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It seems to me that the bank is potentially in a very powerful position. The question is not how it is controlled day by day—we all accept that there must be a considerable
amount of independence in its day-to-day management—but what objectives the Government are expecting it to pursue. We are virtually in the situation that, once again, every citizen could bank with the Bank of England, at least indirectly—something that has not been possible for many years.
I said yesterday that if the nationalised bank was going to be competitive and aggressive, the fact that it will be totally secured by the Bank of England means that it would be a very attractive option for any sensible saver with cash in savings deposits. At the moment, it is able to offer very attractive rates of interest, but much will depend on the strategic objectives that the Chancellor and his colleagues set for the people whom they have appointed to manage a bank that is in crisis but of which the Government are the 100 per cent. owners.
The owner of a business does not appoint a management team and say, “Now run it in a commercial way, as seems best to you.” That would be an almost meaningless instruction. While I was doing other things this afternoon, I gather that the following question was pursued: “Is the Chancellor meant to be building up the business, so that it can be sold to the private sector, or running it down to prepare for the disposal of its assets?” There is a great deal of variation between those options.
If the idea is to build the bank up and prepare it for sale on the best possible terms, it is in a very powerful position. It probably has a greater ability to access the money markets than any other banking institution in the country, because it has behind it the full security of the Government and the Bank of England. It is able to underwrite its business in every conceivable way, so is it the strategic intention that it should go out into the market—at a time when its competitors are in difficulty—and offer the most attractive terms for mortgages that it can so as to increase its market share? Should it make sure that it finances itself as much as possible by enticing depositors in these nervous times with extremely attractive rates of interest?
The bank could be a glorious success. If we were investors from Kuwait or Qatar—if we were a sovereign fund—we would probably encourage the new management to use what amounts to guaranteed funding and head for a 70 per cent. share of this country’s mortgage market.
Of course, the Chancellor realises that the prospect that the bank could do that is causing considerable concern, so I did not ignore his answers yesterday. He said that the European competition laws offer the best protection, but that was all that he said in that regard, and it is something about which I should like to press the Minister. Will she give the House some idea of how she thinks that the European competition laws will affect the bank’s objectives? The current Competition Commissioner, Neelie Kroes, is very powerful and a formidable person, and she is quite rightly trying to strengthen European competition policy, but the policy takes a long time to enforce.
My suspicion is that the Government do not have the first idea how far European competition law will bear down on what the bank will do. I suspect that it will require quite a long process, with propositions going to the European Commission to determine the basis on which it will accept that the bank is not guilty of unfair competition. However, I do not think that the Government have thought through the constraints that they would
expect the new management to place on itself to avoid the charge that it is competing very unfairly with other banks and savings institutions. That is a very great danger, as those other organisations are going through very difficult times in the current market.
Jim Cousins (Newcastle upon Tyne, Central) (Lab): Has it occurred to the right hon. and learned Gentleman that the pressures from the European Commission and the Commissioner might be considerably greater if amendment No. 14 was carried, with its wording:
“setting out the strategic objectives for the business as determined by the Treasury”?
Does he not think that those words in themselves would bring the European Commission down on the Government?
Mr. Clarke: I doubt it. It is the Treasury’s duty to all of us to have some strategic objectives and to tell Parliament what they are. The Treasury is effectively now acting on behalf of the owners, who are the citizens of this country, and we need to know what its strategy is. Then, presumably, the Minister can explain how the Government intend to sort out the European competition angle. Presumably, they will try out the strategic objectives on the Commission to see whether they are acceptable as a fair base for competition. I do not know, and yesterday I got the impression that the Chancellor did not know quite what the impact was going to be.
Mr. Greg Hands (Hammersmith and Fulham) (Con): Will my right hon. and learned Friend give way?
Mr. Clarke: I will in a second, but I do not want to go on too long. Let me just put the other side of the equation. Is the objective to run the bank down? I make it clear that I support nationalisation of whatever form the Government or Opposition put forward. It is defensible if one is going for an orderly run-down of the business. That means no fire sale now, in awful market conditions. It means holding the assets, particularly the loan book, for as long as is necessary to get the best reasonable return when market conditions return to normal.
