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21 Apr 2008 : Column 1048

I choose, in making a judgment about keeping this country safe, to listen to the police officers whom we task with investigating terrorist offences and keeping us safe in a proportionate and precautionary way. Unlike Opposition Members, I am not willing to live with the risk of not taking action now to keep this country safe.

T5. [199748] Mr. Peter Bone (Wellingborough) (Con): Last Friday, a constituent came to see me at my advice surgery. On 18 April 2000, he claimed asylum, and despite help from the previous Member of Parliament, his case has still not been decided. Unfortunately, it is not an isolated case. I have a number of constituents who have waited many years for their cases to be decided. Is this fair to the asylum seeker, his family and the taxpayer?

The Minister for Borders and Immigration (Mr. Liam Byrne): It is very difficult to speculate on the circumstances of an individual case, but if it helps the hon. Gentleman, of course I shall be happy to see him and discuss it in detail.

T6. [199749] Jo Swinson (East Dunbartonshire) (LD): My constituent, Mr. Fereydum Bahrami, applied for indefinite leave to remain in 2004, and the Home Office is reviewing its initial decision to refuse. Indeed, in November 2005, it stated that

Two and a half years later, there is no decision. May I ask the Home Secretary to look at the case and make a decision, and to apologise for the delay?

Mr. Byrne: I will add that one to my list as well.

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Financial Stability

3.31 pm

The Chancellor of the Exchequer (Mr. Alistair Darling): With your permission, Mr. Speaker, I would like to make a statement about this morning’s announcement by the Bank of England to improve conditions in the financial markets. This scheme has been developed following extensive discussions with the Treasury and the Financial Services Authority. I also want to report on the recent G7 meeting in Washington on restoring financial stability to financial markets. I will also report on the measures that we are taking here at home to strengthen the stability of the banking system, as well as to help home owners with their mortgages.

Before I set out in further detail the Bank of England’s special scheme, let me remind the House of the background against which it has been developed. The financial markets throughout the world remain turbulent, following the problems that arose in the US housing market last year. Functioning financial markets rely on banks and building societies being able to raise finance from each other, and from other investors, including through securitisation markets and through inter-bank lending markets. These funds can then be used to finance lending to businesses and to consumers, including the provision of mortgages.

However, global financial markets are currently not functioning normally. Across the world, there is a lack of confidence in credit markets, most notably in mortgage-backed securities. That lack of confidence was prompted by the downturn in the US housing market, and in particular by the problems associated with sub-prime mortgages there. Banks are reluctant to lend to each other, and as a result lending to customers is more expensive and more restricted.

Along with other central banks, the Bank of England has, over the past few months, made additional funding available to the markets through its regular market operations. The UK financial system remains fundamentally strong, and the Bank of England’s action has helped to take some of the pressure out of the system by giving banks additional liquidity to continue their usual banking operations. Indeed, last week the Bank of England made a further £15 billion available, over three months, as part of its open market operations, and the Governor has said that he is committed to providing the liquidity assistance that the system as a whole needs to enable it to function normally.

Here at home, the economy continues to grow. Last week’s figures confirm that unemployment remains low and employment high. That, and the recent interest rate cuts, will provide wider support for the housing market and the wider economy. As banks here and across the world disclose their losses and strengthen their financial positions, which will help to rebuild confidence, the Bank of England can now take action to ease conditions in the financial markets, particularly in relation to mortgage-backed securities.

The special scheme announced today by the Bank of England is a further step towards tackling the problems that have become more evident in recent weeks with the increasing cost and decreasing availability of lending by banks and building societies. Under the new scheme,
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for a six-month period the banks and building societies, and other institutions that are eligible for the Bank’s standing facility, will be able to enter into agreements with the Bank of England under which they exchange high-quality asset-backed securities for Treasury bills. They can then hold these bills or trade them in the markets. Each exchange agreement will be for a maximum of a year but can be renewed at the Bank’s discretion, so that the exchange could be ultimately for up to three years. The arrangement is available only for assets existing at the end of December last year and does not apply to new lending since then.

