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In our debates on Northern Rock, the Chancellor has always reassured us about the quality of the loan book, yet the accounts that were published today present a much less rosy picture. Northern Rock’s impairment figures have deteriorated between two and three times the average of the Council of Mortgage Lenders figures for residential mortgages. The accounts also make it clear that the more aggressive approach to arrears that Northern Rock has introduced has led to a fourfold increase in the number of homes that it owns
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through repossession. Are the Government content with the practice on repossessions that Northern Rock has instituted?

Despite the Chancellor’s reassurances about the quality of the loan book, we see in the accounts published today a rapid deterioration in the loan book and a sharp increase in repossessions. Is the Chief Secretary prepared to reiterate the confirmation the Chancellor has given on the quality of the loans that the taxpayer has, in effect, taken on through the nationalisation of Northern Rock?

Another aspect of the recovery plan—and justification for nationalisation—is the proposed build-up of retail deposits from about £10 billion at the end of 2007 to £20 billion in 2011. That depends on Northern Rock’s ability to rebuild depositor confidence. However, there is a challenge here, because we are now entering into a more competitive phase for deposits as a consequence of the closing off of wholesale markets to financial institutions. What assessment have the Government made of the likelihood of Northern Rock doubling its deposits by 2011, and what will be the impact on achieving the 2010 deadline if it does not?

Will the Chief Secretary also confirm that the commitment given in the appendix to the business plan that Northern Rock will rank outside the top three in any one of the “Moneyfacts” retail deposits categories for the remainder of 2008 extend beyond then? One of the concerns raised when this House and the other place discussed the Banking (Special Provisions) Act 2008 was the impact that the Government guarantee arising through nationalisation could have on competition for both loans and savings. People are rightly concerned that Northern Rock might take advantage of its privileged status as a Government-backed bank to offer better rates than its competitors. Will the commitment on savings extend beyond 2008?

The taxpayer’s exposure to Northern Rock will depend not only on the loan book and the ability to rebuild customer deposits, but on the operating results of the company in public ownership. In 2007, it made a loss of £141 million. The business plan predicts that it will make substantial losses in 2008 and will return to break-even only in 2011. How much will Northern Rock cost the taxpayer over the next three years, simply in terms of its operational results? In deciding to acquire Northern Rock, did the Treasury understand that it would be loss-making from 2008 onwards?

My next point refers back to one made by my right hon. Friend the Member for Wokingham (Mr. Redwood). The plan sets out a timetable of the repayment for the taxpayer-backed loans and releasing the guarantee, but contains nothing to indicate when either the Government or Northern Rock expect the bank to return to the private sector. Will the Minister tell us whether privatisation will happen as soon as the loans are repaid? Have other conditions been set that will trigger the bank’s privatisation?

Notwithstanding this evening’s proceedings, the business plan is still subject to approval by the EU, and it could, of course, ask Northern Rock to revise its business plan. That could have an impact on how quickly Northern Rock’s strategy would be effective in reducing the level of the taxpayer loans and so on. Will the Chief Secretary tell us when she expects to receive
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the Commission’s approval of Northern Rock’s business plan? Until that clarification is received there will clearly be an important uncertainty that affects the way in which the business is run. There are potential risks in respect of the objective that the taxpayer-backed loans will be repaid by 2010. Tonight’s debate gives the Chief Secretary the opportunity to confirm, without qualification and caveat, that the taxpayer will pay not one penny towards the cost of rescuing Northern Rock, and I hope that she will take it.

There were some unfinished pieces of business from our debate on the Banking (Special Provisions) Act 2008, one of which has now been clarified with the publication of today’s accounts and is crucial to understanding the liabilities that will be assumed by the taxpayer through this Order. On Second Reading and on Third Reading some debate took place between the Chief Secretary and my Conservative colleagues and some Labour Members about Granite. It is clear that the risks associated with Granite will be borne by Northern Rock. Today’s accounts make a statement about Granite being

The Office for National Statistics said in its evidence to the Select Committee on Treasury that the risks and rewards of Granite accrue to Northern Rock and thus to the taxpayer.

Does the Chief Secretary now accept that she was wrong in a response that she gave to an intervention from my hon. Friend the Member for Ludlow (Mr. Dunne) during the debate on the Act? She said:

The reality of the accounts today is that the taxpayer bears the risk. The risk is not being ring-fenced, kept to one side or kept offshore. The risks and rewards of Granite accrue to Northern Rock, and they will be borne by the taxpayer.

The other matter that we debated as the Act was going through Parliament was the framework agreement. It was deposited in the Library today, yet as Northern Rock’s report makes clear, the agreement was in place from 22 February—the day that Northern Rock was nationalised. Can the Chief Secretary tell us why Parliament was not presented with the document earlier? Why did we have to wait until today’s debate and the publication of today’s accounts for the document to be placed in the Library? Is that not another example of the Government riding roughshod over Parliament?