If one is sailing on, trading, is the objective to run the bank down? I gather that the new management were giving guidance to the press that the bank would be smaller, preparing people for the fact that there might be redundancies and the bank might be scaled down. How is it supposed to do that? I do not understand how a publicly owned business sets out to run itself down. Does it decide to offer rather less attractive terms for mortgages? Does it tell its customers when they come back to renew their mortgages that it will refinance them only at a higher rate than the competition in order to drive them away? Does it reduce its savings rate after looking at what other people are advertising to make sure that it does not get too many people coming along to save?
If the idea is to slim the business down a bit, what is the Treasury guidance? How much should it be slimmed down? Will the Treasury tell the management, “Slim it down a lot. We are really trying to get rid of it,
just like the Tories, but we don’t want to admit to all those north-east MPs that that is what we are doing?” Or will the Treasury say, “Just slim it down a little bit. Make it look respectable. Just reduce the size of the business; get it trimmed down a little”? Of course the strategic plan will have to be on more formal terms than that, but there must be guidance from the Government. Anyone running the bank now must ask the Government, “Do you want us to build the business up as aggressively as possible or to run it down? If so, could you give a bit of an indication of how much either way?” My feeling—I trust that the Minister will correct it—is that neither the Chancellor nor the Minister has the faintest idea at the moment which of those directions they are going to give.
Mr. Hands: Did my right hon. Friend hear Professor Alan Riley, one of Britain’s foremost experts on state aid, express the opinion that the European Union would certainly require the downsizing of the business as a precondition for clearing the state aid approval in this case? Does he think that Ministers are being just a little disingenuous, as we expect that they have access to equally clear and expert opinion and information?
Mr. Clarke: I am sure that they have, but they are not sharing it with us at the moment. I need to be reminded what the European process is and of how far a process of negotiation can be opened with Miss Kroes. Can the Government try out on her a strategic plan involving a bit of running down and see what she says? Will she expect the strategic plan to be published and some indication to be given of how the bank will operate in the market and then rule on it? Yesterday, I did not think that the Chancellor knew, which was why he kept giving answers that were all about the Conservative party and not about what he proposed to do.
Mr. Hands: My right hon. and learned Friend is making a strong point about the need for the strategic objectives. Does he agree that one of the essential functions of the bank in public sector ownership would be properly to sort out the risk management of the bank? It is difficult to have proper risk management without the strategic objectives. Some of the worst banking scandals of the past 15 years have involved public sector banks. Credit Lyonnais ended up financing a large part of Hollywood in the early 1990s and most recently Bankgesellschaft Berlin in Germany was essentially making politically motivated loans.
8.45 pm
Mr. Clarke: I heard the speeches on that on Second Reading. I quite agree; risk management seems to me to be what banking is all about. That is the commodity in which banks trade, and throughout the history of banking, the most appalling errors have been made in risk management, as they were in the case of Northern Rock. If one looks back far enough, one begins to feel that there will always be extraordinary examples of risk management being suspended or not operating properly in banks’ pursuit of higher than average returns. That is how banks get into such trouble. Presumably, the business plan presented and agreed by the Government will include details of how the nationalised bank proposes to have its risk management under control.
The day-to-day running of the business is also quite important. The Government have been saying all the
right things, such as that they will not be involved in the day-to-day management but will use commercial management, to which they have given guidance. Can we rely on that? I am afraid that the history of nationalised industries reveals that the moment an industry is nationalised, most people think that it has been politicised, and one rapidly finds that it is under great pressure. How many employees should there be? How will redundancies be handled? How will the business operate?
The amendment would require Ministers not only to say now that the business will be free of political pressures but to maintain that position. Yesterday I saw delight among Members below the Gangway on the Labour Benches that the people’s bank was being set up. It will not be too long before those who expressed that delight indicate clearly how they expect the bank’s business to be conducted, in the interests of their constituents and their region, so we will have to hold to what the Government have said. I would prefer to see that objective set out in the Bill, as the amendment recommends, and I hope that the Chief Secretary to the Treasury will be able to accept it. If she does not, she must give us more clarity about what she expects the bank to do now that it is in public hands.