At the end of the scheme, the banks will return the Treasury bills to the Bank of England and will receive back the securities that they provided as collateral. This means that the banks will continue to hold the risk on the securities that they provide, so it is they, rather than the Bank of England, that will be exposed to any fall in value. At all times, the banks must provide as security to the Bank of England assets worth significantly more than the Treasury bills they receive in return. If the value of their assets falls, the banks must provide more assets to the Bank of England or return some of their Treasury bills. They will be charged a commercial rate, so there is no subsidy to the banking sector.

The Bank of England expects the initial take-up to be £50 billion. It will monitor the position daily, both to check new bids from banks and to track the value of the assets exchanged as collateral. The Treasury is supporting the scheme announced by the Bank of England by lending to it—at a commercial rate—the Treasury bills which it will then exchange with the banks and building societies. As the House will know, the Government stand behind the Bank as its sole shareholder, and we are making this clear by providing an indemnity. The Bank of England believes that these measures will support the banking sector during the present period of uncertainty and will help to restore the stability that the financial markets need both now and in the longer term. This will help to alleviate the problems that have seen banks reluctant to lend to each other, and, in turn, support the provision of new mortgage lending.

Maintaining economic and financial stability is a key objective. In addition to the Bank of England’s announcement, I can confirm to the House that the Government will take further action at home, and internationally, to restore stability in financial markets. It is important that banks continue to make full disclosure of their exposure to losses, and that they do so as soon as possible. That is why, at the G7 and International Monetary Fund committee meetings in Washington, we agreed that banks should be as open as possible—as quickly as possible—in order to remove the continuing uncertainty as to their true positions. This process has started throughout the world, including here in Britain, with banks disclosing their losses and making proposals to rebuild their capital position.

Transparency is an essential part, along with other steps that we are taking, of stabilising financial markets. In Washington last week, the Financial Stability Forum agreed a range of actions—some to be implemented in the next three months, and others for the longer term. We agreed to strengthen the oversight of risk management, including capital and liquidity,
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clearer standards for valuation and transparency, and changes in the role and use of credit ratings. We will strengthen international co-operation so that we are better able to prevent crises and deal with problems that occur. We are also working with the IMF to allow it to play a greater role in providing early warning of the threats to financial stability, so that the relevant authorities can take early action to prevent these actions in the future.

Here at home, we are about to finish consulting on the reforms to the banking system that I announced in January. These reforms will make it easier to intervene in the event that a bank gets into trouble, in order to protect depositors and maintain the stability of the financial system. Because it is important that we get this right, I will continue to hold discussions with the industry on the detail of these proposals before bringing forward legislation. We will also want to make changes to the Bank of England to emphasise its role in maintaining financial stability.

The responses that we have received so far to the consultation have made it clear that, given the importance of these reforms, it is crucial that we have further discussions. Once those are completed, I can confirm that it is our intention to introduce legislation this Session to strengthen financial stability and depositor protection. The legislation needs to be on the statute book early next year, when some of the provisions of the Banking (Special Provisions) Act 2008, which we passed in February, are due to expire.

Finally, we are determined to do everything that we can to help home owners, so I am meeting the Council of Mortgage Lenders, the Finance and Leasing Association and major lenders tomorrow, along with the Chief Secretary to the Treasury and the Minister for Housing. Since 2004, mortgage lenders have been required by statute to treat their customers fairly, and at our meeting I will be discussing how banks and building societies can help people whose fixed-rate mortgages are coming to an end, as well as helping people who may get into difficulties in repaying their mortgages. Banks and building societies have a duty to treat their customers fairly and, in the light of everything we are doing, I want to discuss how they can pass on the benefits of falling interest rates as well as wider Government support to mortgage holders.