Although our debate focused primarily on Northern Rock, it is worth remembering that the Act enables the Government to nationalise any other bank where lender of last resort status has been given and that the taxpayer assumes an open-ended commitment without effective parliamentary scrutiny. Today’s debate seeks to annul an order that had been made last month. Parliament should be given the right to approve
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nationalisation before it takes place, rather than debate it retrospectively. Parliament should have the power to veto these proposals, rather than be treated as a doormat by an over-mighty Executive. The Prime Minister talks about strengthening Parliament, but he undermines its authority through measures such as this.

The publication of the accounts and business plan today makes it very clear that nationalisation is not the end of the Northern Rock story. The Government’s mishandling of the Northern Rock crisis has led to the risk that taxpayers will not get back all the money we have lent to the bank. The repayment depends on the bank’s ability to manage down the mortgage book and to rebuild customer deposits and the viability of the remaining business, EU state aid approval, and the state of the housing market. The Government have gambled our money on Ron Sandler and his management team, but we know it need not have been like this. As the rescue of Bear Stearns shows, private sector solutions can be found to the problems created by the credit squeeze.

We also believe that nationalisation was not the only alternative. The Chancellor proposed that in future failing banks could be dealt with through a form of administration. We believe that that could have been the answer to the question. It would have presented a better deal for the taxpayer and the assets could have been realised in a way that protected the interests of taxpayers, rather than exposing them to ongoing continued risk until 2010-11. The Government rejected that course of action despite endorsing it for the future.

The Northern Rock story will run on and on. Even based on today’s announcement, the liability of the taxpayer will run beyond the next general election, leaving another problem for the next Conservative Government to sort out.

10.20 pm

The Chief Secretary to the Treasury (Yvette Cooper): We are debating the transfer order to take Northern Rock into temporary public ownership. I am disappointed that the hon. Member for Fareham (Mr. Hoban) and his party have chosen to pray against it. This morning, Northern Rock published its annual accounts for 2007 and a more detailed business plan. I shall refer to them in responding.

We need to be clear about the purpose of the order. It will take Northern Rock into temporary public ownership in order to safeguard the financial stability of the banking system and the financial interests of the taxpayer. The Chancellor set out three objectives that have guided everything that we have done in relation to Northern Rock: maintaining financial stability; protecting consumers; and protecting the taxpayer. The decisions that we have made have shown how seriously we take the financial stability of the banking system. The Government are prepared to take strong action and make difficult decisions in order to safeguard that financial stability. Given the turbulence in the financial markets in the summer, the ongoing credit squeeze and the series of problems with Northern Rock’s business model in the autumn, it is clear that without intervention Northern Rock would have gone down. That would have had serious risks not only for
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depositors and creditors but for the stability of the banking system. That would not have been in the public interest. That is why we took action and why it was right to do so. That is why we authorised the Bank of England to provide support and stepped in with the Government guarantee arrangements last autumn. That was supported by hon. Members from both sides of the House at the time.

We have searched for alternative options, including private sector takeovers. In trying to ensure that we protect the taxpayer, we have made it clear that temporary public ownership is the best deal. That is in part because of the state of the market. The alternative deals were simply not good enough for the taxpayer.

Mr. Philip Dunne (Ludlow) (Con): Will the Chief Secretary enlighten the House on whether the Chancellor took advice or was given guidance during his discussions with the US Secretary of State, Secretary Paulson, on his experience in securing a rapid decision-making process to take a bank that was getting into difficulty into private sector ownership? What lessons did the Chancellor learn from those discussions?

Yvette Cooper: Interestingly, the experience on the other side of the Atlantic has shown that banks across the world are facing serious pressures as a result of global economic and financial market turbulence. In many ways the situation with Bear Stearns was very different from that with Northern Rock. Bear Stearns is not a retail bank and does not have retail deposits, and so the implications for depositors as opposed to creditors were very different. There is a different legal framework and the situation was different as there were viable private sector offers on the table.

Clearly, decisions have to be made about what is the best alternative in the circumstances faced in particular financial markets at particular times. Equally, it is important that we do not simply pretend that there are alternatives when they do not exist. That is why Opposition Members need to take a bit of responsibility. The decision was taken last autumn to support Northern Rock, through the Bank of England’s loans and through Government guarantees. I reiterate my view that that was the right decision to take at the time, and it was supported in all parts of the House. Once it was taken, there were knock-on consequences that had to be faced up to. Opposition Members have repeatedly refused to do so.

The hon. Member for Fareham repeatedly raised his concern that it was the decision to take Northern Rock into temporary public ownership that created exposure for the taxpayer. That is not the case. The taxpayer’s exposure was created by the decisions that were taken in the autumn on both the Bank of England loan and the guarantees that were put in place. Having done that, and been clear that that was the right decision in the interests of protecting the financial stability of the banking system, it was then important that we ensured that the taxpayer’s interest was protected. The options of insolvency, administration, Bank of England-led administration and wind-down, which were put forward by Opposition Members, would all have been a worse deal for the taxpayer than temporary public ownership and the business plan that we have now set out.

