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9 Oct 2008 : Column 429

Hugh Bayley (City of York) (Lab): The hon. Member for The Wrekin (Mark Pritchard), who has now left the Chamber, asked about affordability. Does my right hon. Friend take some reassurance from the editorial in today’s Financial Times, which says:

When the Conservatives left office, our national debt was 47 per cent. of gross national product. We have got it down to 37 per cent., which has created, through good economic management, the room for this kind of intervention when it is so necessary.

Mr. Timms: My hon. Friend is absolutely right. We have the lowest level of debt, other than Canada, in the whole of the G7, which means that we are in a position whereby we have the headroom that we need.

Mr. Henry Bellingham (North-West Norfolk) (Con): The Minister will be aware that Norfolk county council is among a number of local authorities with money on deposit with subsidiaries of Icelandic banks. It seems to many of us that, in the circumstances post-Northern Rock, that was not the wisest thing to have done. Did the Treasury give any specific instructions or advice to those local authorities?

Mr. Timms: If a local authority has any concerns about that, I suggest that it contact the Local Government Association, which, as I said, has a meeting with my hon. Friends this afternoon.

Within the package of proposals that we have brought forward, we will ensure that where public funds are involved there will be conditions on remuneration arrangements in banks—we do not want rewards for excessive risk-taking—and to secure and maintain credit to home buyers and to small businesses. The proposals have been widely welcomed. As well as supporting stability in the financial system, they will protect depositors, safeguard their interests and play an important part in the international response to this global crisis. In turn—

James Brokenshire (Hornchurch) (Con): Will the Minister give way?

Mr. Timms: I will make a little more progress before I give way again.

In turn, that should help people and businesses to support the economy in these extraordinary times. Whenever possible, countries should work and act together to maintain stability. My right hon. Friend the Chancellor has agreed with European Union Finance Ministers to work together to rebuild confidence in the banking system. All member states have now committed to immediate steps to enhance depositor protection. My right hon. Friend will also be in Washington this weekend to discuss steps to be taken internationally, including on strengthening the system of international supervision, and the Prime Minister has agreed with other major countries on a meeting of Heads of Government to ensure that international action is taken.

It has been necessary for Government to take decisive steps to strengthen the stability of the banking system. The best solution to a firm’s specific concern is, where it is available, a private sector solution. On 18 September, it was therefore announced that Lloyds TSB and HBOS
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were to merge following market turbulence whereby HBOS found itself in increasing financial difficulties as investors lost confidence in its ability to continue operating. To help to secure the deal quickly in the best interests of wider financial stability, the Government have changed competition rules to allow financial stability to be considered in the scrutiny of this merger. The decision on whether the merger should be referred to the Competition Commission will be taken in the normal way by the Secretary of State for Business, Enterprise and Regulatory Reform in the light of implications for competition and financial stability, and an affirmative resolution will be made to add the maintenance of UK financial stability to the list of public interest considerations in the Enterprise Act 2002.

Mr. Philip Hollobone (Kettering) (Con): This banking crisis followed a severe oil price shock in the summer, with the price of oil reaching $150 a barrel. Since then, it has fallen by 40 or 50 per cent., but the price of petrol and diesel at the pumps has remained stubbornly high. Is the Minister considering the possibility of investigating anti-competitiveness among the oil companies at petrol stations, because this is having a real impact on household budgets?

Mr. Timms: The fall in the price of oil is certainly very welcome. There are also indications that the recent increases in food prices are moderating. However, the hon. Gentleman is absolutely right—those reductions need to be reflected in the prices charged to ordinary consumers.

Sir Stuart Bell (Middlesbrough) (Lab): I hesitate to interrupt my right hon. Friend’s flow, but it had already been interrupted.

Not enough is being made of the fact that there will be strict controls through the Financial Services Authority on compensation packages for the executive directors of these various banks. Let me remind the Financial Secretary of what the Chancellor said:

Can the Financial Secretary repeat that today, because it is being overlooked in the outside world, where there seems to be a view that we are going to skate away from these so-called golden parachutes?

Mr. Timms: I have already touched on that, but my hon. Friend is right to underline it. Indeed, the FSA has made it clear that it will consider remuneration arrangements as part of its assessment of the banks.

Mr. Chris Mullin (Sunderland, South) (Lab): Will my right hon. Friend give way?

Mr. Timms: Let me make a little more progress, if I may.

I talked about our response to the difficulties of HBOS, so let me move on to Bradford & Bingley. Purely private solutions to firm-specific problems are not always available, and there will be circumstances in which the Government need to take steps to deliver solutions with the private sector to ensure that depositors are protected
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and that banking services are not disrupted. Following a period of extreme market dislocation, Bradford & Bingley found itself in increasing difficulties as investors lost confidence in its continued independence. On 17 September, the FSA declared that Bradford & Bingley no longer met its threshold conditions as a deposit taker, and after consultation with the FSA and the Bank of England, and having explored all the options, we announced that Bradford & Bingley’s UK and Isle of Man retail deposit business, along with its branch network, would be transferred to Abbey. The remainder of Bradford & Bingley’s business was taken into public ownership through the transfer to the Treasury of the company’s shares. That included its mortgage book, personal loan book, headquarters and relevant staff. The remainder of Bradford & Bingley’s business will be run down over time—for example, as mortgages are repaid by its customers. The Treasury and the financial services compensation scheme will recover payments in the wind-down. The financial services compensation scheme paid out approximately £14 billion to enable retail deposits covered by the scheme to be transferred to Abbey. The Treasury has also made a payment to Abbey for retail deposit amounts not covered by the financial services compensation scheme—some £4 billion. We fully expect taxpayers to get the full £4 billion back.

