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However, I must tell the hon. Gentleman again that we are not the only country doing this. Unless we are prepared to use the power of government to get lending going again, the problems will simply be compounded as more and more firms get into difficulties—they cannot get access to credit and so get into difficulty—which feeds back into the effect on the banks.

The hon. Gentleman is right—I agree with him—and I said in my statement that we needed to have a thorough audit, openness and substantially more transparency than we have seen in the banking system over the past few years.

The last thing about which the hon. Gentleman asked was the question of monetary policy and quantitative easing, which I mentioned quite deliberately in my statement, because I wanted to tell the House exactly what we are doing. Under the scheme that we are proposing, there would be no increase in the amount of money going into the economy, because for any additional money that the Bank of England puts in through normal market operations, an equivalent sum will be taken out, so that it will not affect the quantity of money in the economy.

I did say, however, that by having this mechanism it is possible that if, at some point in the future, we wanted to use it for monetary purposes, it could be so used, but that is not what we are doing at the moment. I shall repeat to the House what I said this morning: if that policy changes, I shall tell the House. At the moment, although our interest rates are low at 1.5 per cent., we are not in the same position as they are in America, where interest rates are virtually zero. I have been very up-front: I have said to the House that this is exactly what the position is just now, but if the policy changes, I will tell the House.

I would, however, say in conclusion that I am sorry that the hon. Gentleman and the Conservatives could not maintain cross-party support. I really do think that at this time, when we face such serious economic conditions across the world, that all of us should work together to help get credit going again, to help the wider economy, and to help the people of this country and of countries around the world.

Dr. Vincent Cable (Twickenham) (LD): It is clear from the statement today that the crisis in the banking system is even more serious than it appeared three months ago, that the economy is in an even more vicious downward spiral, and that the bank rescue did not work. The Government increasingly resemble somebody who is trying to give the kiss of life to a corpse.

But before we discuss the latest resuscitation techniques, may I go back to the bank rescue that we had? It was a £37 billion recapitalisation: what happened to the £37 billion? Where did it go? The Government tell us that they are putting in place new lending agreements, but when the £37 billion was put in we were told that there was conditionality and that there were lending agreements. What happened to them, and where did the money go? Why was no inventory of bad debts taken at that time?

Is not the truth of the matter that instead of lending the money, as the Government and the Treasury wanted, the banks held it in reserve, as required by the Financial Services Authority? The significance of the FSA’s statement
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today is that it got it wrong and is now having to change its instruction, which undermined what the Treasury, the Government and the taxpayer were trying to achieve.

On the new £100 billion guarantee scheme, how is it possible to insure enormous amounts of bad debt if the insurer does not know the risk and if the risk cannot be evaluated until we have a valuation of the bad debts, which nobody yet has? Are the Government not operating the scheme in a falling asset market, with potentially enormous losses coming through on commercial property, for example? This morning, one of the brokers in the City estimated that in a falling asset market, the £100 billion insurance scheme could produce losses for the taxpayer of £30 billion to £40 billion. We are talking about an amount the size of the defence budget, which could go down the pan if this is wrongly timed and wrongly operated.

May I get to what I think we all agree is the central issue, which is how we get new lending going to sound commercial and household borrowers? I welcome the change of direction at Northern Rock; it had to happen. But the key is what the Government are doing with NatWest-Royal Bank of Scotland. The Government have increased their share from 58 per cent. to 70 per cent. Is that not nationalisation in all but name? Why do we not just say so, and why do the Government not spell out the implications of acquiring a bank whose balance sheet is bigger than the British economy? Why do they not explain to us, for example, why this bank managed to lose £2.5 billion through lending money to a Russian oligarch? This is not just about the past. I have been corresponding with the chairman about the bank’s loans to another oligarch, Mr. Deripaska. The chairman tells me that it is a commercial matter—but it is not a commercial matter but a public policy issue. Another public policy issue is what happens to the hundreds of billions—not tens of billions—of toxic paper in the investment bank, because the taxpayer now has responsibility for that.