The Government will continue, along with the Bank of England and the Financial Services Authority, to do everything they can to maintain stability. The announcement by the Bank of England this morning will help to resolve problems in the wholesale financial markets, which have a subsequent impact on the retail markets, and so help businesses, individuals and, in particular, the mortgage market. I commend this statement to the House.

Mr. George Osborne (Tatton) (Con): I thank the Chancellor for prior sight of his statement, and the Governor of the Bank of England, who phoned me yesterday to explain in advance what he was proposing to do. On a lighter note, I welcome the hon. Member for Sheffield, Hillsborough (Ms Smith), who is still in her place—the call from the west wing clearly worked, although judging by the Prime Minister’s face, that was the last time that they will talk.

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It is nine months since the credit crunch began. We know from the recent International Monetary Fund report, to which the Chancellor referred, that Britain has been left more exposed than any other European country: it has the highest Government borrowing in the developed world and the highest personal debt on record. Of course we welcome any international moves to improve stability. Such moves should include reforms to the Basel accords. Surely it is time to look at counter-cyclical capital rules, so that we try to avoid this boom and bust in debt and asset prices in future.

I know that the Prime Minister was with the Kennedy clan last week. Perhaps he should borrow a phrase from President Kennedy: next time, let us fix the roof “when the sun is shining.” In the meantime, the Bank of England has to pick up the pieces. I broadly welcome the liquidities scheme that it announced this morning. [Interruption.] Indeed, we were recently calling for it. The difference between a well-judged intervention and a bail-out lies in the details and in the protection offered to the taxpayer.

Will the Chancellor, on the record today, give us his personal promise that as the man entrusted with the nation’s finances, he believes that the guarantees are such that there will be no loss to the taxpayer? Would not the risk to the taxpayer be reduced still further if the Government had not agreed to indemnify securities backed by credit card debt as well as those backed by mortgages? Why has he done that? Perhaps he could explain that to the House, because we are trying to keep people in their houses, not prop up credit card lending. According to the market notice issued by the Bank this morning, the British taxpayer is underwriting securities based on United States credit card debt. Could the Chancellor confirm whether that is the case? Has he calculated the extent to which that will expose the taxpayer to developments in the US economy?

The Chancellor is calling on the banks to be more transparent about their liabilities—I agree with him on that—but can he confirm that the Treasury has insisted that the scheme be designed to keep the taxpayer exposure off the Government’s balance sheet? Is it true that the swaps are for 364 days because if they were for a day longer, £50 billion of debt would be added to the national debt? Crucially, what steps is he taking to ensure that the main lending banks will use the facility to pass lower rates to borrowers? Has he had any commitment from the banks that they will do that?

We have seen the share prices of the banks go up since word of the scheme was leaked by the Prime Minister on his American trip, but what we have not seen is mortgage costs come down. The last time the Chancellor called for the banks to pass on a rate cut, they all ignored him, even the bank that he now owns, and several actually raised their rates. Let us hope he is more successful when he meets the Council of Mortgage Lenders tomorrow.

Finally, do not the past nine months reveal the folly of a Prime Minister who failed to use the global good times to prepare for the difficult times? A competent Government would be in a position to help people with the rising cost of living. Instead, this incompetent Government’s 10p tax rise will add to the misery of some of the lowest-paid families, who are already struggling with a rising cost of living, and could more
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than cancel out any help with mortgage costs that this scheme might bring. It is not too late for the Chancellor to back down and stop this tax raid on the poorest. We know from the climbdowns on capital gains tax and non-doms that this Chancellor is for turning. We know from his comments yesterday that he thinks the Prime Minister’s last Budget was such a mess that he has to return to it. If the Chancellor has a concession to announce or if he wants to set out the process towards any concession, he should not leave it to his deputy; he should get up and have the courage to announce the concession at the Dispatch Box himself.

The Bank of England is now playing its part to help families hit by the credit crunch, and it is time for the Government to do the same. It is time for the Government to stop fighting themselves and start fighting for the country. It is time for a Government who are on the people’s side, not on people’s backs.

