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The Government have assured us that they are covering risk as a result of the discounts on the transfer of assets. Can the Chancellor tell us what those discounts are? Only two weeks ago, the International Monetary Fund made an independent estimate that residential property in the UK was 25 to 30 per cent. overvalued. That is the IMF’s estimate; it has no axe to grind. Any asset-backed mortgages that have a
discount of less than 30 per cent. represent a transfer of risk to the taxpayer. As I understand it, the Bank of England will provide a discount of up to 30 per cent. but not beyond it. Will the Chancellor explain that discrepancy?
The statement also says—this was confirmed a few moments ago—that the Bank of England will accept credit cards as part of the transfer mechanism. It is said that they will be accepted because they have a AAA rating but after the complete mess that the rating agencies have made over the past six months and the meaninglessness of the AAA rating designations, what possible confidence can we have in that assertion?
My main point is this: if the Government are substantially to relax the conditions under which they make liquidity available to the banking system, surely conditions should be attached to that process. The most important condition should be that the banks accept up front and in writing that they will go to the markets to raise money in the way proposed by the Royal Bank of Scotland. Without that, there is no guarantee that the money raised in this way will not sit in the banks without being advanced to the markets, to small business or to residential borrowers. Without those guarantees, the package promises to be a liability to the taxpayer and to do little to sustain the domestic economy.
Mr. Darling: I always thought that part of the Liberal Democrats’ problem was that they believed in fairy tales, but I had not understood that the hon. Gentleman did not know the ending of a fairy tale. I hope that when he goes home this evening he will apologise for misleading his grandchildren—inadvertently, of course—about the end of that nursery story.
The hon. Gentleman’s position in relation to the Bank of England’s proposals lacks sense, too. The logic of what he is saying is that the Bank of England should not be providing the support. If these were normal circumstances, that would be a perfectly statable case, but these are highly unusual circumstances. We are in a situation, getting on for nine months after the problems first started, in which the mortgage bank security market is virtually non-existent. That is putting particular strain on banks and making them increasingly reluctant to lend to each other and to customers. That cannot be good for any of us as the problem spreads further into the wider economy. That is why I believe that what the Bank is doing is right. It is similar to what other central banks are doing.
On banks that have got themselves into a position in which they need to recapitalise, I agree with the hon. Gentleman that it is important that they disclose their position as quickly as possible. The sooner the world knows the extent of the exposure, the more confidence there will be in our getting back to trading on a normal basis. Banks are doing that in this country and all over the world. However, the Government cannot say to every institution, willy-nilly, “You ought to have a rights issue,” because that may not be appropriate for some institutions. When the hon. Gentleman thinks through the logic of his position, I think he will see that what he is proposing does not work.
The Bank of England set out the securities that it will accept in the market notice that it published today, as the shadow Chancellor said. As I said in reply to him, it is up to the Bank of England to decide what securities it will accept and, crucially, what margin it requires in order to protect its interests—and, ultimately, the taxpayers’ interests. The measures proposed by the Bank of England are necessary and will be beneficial in helping to get the banking system back into a position in which it functions normally. That will benefit businesses, individuals and mortgage payers in this country.
John McFall (West Dunbartonshire) (Lab/Co-op): I have a simple question for the Chancellor: does he believe in the principle of moral hazard?
Mr. Darling: I think that the principle of moral hazard is very important, but as I have said to my right hon. Friend on a number of occasions, I do not think that we can just stop there. We have a particular problem in relation to the banks. The banking system is crucial to just about every single business and individual, and to all home owners in the country; no Government could simply say, “It really doesn’t matter what will happen to the banking system.” It is crucial to the economy, as we have seen in the United States, as we see in Europe, and as we now see in Asia. There is not a country in the world that is not now being affected by the problem. That is why it is right for the Bank of England to take action, and why it was right to spend the past few weeks developing a proposal that I think will help to begin the process of getting back to normality.
Peter Viggers (Gosport) (Con): This is further massive financial exposure by the Government. Will it count as Government debt, and if not, why not?