I want to conclude on this point. The Government now effectively control one of the largest banks in the world. They will almost certainly have to put more money in, and they may well acquire other banks. Why do they not now focus on the issue of how to get those banks—those enormous institutions—channelling funds into the British economy, and concentrate on that single-mindedly as their major objective?

Mr. Darling: I agree with the hon. Gentleman to this extent: the key for us, as for other Governments, is to get lending going into the wider economy. But I disagree with him in that I think that that has to be done not just through one particular bank, but through the banking system in general. The proposals that I have made aim to do that.

The hon. Gentleman asked a number of questions. He asked about the £37 billion. That was used to buy shares in the Lloyds group of banks—Lloyds-HBOS—and also in RBS. We still have those shares, and in time, when conditions improve as we get through this, our intention is to return that back on a commercial basis.

The FSA has made changes to the rules, but it can do only so much; it is also necessary to reform the Basel agreement, which governs the international capital ratios to which the hon. Gentleman referred. He was not the only one calling for that change; many, many people have been doing that.

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The hon. Gentleman also asked about the agreements with RBS. The majority shareholding in RBS was acquired by the Government in December, and overall lending by RBS did increase as part of that wider agreement. Indeed, today, in return for converting our preference shares into ordinary shares, RBS has agreed to extend its lending by £6 billion. In relation to the other bank in which we have a shareholding—the Lloyds group—it is only today that that new organisation has come into force because of the procedures that had to be followed through. I agree with the hon. Gentleman and the hon. Member for Tatton (Mr. Osborne) that it is important that we, and indeed banks, are clear about what exactly is on their balance sheets. Clearly, in the case of RBS, the decision to acquire ABN a couple of years ago, with all the problems that have followed from that, caused that bank some very substantial problems.

If we are going to enter into an insurance scheme, or any scheme anything like that, we need to be clear exactly what the exposure is. The hon. Member for Twickenham (Dr. Cable) asked why we do not know today—but he answered that question to some extent himself. That process is difficult when conditions are deteriorating, and it takes time. However, I thought it right to tell the House what the Government’s intentions are in that respect. I agree with him that the key thing is to ensure that we take action to get borrowing going into the economy, but that has to be done through the whole banking system, not just part of it.

John McFall (West Dunbartonshire) (Lab/Co-op): I commend the Chancellor for today’s initiatives on top of the £37 billion that the Government gave, which most definitely kept these banks alive, albeit that some are on life support today. Let us be clear that the reason for today’s injection is the lack of openness and honesty by the banks on the amount of bad debts that they have on their books. That amount has had an almost fatal influence on the lack of confidence in the financial sector. If the steps that the Government take today do not free up lending—after all, what are banks for, if they are not there to lend?—can my right hon. Friend assure us that he will protect the taxpayer’s interest, as Sweden did, as the shadow Chancellor said, by taking a 100 per cent. equity stake in the institutions that have failed their shareholders, failed their customers and failed the taxpayers in this country?

Mr. Darling: I am grateful to my right hon. Friend. He is absolutely right that the Government have to continue to do whatever is necessary to get credit flowing. As I said before, my guess is that there is no single solution, and a range of measures will be necessary. However, it is absolutely imperative because our recovery, and the recovery of economies throughout the world, depends on credit flowing again.

Mr. Iain Duncan Smith (Chingford and Woodford Green) (Con): We know that RBS shares are falling like a stone after its announcement today. What concerns many people out there is that the Government took a majority stake in that bank back in December, yet never seemed to know anything about the level of bad debt that it was about to announce less than a month later. How can the Chancellor genuinely reassure the public out there that what he is now proposing, with even more money—billions more—going in, with, it appears, even less knowledge than before, is not good money going after bad?