James Brokenshire: The Minister has been talking about the recovery of assets. He will be aware that the Chancellor said that Icelandic accounts had been frozen and that steps would be taken to recover the assets. Can the Minister give any further update on the measures that are being taken and on any further discussions that have taken place with the Icelandic authorities on the recovery of those funds?

Mr. Timms: I will come to the position of the Icelandic banks in a moment, but I wanted first to update the House on the range of issues that have emerged.

If there are losses at the end of the wind-down of Bradford & Bingley, the cost will be met first by Bradford & Bingley shareholders and subordinated debt-holders. The financial sector and the Treasury will then share any further losses between them. It is anticipated that the financial sector will bear a significant proportion of any such further losses from future profits when financial markets return to normal. It would require some £4 billion of impairments on the mortgage assets before the Treasury and the taxpayer suffered significant losses. Moody’s credit rating agency estimates that asset impairments will amount to about £1.2 billion. We are confident that, through quick and decisive action, we are doing whatever it takes to stabilise the financial system in the UK while protecting the taxpayer.

Savers at Bradford & Bingley are now savers at Abbey, with the assurance of their deposits being with a major bank. Savings can be accessed in the usual way and remain covered by the financial services compensation scheme. Bradford & Bingley’s branches, call centres and internet operations continue to be open for business as usual. The Government have also guaranteed that for those working in Bradford & Bingley’s headquarters, there will be no compulsory redundancies over the next six months, employee terms and conditions will remain unchanged, and pension rights will be protected.

On the issue that the hon. Member for Hornchurch (James Brokenshire) just pressed me on, acting yesterday on the advice of the Bank and the Financial Services
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Authority, and in light of recent announcements by the Icelandic authorities, the Chancellor took action to protect retail depositors in three Icelandic banking operations in the UK: Icesave, which is a UK-based branch of Landsbanki; Heritable, which is a UK-based banking subsidiary of Landsbanki; and Kaupthing, Singer and Friedlander, which is a UK-based banking subsidiary of Kaupthing bank. That action was taken to ensure stability of the UK financial system and savers’ money is now safe and secure.

Mr. Mark Hoban (Fareham) (Con): For the sake of clarity, will the Financial Secretary say whether savers’ money is protected up to £50,000, or above £50,000?

Mr. Timms: As my right hon. Friend the Chancellor made clear, all the deposits by retail savers will be protected.

Yesterday, the FSA deemed Icesave to be in default. Because of the Chancellor’s decision, no retail depositor will lose any money as a result of the closure of Icesave. The Treasury and the financial services compensation scheme are working with the Icelandic authorities and their deposit insurance scheme to ensure that depositors are paid back as quickly as possible. My right hon. Friend the Chancellor emphasised to the Icelandic Finance Minister that UK depositors in Icesave should have the same protections as depositors in Iceland, and receive their deposits back in full promptly. Arrangements are being put in place to ensure that all ISA customers of Icesave will continue to benefit from the tax-free status of their accounts.

To protect UK economic interests, the Government have frozen the funds and financial assets held by the Icelandic bank, Landsbanki. We fully understand the exceptionally difficult challenges faced by the Icelandic Government and the pressure that they are under. We want to work co-operatively and constructively with them, particularly to ensure that depositors and creditors are protected. We have, though, been unable to obtain complete clarity from Iceland on the position, so the freeze we introduced is a precautionary measure protecting UK interests, and it could be lifted once safeguards are in place to prevent action detrimental to the UK economy.

Julia Goldsworthy (Falmouth and Camborne) (LD): I just have a quick question on the freezing of assets. Could the Financial Secretary clarify under which legislation the assets were frozen? My understanding from reports in today’s newspapers is that the freezing took place under anti-terrorism legislation, and I am interested to know how the Government justified freezing the assets through such legislation.

Mr. Timms: The important thing was to safeguard UK economic interests. The hon. Lady is quite right: the power used happened to be in the Anti-Terrorism, Crime and Security Act 2001, but it was felt necessary to protect UK economic interests.

Yesterday, the FSA also deemed that Heritable and Kaupthing did not meet threshold conditions. In order to provide for as much business continuity as possible, the majority of Heritable’s retail deposits, and the Edge accounts in Kaupthing, were transferred to ING Direct, using the Banking (Special Provisions) Act 2008. ING Direct is working rapidly to ensure business as usual for
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customers. Action by the tripartite authorities protects savers’ money and provides certainty for retail depositors. The transfer of the retail deposit book has been backed by cash from the Treasury and the financial services—

Madam Deputy Speaker (Sylvia Heal): Order. I am afraid the right hon. Gentleman’s time is up.