Ms Diane Abbott (Hackney, North and Stoke Newington) (Lab): It is not unreasonable that more information should be available about the Government’s strategic objectives in relation to Northern Rock. I say that particularly in the light of the debate earlier today. I sat through most of it, and two things are not clear to me. First, people are accustomed to talk about Northern Rock as though it were the hapless victim of international credit crunch storms. Actually, it was the victim of a flawed business model, and I have yet to hear Ministers from my own Front Bench take a view on that business model.
Secondly, colleagues representing seats from Newcastle and the north-east strongly stated the point of view that, in public ownership, the bank should both stick to the same business model and get bigger and better—to paraphrase a colleague, it should be a northern bank to vie with other great international financial institutions—yet many newspapers and commentators talk of an orderly run-down over time. Until we have some clarity about where the bank is going, the kind of robust accountability that we need from a nationalised bank will not be possible.
The Chief Secretary to the Treasury (Yvette Cooper): I understand the spirit of the amendment. I shall first address what it would do and why I think that it would be a problem, and then address some of the wider points raised that underlie it.
The amendment would require the Treasury to lay a minute setting out the company’s strategic objectives and, effectively, a business plan for delivering those objectives before a transfer could be executed. That would cause problems given the Bill’s purposes and overall aims, which are to deal with potential risks to financial stability and the kind of circumstances in which it might be appropriate for Government to act swiftly—perhaps in a matter of days. The different powers in clauses 3 and 6 will allow the Government to respond quickly to a difficult situation. Setting out the
strategic objectives of the company and the business plan may take longer. The new board is coming into place and Ron Sandler is taking up his post. It is right that they should have at least a few weeks to consider their options, develop a business plan, look in some detail at the bank’s overall position and set out the appropriate arrangements.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): We know that for the past five months the Government’s preference has been to sell the business as a going concern to a private sector buyer, but is the right hon. Lady telling the House that during those five months the Government have not done any preparatory work on establishing a business plan for the eventuality of a nationalisation, which the Chancellor noted was on the table as long ago as October?
Yvette Cooper: As we have said many times, the Government carried out appropriate contingency planning, and it was right that we should do so. That goes to the heart of the concern about the amendment. First, there is the question of timing. Secondly, there is the question of who should do the work. The wording of the amendment would be counterproductive. Opposition Members have said that they want to reduce the level of intervention by Government Departments and Treasury officials. If they are asking for a plan that was drawn up in advance of any transfer order being put in place, they should recognise that such a plan could only have been drawn up by the civil servants and the Department.
It is right that a great deal of work should be done by the board—by Ron Sandler and his team in the case of Northern Rock, but bearing in mind that the Bill applies more widely, the provision should be applicable in other circumstances as well. We need to provide for the circumstances in which a new team might need to come in and look at the books in some detail before making more specific proposals.
Mr. Kenneth Clarke: I entirely agree that the new management should be given time to look at the books and that they must draw up the business plan, but does the right hon. Lady agree that they will need some strategic direction from the Government before they do so, including—to reduce the question to its most elementary, as several of us have been asking for the past two days—whether the team are supposed to grow the business, to make it as powerful a business as they can in the marketplace, or whether they are supposed to shrink it, a bit or a lot? I am sure the Minister accepts that as the new management are effectively being sat on the Consolidated Fund when they are put in their new position, they are in an extremely powerful position.
Yvette Cooper:
I appreciate the point that the right hon. and learned Gentleman is making, but he is asking questions that will depend in part on the business plan. The Government have already set out some key objectives about securing the ongoing stability of the financial system—which is why we have said that at this stage we believe that the Government guarantees need to continue—and about securing value for money and the best possible return for the taxpayer. As part of that we have already said in the Chancellor’s remarks and in my earlier remarks that that includes
being able to return the business to the private sector at the earliest opportunity, getting the loans paid back with interest to the Bank of England, and moving the business at the earliest opportunity to a point where the Government guarantees are no longer needed. Those objectives must all be kept in place, but we also have to make sure that we comply with the EU state aid rules and that we do not create unfair competition.