Mr. Darling: As I said to the shadow Chancellor, the classification of debt is a matter for the independent ONS. On the broader point made by the hon. Member for Gosport (Peter Viggers), as I have said, Treasury bills will be obtained by banks only in return for collateral. Let me make a general point: I know that both in the Treasury Committee and on the Floor of the House the hon. Gentleman has frequently asked perfectly pertinent questions about Northern Rock, as he was concerned about the exposure in that case. The Government did step in to stabilise the position at Northern Rock, but of course money has not been lost; indeed, Northern Rock’s exposure and debt to the Bank of England are being reduced.
Sir Stuart Bell (Middlesbrough) (Lab): The Chancellor referred to low unemployment in his statement. Is he aware that between December last year and February this year employment rose in our country by 152,000? In the last financial year, it rose by 456,000, and 29.51 million of our fellow citizens are now in gainful employment. His theme today is stability. Will not his measures add to the stability of our economy and help our businessmen, citizens and consumers—all of us—overall?
Mr. Darling:
The answer to my hon. Friend’s question is yes, they most certainly will. The shadow Chancellor offered to give us a free lecture on boom
and bust, but he might have recalled the difficulties that arise when there are 3 million or 4 million people out of work, and interest rates are at 15 per cent. That is what destabilised the housing market in the early 1990s. The position today is quite different. There are very high levels of people in work, and historically low interest rates. What we have to deal with at the moment is an almost unprecedented shock to the financial system, or certainly one that we have not seen in recent generations. It is important that we, and other banks, and authorities throughout the world, act together to do everything that we can to ensure stability in the banking system.
Mr. John Redwood (Wokingham) (Con): How much extra cash do banks in the UK now have to deposit or keep for prudential reasons, as a result of the regulator’s change of rules? That will offset the beneficial effects of some of the package. Will the measures be enough to bring mortgage rates down?
Mr. Darling: In relation to the first point, the right hon. Gentleman is aware that the FSA is responsible for the prudential supervision of the banking system and specifying what arrangements are required, first under Basel I and then under Basel II, which is in the process of coming into force.
In relation to the right hon. Gentleman’s wider point about mortgages, we want to make sure that financial institutions are in good financial health, as I said in reply to the hon. Member for Twickenham (Dr. Cable). That means that some of them will have to restore their capital position. I believe that this is a way of helping to restore the position in relation to financial markets. I have made it very clear that, as most people in this country would expect, in taking action through the Bank of England—either in direct interest rate cuts or through today’s support—the Government are entitled to expect that businesses, individuals and, in particular, mortgage payers will see the benefits of what we are now doing.
Mr. George Mudie (Leeds, East) (Lab): The Chancellor needs congratulating if he has got the Bank of England acting with some urgency at long last. However, the House needs to be reassured that we are not, as taxpayers, just bailing out the very same bankers who got us into this problem. I have noticed the financial conditions attached to the loan for the building societies and banks. However, are there other conditions that will force those institutions to pass on rate cuts, extend mortgages and the like—or will the money be used just to mend their balance sheets?
Mr. Darling:
In reply to the latter point, it is not possible for the Government to insist that a cut in the bank rate, for example, should be passed through in every case, whatever happens. There may be reasons why a financial institution is not able to do that—not least because it may need to make sure that its capital position is strong. However, one of the reasons why, in the present position, the rate decreases have not been passed on, and why people have found getting mortgages more difficult or expensive, is that there is less money around because banks are not lending to each other. When we sat down to discuss how we could try to resolve the problem, we asked ourselves what was
the root cause of that lack of funding and of the increase in the cost of getting loans, and it is the fact that the mortgage-backed security market is virtually shut. Sorting that problem out will begin the process of freeing up the lending process. That, I believe, will enable us to achieve the situation that we all want, in which people receive the benefits of that. It is not possible to prescribe in a mechanistic way what every single institution in this country must do, but, as I said, if public money is doing its bit, people expect banks to do everything that they can so that the general public can see the benefit.