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Mr. Darling: The Government acquired their shareholding in RBS about five weeks ago. A new management team was put in, and a new chief executive, and one of their jobs was to go through the books and find out what their liabilities were. Until that time we did not have the power to go in and conduct that examination, because it was a privately owned bank; it was not owned by the state. That has been possible only since we got that shareholding and put in the different team. Of course, the reporting requirements of the markets mean that these things are reported to the stock market rather than to the House of Commons. I entirely agree with the right hon. Gentleman that very many people in this country are justifiably angry about what has happened. We need to sort the matter out, and we need to ensure that we can sort out the particular problems in the banks that we own, but above all we need to ensure that we can get credit flowing again.

Mr. Ian McCartney (Makerfield) (Lab): I thank my right hon. Friend and support his statement today, particularly his clear stand about an obligation on banks to start lending to our citizens and to our companies in the wider economy. In his negotiations with banks, what obligations will he place on them to deal more fairly with borrowers from low-income families? For the past few years, banks have failed abysmally to offer those people proper facilities and resources to bank in an adequate way, leading them sometimes to become the victim of loan sharks. Can he give some indication of what banks will now be expected to do to assist this huge group of people in Britain who are suffering very badly in the current crisis?

Mr. Darling: My right hon. Friend has a long and distinguished record of putting in place measures to help people on low incomes who have found themselves in the hands of loan sharks. There are two aspects to this issue. One relates to the specific and quantifiable commitments on increasing lending. The other thing that irritates people is the banks’ conduct of business and the way in which they communicate with customers. Many people—I have constituents who have had problems like this—say that they have had a perfectly happy existence with their bank for many years, but then suddenly get a letter saying, “By the way, your facilities have been withdrawn or changed—and here’s a fee.” My right hon. Friend is absolutely right. It is not just a matter of the lending conditions and getting lending going; customers have to be treated fairly. Institutions often fall over themselves to sign people on, but they need to show exactly the same consideration to people who, in some cases, have been customers for many years.

Adam Afriyie (Windsor) (Con): Every sensible business in the United Kingdom and across the world will conduct due diligence before purchasing another organisation, so why did the Government not conduct a sufficient level of due diligence? Will the Chancellor apologise to the British people for losing £17 billion of their money?

Mr. Darling: If the hon. Gentleman just thinks about it for one moment, he will remember that in October, the banking system and individual banks were facing collapse. I suppose we could have said, “Let’s consider our position. Let’s wait for several weeks or months
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while we carry out some due diligence and see what happens.” We were in a position last October where we had to act immediately and decisively. I remind the hon. Gentleman that at that time the Conservative party supported us; I appreciate that its position is different now. We had to act decisively, for reasons that most people understand.

John Reid (Airdrie and Shotts) (Lab): I am grateful to the Chancellor for his past courtesy in correspondence and in his offer of meetings. I welcome in today’s announcement the embedding of the principle that there must be a quid pro quo: if guarantees have been given by the taxpayer, transparency and legal obligations are incumbent upon the banks. Will he consider how he might generalise that in his proposals for international reform, for instance, through international monetary exchanges? Market transactions would continue, and they would be balanced by central bank guarantees, but only in return for a greater degree of transparency that would allow some regulation, and a financial contribution from the transacting parties that ultimately could provide reinsurance to replace Government guarantees. Would that not be a better way of internationally combining the market with central Government assistance and guarantees?

Mr. Darling: My right hon. Friend has indeed been in correspondence with me on this subject. I repeat that I would be very happy to meet him to discuss it further. As I said in that correspondence, the question turns on just how much risk the state should be prepared to take on what might be a long-term basis. A balance has to be struck. In the position that we face, every Government will have to do things that they might have thought unimaginable a couple of years ago. It would be foolish to rule out from the start all sorts of things that might be necessary or possible in the future, but a balance has to be struck between what risks we can reasonably expect institutions to take on and those that the state might take on. I am happy to pursue correspondence with my right hon. Friend or to have a discussion with him, should he wish to do that.

Mr. Michael Fallon (Sevenoaks) (Con): Does the Chancellor not recall, after the first bank bail-out on 13 October, when I specifically asked what due diligence there had been in respect of his £37 billion investment, he replied that “a cautious view” had been taken of the banks’ liabilities. If he was that careless about the £37 billion, what assurance have we got that the next £50 billion is going to be better value for the taxpayer?