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Mr. Redwood: Surely the Chief Secretary can see that, if the Bank of England had simply acted as bank manager, and provided tough love to Northern Rock and managed it through it, we as taxpayers would not have had to absorb all the responsibilities and potential losses of sacking staff and losing on current trading. Will she confirm that she is accepting a business plan that means that the taxpayer will have to pay the losses in 2008, 2009 and 2010? Why do we need those as well?

Yvette Cooper: The right hon. Gentleman describes what he says would have been “tough love” by the Bank of England in managing it through. I presume that he is talking about the proposal, which Opposition Members have described, of a Bank of England-led administration. That would effectively use powers that do not currently exist. We think that there is a strong case for introducing a new special resolution regime, and that that would be the right thing to do. However, it would involve major changes to the law and the current approach to insolvency and failing or troubled banks. It is right that such proposals should be consulted on seriously and introduced through legislation. For Opposition Members to pray in aid powers that simply do not exist on the statute book, and think that they would somehow magically come to the rescue of Northern Rock, is pie in the sky and irresponsible. They are simply not facing up to the serious problems that Northern Rock faced.

As hon. Members know, Northern Rock’s new management team has presented the Government with a detailed business plan for their approval. It details how the new board intends to repay the Bank of England’s loan, release the Government guarantee arrangements and return the business to the private sector. It is based around four strategic priorities: to contract into a smaller, sustainable business, reducing the asset base; to repay the Bank of England loan by the end of 2010, while increasing the level of retail deposits, although keeping them below 2007 levels; to restructure the organisation and its operations; and to strengthen risk management in key areas. The bank envisages repaying the loan by 2010, and £2.5 billion has already been repaid since the end of 2007.

The business plan also addresses a concern that has been widely raised about Northern Rock’s business model—its excessive dependency on the wholesale funding markets—and addresses that over-reliance by reducing the size of Northern Rock’s asset base and by increasing its retail deposit base. It is important, and we have stressed throughout, that Northern Rock should not cause unfair competition in the rest of the financial markets. The business plan recognises that. Although the retail deposits will increase over the next three years, both Northern Rock’s level of retail deposits and its share of the retail savings market will remain lower than at the start of last summer. The competitive framework that Northern Rock published as part of its business plan also commits it to not appearing in the top three of the best-buy tables for the rest of 2008. The framework will be kept under review and will remain subject to the requirements of the European Commission.

Mr. Hoban: Will the Chief Secretary give a commitment that Northern Rock will not appear in the top three best-buy tables beyond 2008? Can she tell us
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what the total loss forecast for Northern Rock will be between now and 2011 in the business plan that the Treasury will approve?

Yvette Cooper: As I said 10 seconds ago, the competitive framework that Northern Rock published today as part of its business plan also commits it to not appearing in the top three of the best-buy tables for the rest of 2008. The framework and the overall approach will be kept under review, as is right. I remind Members that we have always said that we would engage in detailed discussions with the European Commission to make sure that we are compliant with the state-aid approach. With regard to the overall financial position for Northern Rock and for the taxpayer, we have made it clear that such an approach gives us the best deal for the taxpayer, who already had exposure as a result of the Bank of England loan and the guarantees that were put in place.

Had we taken the approach that Opposition Members set out, and tried to go for the fire sale of the assets that they proposed, there would be considerable risk to the taxpayer, and to the Bank of England loan, which as a result of the business plan is now being repaid.

Mr. Hoban: Will the Chief Secretary tell the House what the predicted losses are in the business plan that the Treasury will approve? It is clear that there will be substantial losses next year, in 2009 and 2010, with break-even in 2011. What will the losses be? The taxpayer will have to stump up for them. We need to know what they will be.

Yvette Cooper: Today, Northern Rock set out in its accounts what its financial position was for 2007, and it has set out its business plan for the next few years. It has set out a clear framework as part of the business plan, which involves repaying the loans from the Bank of England. It is important for the taxpayer that the loans are repaid, and we should be clear that under the approach repeatedly proposed by Opposition Members those loans from the Bank of England would be at stake—they would be put at risk. Opposition Members have never faced up to the fact that their completely incoherent and all-over-the-place approach would seriously put at risk not only support from the taxpayer as a result of the guarantees, but the approach taken by the Bank of England.

Mr. Graham Stuart (Beverley and Holderness) (Con) rose—

Yvette Cooper: I shall give way once more, but I am conscious of the fact that Members from other parties also want to contribute to the debate.

Mr. Stuart: My question is simple. What will the cumulative losses be before 2011?

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