My hon. Friend the Member for Hackney, North and Stoke Newington (Ms Abbott) asked what views Ministers had taken of Northern Rock’s business model. The Chancellor has made it clear that part of the problem that we have is due to the Northern Rock business model. When the global credit crunch occurred, which was triggered for all sorts of reasons including events in the US sub-prime market, because of Northern Rock’s business model, which was unsustainable, it got into particular trouble. That is why action was needed and the Government had to step in. Earlier in the debate, it was said that no one would expect Northern Rock to operate the kind of strategy that it was operating last summer; that was clearly unsustainable. The new strategy should be drawn up by Ron Sandler, and it will then need to be approved by the Government.
In the arm’s length arrangements that we are trying to establish, it is important that the detailed work should be done by Ron Sandler and his team. They have the expertise to do it and will put forward proposals that will need to be agreed by the Government and to comply with EU state aid requirements and other provisions to ensure that there is no unfair competition.
David Howarth (Cambridge) (LD): The problem with the Chief Secretary’s argument is that the two objectives—financial stability on the one hand, and securing the Government’s position on the other—might conflict. A profit-maximising strategy on the part of the bank, of the sort described by the right hon. and learned Member for Rushcliffe (Mr. Clarke), might further destabilise the market by undermining competition. On the other hand, that exact strategy might well secure the Government’s position in the short term. Surely the strategic direction needed is the balance between the two objectives.
Yvette Cooper: The action that we have taken so far has made clear the priority that we give to the financial stability of the banking system as a whole; that has been evidenced. Any suggestion that as part of the process the Government will put maximising their income above the financial stability of the banking system would clearly be nonsense.
We have made it clear throughout that our key objectives are financial stability and returns for the taxpayer. We will publish two documents. The first is the business plan for Northern Rock, based on the work being done by Ron Sandler. The other is a framework document, which will set out the operating relationship between Northern Rock and the Government. The framework document will be published shortly.
Those two documents will provide hon. Members with the information that they understandably and rightly ask for. However, in respect of the amendment, it is inappropriate in principle to ask for those documents to be published before any transfer can be taken. In practice, the kind of financial stability issues
with which we might have to deal may involve issues of timing and of who should take the decisions, who should do the work and who should put forward the proposals. The amendment would not allow those to be dealt with.
Mr. Hoban: May I probe the Chief Secretary a bit more on the framework document and the timing of its publication? Will it be published before we debate the order to nationalise Northern Rock?
Yvette Cooper: I cannot confirm the precise timing; I also do not know the precise timing of the debate on the order. However, I certainly assure the hon. Gentleman that we intend to publish the framework document shortly. A lot of work has been done on it, and we intend to publish it as soon as we can.
Ms Abbott: Earlier, my right hon. Friend said that until Ministers had a business plan, they would be unable to say whether their strategic intention was to grow Northern Rock or run it down. Is not the contrary the truth? Until we know whether the intention is to grow Northern Rock or run it down, we cannot draw up a proper business plan.
Yvette Cooper: With respect, Ron Sandler and his team are considering the nature of the assets and liabilities and the detailed provisions that support Northern Rock at the moment. They will have questions about what a sustainable future for the bank will be. As I have made clear, no one expects Northern Rock to be able to operate the kind of strategy that it operated last summer. Equally, the bank’s market share has already contracted significantly. However, rather than Ministers making precise judgments about strategy on individual products and other such things, it is right that we should have the further assessment on the strategic plan from Ron Sandler and his team before we confirm it and take the decisions on the right way forward.
Mr. Kenneth Clarke: The Minister keeps saying that of course there can be no question of going back to the business model that there was last summer, when Northern Rock failed because it could not access the money markets any more. However, the new management may say, “But we can access the money markets—we are about the only bank that can at the moment. Our spreads are considerably lower than the competition. Look at the state of the others given what we can offer with our access to markets. We can slay the Halifax, get rid of Alliance and Leicester, do a hell of a lot of harm to Bradford and Bingley, and give you a lot of market share.” That would be a very attractive financial business plan. If the Kuwaitis had bought it, they would probably find it attractive. What will the Minister do if she gives the management no strategic guidance and leaves them to go away and do their best, and they come back with an aggressive plan showing that in the current market conditions, with the Bank of England behind them, they can move in and make this a very healthy business?
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