Sir Nicholas Winterton (Macclesfield) (Con): I welcome the liquidity proposals that the Bank of England has announced today, but I remain concerned about taxpayers’ exposure. Does the Chancellor think that the lessons of recent times will be learned by the banks and building societies, and that those institutions will stop indulging in irresponsible lending? Will the Chancellor and the Government play their part by not adding to the cost of living in this country through stealth taxation?
Mr. Darling: Banks and building societies should lend responsibly. They should be satisfied that the borrower can afford the loan being taken on, that the asset on which the loan is secured is good and that they will get their money back. I also agree that those responsible for running financial institutions should remember what has happened. What often happens is that the generation involved in one financial or banking crisis has long gone by the time something else happens. I hope that the memories of what has happened in the past few months stick not only with the current generation of managers, but with the rising generation. People need to learn from experiences, particularly bad ones.
Alan Simpson (Nottingham, South) (Lab): I welcome the Chancellor’s statement, although I recognise that it cannot be the place of a Labour Government to bail out a banking sector that has allowed itself to privatise profits and nationalise debt. Will the Chancellor spell out to the House that he intends to bring forward regulations for the banking industry that will, first, make it illegal for banks to conduct the off-balance-sheet transactions that have taken us into our current mess, and, secondly, require the full disclosure of the toxic debt that they are carrying? Is he confident that in the intervention in respect of access to mortgages, he will not be discriminating against the building societies that have remained in mutual ownership and in which people have saved, as opposed to those that converted to banks in order to speculate?
Mr. Darling: As I said, all institutions that are usually eligible for Bank of England support, including the building societies to which my hon. Friend refers, will be eligible in this regard as well. We are as mindful of their position as we are of that of other banks. I agree with what he says about the need for far greater transparency. There also need to be stricter rules in relation to off-balance-sheet activity, which has enabled some banks to get round their other regulatory responsibilities. That is clearly not a satisfactory position.
In relation to my hon. Friend’s first point, the important thing to remember is that this money, through these facilities, is effectively being lent, not given, to these institutions—they have to repay it. As I said, the collateral—the security—that they have to offer in return will be greater than what they get out of the system. This is helping to put money into the system so that it starts to work again, because if we do not do that there is a risk that the problems that we now see will spread even further and take much longer to recover from. That is why we are taking this action.
Sir George Young (North-West Hampshire) (Con): Is the rate of interest that the Treasury is charging the Bank of England on these bills less than the rate of interest that the Bank of England is charging the clearing banks, and if so, by how much?
Mr. Darling: The Bank of England is charging commercial rates, and we are providing funds to the Bank on that basis too.
Jim Cousins (Newcastle upon Tyne, Central) (Lab): I congratulate the Chancellor on getting the Bank of England to do now what it should have done last August at far less cost. Will the Bank of England require, in return for these loans, finance to be restored to home buyers? Will it also require the banks not to pay themselves bonuses for getting out of this mess on the same scale and style that they paid bonuses to themselves for getting into it?
Mr. Darling: Many people look at these bonuses and ask themselves what the individuals did to get them. In relation to Northern Rock, on which my hon. Friend has had quite a lot to say, that is a perfectly pertinent question to ask. This is not something that we can legislate for; at the end of the day, it has to be for companies themselves.
I dealt earlier with the point about passing on the benefits of interest rate reductions to home owners. This action, which comes on top of other action that the Bank has taken independently or with other central banks, of putting money into the system, has helped. I do not think that last summer anyone would have envisaged that what we now see in the financial markets would have gone on for so long and be so deep in so many countries. It is important not only that action is implemented but that it works.
Stewart Hosie (Dundee, East) (SNP):
I welcome the statement and thank the Chancellor for advance notice of it. I particularly welcome the international elements of transparency, co-operation and early warning. I give a guarded welcome to the £50 billion of Treasury bills and the changes to the use of credit ratings. The Chancellor spoke about the background against which these new measures have been developed. He spoke about liquidity and rightly pointed out that we have known about this for some nine months. Given that last August the Governor of the Bank of England knew about the difficulties that the credit squeeze was causing, given that on 4 September last year the inter-bank offering rate was higher than the Bank of England emergency rate, and given that on 6 September the
European Central Bank pumped £150 billion-worth of liquidity into the system, does the Chancellor now regret allowing the Governor last September not to increase liquidity in the system? Is the real lesson for the future that in a future event such as this, early intervention will always be better than allowing things to drift on for eight, nine, 10 or 11 months?