Mr. Darling: I note that the shadow Chancellor had very little to say about the Bank of England scheme, just as he has had precious little to say throughout the past few months. Indeed, ever since these problems first arose in the financial markets last summer, what he has had to say has been contradictory. I note his invitation to discuss boom and bust—something that the Conservative party is well qualified to talk about. I prefer to remind the House that because we have a strong and stable economy, with low levels of unemployment and record levels of people in work, we are far better placed than most other economies to see through this period of financial uncertainty and turbulence.

As for the hon. Gentleman’s assertion that we are the only country affected, he must have noticed that banks and other financial institutions in the United States have been substantially affected. So too have banks in Germany and in other parts of the world. This problem is affecting the banking system throughout the world, which is why central banks and Governments have been taking action to try to alleviate it, with a view to getting the financial markets stabilised and returning to normality.

The hon. Gentleman asked several questions. He asked about the Basel regime, and Basel II in particular. I am sure he would agree that it is important that the banks have adequate capital, and the Basel II agreement was meant to ensure that banks are properly capitalised, so that if they run into difficulties they have something to fall back on. Indeed, the evidence of the past few weeks is that several banks throughout the world need to improve their capital position.

The hon. Gentleman asked how the banks will adapt from the present regime to the new regime, and the FSA is considering that. He also asked about the Bank of England scheme itself, which I understand he broadly welcomes. First, the issue of its classification is for the independent Office for National Statistics. Secondly, perhaps I may explain to him further how the scheme will work, although the Governor must have covered this ground in his helpful conversation yesterday. The Bank of England will make available Treasury bills to a bank in return for which it will have to pledge collateral. Most of that will be mortgage-backed securities, but it can include credit card assets,
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provided that they are AAA-rated, but in any event it will be for the Bank of England to decide what collateral it will accept.

Crucially, as I think the hon. Gentleman acknowledged on the radio this morning, the Bank of England will ensure that it takes far more from the bank than it gives out in Treasury bills. An example is given in the Bank of England press notice today, which shows that if £100 of collateral is pledged, the receiving bank will get between £70 and £90, depending on the strength and value of the collateral. In other words, there will be a margin to protect the taxpayer. In addition, the banks will pay a fee.

The crucial point is that the Bank of England is now able to take action to provide liquidity in the system for a longer period, which will help banks to restore their capital position and be able to start lending to businesses and individuals. That is crucial for this country in terms of improving the mortgage market. We want to ensure that institutions are sound, but we also want to see the benefits of what is happening passing to home owners, because they are entitled to expect not only support from lenders, but that will the Government to do everything they can to support them. We will continue to do that.

Dr. Vincent Cable (Twickenham) (LD): This is a strange day for a Labour Government. They are announcing that they are advancing billions of pounds to the banks at the same time as they are taking billions of pounds away from low-paid taxpayers. The Chancellor reminds me a little of a character whom I frequently encounter in the stories I read to my grandchildren—Little Red Riding Hood, who went around trying to be kind and helpful, but ended up being out-manoeuvred and then eaten by a wolf. [ Interruption.] The Chancellor is in the process of being slowly devoured by the British banking system. The banks are not in this position by some unfortunate accident. Their own Institute of— [ Interruption. ]

Mr. Speaker: Order. Hon. Members are entitled to get stories wrong from time to time.

Dr. Cable: The banks are not in this position by accident. The Institute of International Finance, which is the bankers’ group, acknowledged only last week that the banks had engaged in substantial bad practice. British banks have, over the past few years, lent too much, too quickly and too carelessly. The correct course of action, which the markets now anticipate, is that the banks should make a rights issue to their shareholders to raise money to offset the losses that they have to own up to. The problem is that chief executives do not want to go to the markets because they face the sack, so they rattle the begging bowl to the Government and hope that the Government will help them out, which they are doing.

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