Mr. Darling: As I have just explained to the hon. Member for Windsor (Adam Afriyie), we had to take action very quickly and in a very short period. I think that the hon. Member for Sevenoaks (Mr. Fallon), like most of his colleagues, supported us at that time.

Frank Dobson (Holborn and St. Pancras) (Lab): I welcome my right hon. Friend’s statement, but does he accept that this bail-out of Tory bankers will be acceptable to the people of this country only if they can be assured that there will be strict national and international regulation of banking to prevent such a catastrophe from occurring
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again, and severe constraints on pay and bonuses in all the banks that are receiving public money? If they want public funds, they should be subject to public pay constraints.

Mr. Darling: As my right hon. Friend knows, the banks in which we have taken shareholdings do have restrictions on the pay of their boards of directors. I agree that there needs to be an overhaul of supervision and regulation, and that rules need to be toughened up to reflect the reality of how banks are now developing in this country and others. I certainly agree that far greater international co-operation, so that some of these problems can be spotted and dealt with far earlier, is even more urgent than it was when we first raised the subject in the international community, about 10 years ago.

Mr. Hugo Swire (East Devon) (Con): As part of his due diligence, has the Chancellor discovered what percentage of Rusal is currently pledged at the Royal Bank of Scotland, and does it cause him any concern?

Mr. Darling: I would have to write to the hon. Gentleman on that.

Mr. George Mudie (Leeds, East) (Lab): When the Chancellor brought forward the £37 billion, it was supported in the House because it was seen not as a bank bail-out but as a way of helping the real economy. The bankers took the money and let the Chancellor down. He is now giving them more money. Can we be assured that we have guarantees this time that we did not have last time, and will he spell them out to the House? We need to know that the guarantees are there, and that the bankers cannot let the Chancellor and the people of this country down again.

Mr. Darling: The purpose of the recapitalisation in October was mainly to ensure that the banking system was able to function. [Interruption.] I know that that is what it was, because that was precisely why I agreed to it. In return for that, the banks in which we took shareholdings had to agree to maintain their level of lending. RBS, the only bank in which we have had such a shareholding for the past five or six weeks, has increased its lending. It has agreed today, in return for converting the preference shares, to an extra £6 billion of lending. The other group in which we have taken a shareholding, the Lloyds group, is being listed as a single bank for the first time today, so that is when the agreement starts.

My hon. Friend makes a good point about ensuring that we have binding agreements with any bank that uses such facilities, and it is important that we do that. The object is to get money flowing through the economy and providing people with the credit that they need.

John Mason (Glasgow, East) (SNP): The Chancellor said that over the past 10 years, foreign banks had contributed a huge amount of lending for both mortgages and corporate loans. Can he give us any assurance about whether that lending is to be replaced by foreign banks or UK banks?

Mr. Darling: The hon. Gentleman is right to say that a lot of lending came from foreign banks. Indeed, it came from what his colleague the First Minister of
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Scotland referred to, until recent times, as “the arc of prosperity”. Unfortunately, the arc of prosperity is not providing the level of funding that it did in the past. Part of my announcement today, implementing the recommendations of the report that I commissioned from James Crosby, is that we will guarantee additional lending for both mortgages and businesses, so that we start to fill that gap. Of course, we will do so completely openly, so that people can see what those guarantees are based on. The problem in the past was that a lot of securitised markets were so opaque that people did not know what was going on, which led to a substantial part of the problems that we all now face.

Ann Clwyd (Cynon Valley) (Lab): May I give my right hon. Friend an example of how the banks are treating people who should be some of their more valued customers? A constituent of mine who runs the last medium heavy engineering company in the south Wales valleys was told by Barclays bank just before Christmas that it would be cancelling a temporary overdraft facility, rejecting an application for a Government-guaranteed loan without properly considering it, and cancelling a mortgage offer on the day when it was to be completed. He says:

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