Mr. Darling: My guess is that if we had introduced this particular scheme in August last year many people would have said, “Why on earth is this necessary?”, because the extent and the depth of what has happened could not possibly have been foreseen at that time. As I have said before, certainly to the Treasury Committee and, I think, on the Floor of the House, by the time Northern Rock started to get into difficulties it would have been very difficult to help it through a general provision, because by that time it needed so much money that it was almost inevitable that it would come along to the Bank of England. The hon. Gentleman is right that it is always to our advantage to prevent such things from happening in the first place, if that is possible. That is why we will introduce legislation later in this Session, which I hope that he and his party will support, that was partly foreshadowed by the Banking (Special Provisions) Act in connection with Northern Rock.
Mr. Kevan Jones (North Durham) (Lab): I welcome the Chancellor’s support for the banking system, but does he agree that it is important to look at what is happening in other sectors in the economy? Last Friday, I visited the Nissan car plant in Sunderland and met some of the 800 new employees who have been taken on to produce the new Qashqai car. That investment was secured because of a stable economy, but also because of a flexible and skilled work force who make the plant the most productive in Europe and one of the most productive in the world.
Mr. Darling: I agree with my hon. Friend, and the Qashqai has been extraordinarily successful. I know from my time as Secretary of State for Trade and Industry that the situation he describes came about partly because of the support that the Government were able to give Nissan, and because it recognised that we have a strong, stable economy and that the work force in the motor industry in the north-east is extremely highly skilled and motivated. Indeed, the number of cars being produced by the motor industry at the moment is more reminiscent of what happened in the 1970s. The industry has been highly successful.
Mr. Peter Bone (Wellingborough) (Con): How is it that the Chancellor can find £50 billion at the drop of a hat, but unfortunately cannot alter his Budget to protect poor people who are losing money through tax rises?
Mr. Darling: To explain it in simple terms, the Government are effectively lending money through the Bank of England to the banks. In other words, that money has to be repaid, so the position is rather different.
Paul Flynn (Newport, West) (Lab):
There is money available—tens of billions—to fund the banks because of their own incompetence, and money was available,
which will not be repaid, when we had an unplanned war against Iraq, so surely a Labour Government with a brilliant record of stealth socialism in their redistribution of wealth to the lower-paid for the past 10 years can find a mechanism to ensure that those who will lose out because of the abolition of the 10p tax rate will be compensated.
Mr. Darling: As my hon. Friend acknowledges, the Government have done a great deal for people during the past 10 years, particularly those on low incomes, and as I said yesterday, we will continue to do so. It is essential that we put in place the plan before us today because many people in this country, including those on modest incomes, depend on being able to get access to mortgages, and on mortgage payments being kept as low as possible.
Mr. Philip Hollobone (Kettering) (Con): What is the Chancellor’s preferred indicator for assessing liquidity in the banking system, and does he believe that the published London interbank offered rate accurately reflects the scale of the credit crunch?
Mr. Darling: Is the hon. Gentleman referring to the LIBOR rate?
Mr. Hollobone indicated assent.
Mr. Darling: The British Bankers Association is looking at that at the moment, which is probably quite a good thing for it to do.
Gordon Banks (Ochil and South Perthshire) (Lab): The success or otherwise of the measures announced today will be seen in the economy and the banking industry in general, but I wonder whether the Chancellor has any formal process to evaluate the success of the measures during the three-year period for which they could operate.
Mr. Darling: Success will be demonstrated by the financial markets beginning to return to a stable position, so that banks begin to lend to each other again, which in turn will be reflected in it being easier for them to lend, and for people to borrow, whether we are talking about businesses or mortgages. There has been a substantial jolt to the system that will take time to work its way through, but the step we are about to take is an important one in that process.
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