12.43 pm

Mr. Mark Hoban (Fareham) (Con): Over recent months, we have seen the impact of the credit crunch move beyond the banking system, first to home owners and now to businesses. What was seen as a problem of banks being unwilling to lend to each other has become a problem of banks being unable or unwilling to lend to their customers. In the mortgage market, that has been characterised by lower loan-to-value ratios as banks ration credit, and higher interest rates as the spread between the London interbank offered rate—LIBOR—and the base rate widens. Businesses are seeing comparable issues. For example, businesses have seen their overdraft rates go up from 10 per cent. to 15 per cent. The markets seized up because of concerns about banks’ capital and their ability to withstand losses, which added to concerns about liquidity.

Ann Winterton (Congleton) (Con): There has been much speculation about the mark-to-market rules, which have played their part in creating this instability. Can my hon. Friend confirm that the implementation of mark-to-market rules is a European Union competency?

Mr. Hoban: As I understand it, the mark-to-market rules fall within international accounting standards, which are implemented through EU law. The International Accounting Standards Board is looking at how illiquid financial instruments are valued in the absence of financial markets. That work is ongoing, and we need co-operation between the EU and the United States on that issue because there is a risk of divergent standards being used.

Mr. Doug Henderson (Newcastle upon Tyne, North) (Lab): Following the point raised by the hon. Member for Congleton (Ann Winterton), would the hon. Gentleman agree that it is unlikely in the long term that confidence will be built in inter-bank lending or in consumer depositing internationally until international regulations are established by an organisation such as the International Monetary Fund, so that people would know that if a financial institution did not meet regulations, there might well be something dodgy going on?

Mr. Hoban: I am not sure whether the hon. Gentleman is referring to accounting standards, which are rightly set by the International Accounting Standards Board, or a single global regulator. There is a cross-party consensus that there should not be a global financial services regulator, but this crisis has demonstrated the need for greater international co-operation when it comes to such challenges.

Sir Stuart Bell: I congratulate the hon. Gentleman on his knowledge of competencies and the relationship between accounting standards and European law. He mentioned co-operation with the United States and, to
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enlighten him further, the US Congress is at this moment looking at mark-to-market. Everything will come together in a package one way or another, and I am sure that the hon. Gentleman will welcome that.

Mr. Hoban: My knowledge of international accounting standards comes from the fact that I am a chartered accountant, although I am no longer practising. When looking at mark-to-market, and international moves to deviate from that—my right hon. Friend the Member for Witney (Mr. Cameron) proposed a temporary suspension of mark-to-market last week—it is important that we adopt a common approach. It is unhelpful if the US adopts one approach while UK and European markets adopt another. There needs to be some consistency if we are to have comparability of financial statements.

The seizing up of inter-bank lending has led to illiquidity as banks seek to hold on to cash. As Northern Rock shows, a bank can be solvent, but still face problems because of liquidity. We believe that action needed to be taken to tackle both liquidity and capital and that you could not tackle one without tackling the other. This is where yesterday's £50 billion rescue package is pivotal in its support for recapitalisation and further moves to improve liquidity in the inter-bank market. I want to raise some detailed questions about yesterday’s package in a moment.

Taxpayers will ask us why we needed to do this, who else is sharing the pain and more crucially, how we will know if it has worked. The answer to why we need to do it is clear: financial instability has caused problems for businesses and households, and if action had not been taken those problems could have got far worse. It is also clear, however, that if taxpayers are to bear risk they need to know that others are taking their share of responsibility, too. Banks will have look again at dividends to conserve their capital and there will be little public support for banks paying bonuses when the taxpayer is at risk.

Hugh Bayley: Writing in today’s issue of The Daily Telegraph, the Conservative party leader sought a guarantee that there would be no bonuses for senior executives of banks that have taken the greatest risks. Is that just political bluster or does he have a list of the banks in question? How would the hon. Gentleman’s party propose to ensure that no bonuses were paid? What legislative measures would it put in place to ensure that?

Mr. Hoban: The hon. Gentleman seems to have spent much of his time this morning reading the newspapers.

Hugh Bayley: I do read the newspapers—and so does the hon. Gentleman.

Mr. Hoban: It is good that the hon. Gentleman does that. He should have asked the Financial Secretary how the Government intend to achieve what he outlined, because yesterday’s statement refers to executive compensation packages. There will be an agreement between the Government and banks on recapitalisation using the £25 billion that has been set aside. It would be interesting to hear the Government present their mechanism for that. Perhaps the Financial Secretary could outline the Government’s progress on it.

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Hugh Bayley rose—

Mr. Hoban: I am conscious that many hon. Members want to take part in the debate, and I have already been generous in taking an intervention from the hon. Gentleman.

The package will not work if it simply enables people in the City to breathe more easily and leaves those in our cities and towns no better off. The conditions attached to it are therefore important. How will the Government ensure that the banks’

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