the Exchequer has already decided to give back extra responsibility to the Bank of England.
“In 1995, Barings bank collapsed due to rogue trading in the far east. Nick Leeson had found a way to put on massive uncovered derivatives exposure without the knowledge of Barings’ treasury in London, in a different time zone if not on a different planet. At the time, I was managing the investment banks team at Barclays, and we were the principal banker to Barings. The collapse came on a Friday evening and the markets were threatening chaos, but Eddie George, the then Governor of the Bank of England, called together a small group of bankers, including myself, and we worked over the weekend to calm the fears of banks that were exposed to Barings. The direct result was that there was no run on the banks on the Monday morning, Barings was allowed to fail and there was no systemic contagion.
“The difference between that experience and the more recent experience with Northern Rock is the difference between accountability and the tripartite system. In 1995, Eddie George knew that it was down to him to prevent a run on the banks, whereas in the case of Northern Rock, we had the Financial Services Authority looking to the Bank of England, which was looking to the Treasury for action. The result was the first run on a bank in 150 years and a taste of the financial meltdown to come.
“From my experience, I am positive that a key to restoring the health of our financial sector is giving back powers and accountability to the Bank of England, and I am delighted that my right hon. Friend plans to do just that.
“There is a second key action that we need to take as well. The financial crisis was not just a failure of regulation; it was also a failure of competition. The great Adam Smith always said in his wealth-creation ideas that for markets to be free and for us to create new wealth we have to have free entry and free exit of market players.
“But in the world of finance those principles have not been true for years: cost and complexity have created huge barriers to new entry; we have already seen that Governments cannot possibly allow a single bank to fail when there are issues of systemic contagion; and we see every day the distortion of free competition in the power of investment banks to charge huge margins for derivatives trading and underwriting.
“So, I and many of my ex-City colleagues argue that a key way of making our banking system safer is through measures to change the culture of our financial sector. The banks that are supposedly too big to fail must be broken up. The barriers to entry must be removed. The ability to charge monopoly prices must be taken away.”