Examination of Witnesses (Question Numbers
200-219)
MR NICHOLAS
MACPHERSON AND
MS LOUISE
TULETT
22 OCTOBER 2008
Q200 John McFall: Can I pick up a
point Mr Cousins said when he mentioned about the mortgage market
getting back to 2007 levels? You and I know that the house purchase
market has collapsed this year and the three-month arrears are
up 23%. When are we going to get back to the 2007 market level?
We cannot have securitisation because the money is not there for
that, so let us have clarity on what we mean by this 2007 lending?
Do you agree with the points I have made?
Mr Macpherson: I agree, we are
not going to get large amounts of securitised lending in the current
circumstances, but I do think, with the banks potentially now
being much better capitalised, it is perfectly reasonable to ask
them to make available products and, ultimately, funding to a
much higher level than is the case at the moment. The deal mentions
2007. In 2007 obviously there was a period earlier in the year
when they were all expanding and then in the latter half of the
year when they were contracting, but I think that is a reasonable
ask. These banks announced these proposals and they are committed
to doing it, and I hope we can hold them to account and, indeed,
in due course this committee might hold them to account.
Q201 John McFall: I understand that,
but think we have got to be realistic, Mr Macpherson, and the
fact is that, given the market has collapsed, given the three-month
arrears, realistically, when are we going to get back to half
that level? Let me tell you, I have spoken to quite a number of
banks and institutions, and this is not me making this up, this
is them telling me what the situation is you. So liquidity for
banks, which is good, which is welcome, is going to be used in
many other areas.
Mr Macpherson: Of course, and
the other thing which is mentioned in the deals is SMEs. It is
precisely because the current level of mortgages is so low, it
should not be terribly difficult for them to get it higher, but
whether we will ever get back to the days of 2005, 2006, early
2007---.
Q202 John McFall: But you know that
we will get back to that.
Mr Macpherson: But not in the
same way. The Governor of the Bank of England made the same point
yesterday. It will be different. No doubt there will be new products,
but we have got to encourage those banks to begin to turn the
current contraction round.
Q203 John McFall: But you would not
want to agree with me that we would be lucky to get back to half
the levels?
Mr Macpherson: You have probably
gone deeper into the analysis than I have, but I think this is
going to be challenging.
Q204 John McFall: The liquidity from
the Government for the money guarantees, that is good, but we
have got to ensure that that gets into the system. Are you ensuring
that?
Mr Macpherson: Yes, and it is
already being taken up. Some banks have already made use of the
guarantees. We are very keen to make that happen. We have mentioned
the figure of £250 billion, but that is very much an estimate.
If we needed more we would be prepared to do more.
Q205 John McFall: If you are alert
to that and keep being alert to that, because the feedback I am
getting is maybe it is not getting into the system as quick as
it should, good policy that it is.
Mr Macpherson: Yes. The key thing
is to ensure that the banks are lining up. If they came along
and sought to have massive guarantees all on the same day, it
does get problematic, but I think the banks have talked amongst
themselves about how they can efficiently access it and we are
working very hard and the Debt Management Office which is managing
this, and I think, is do a really good job.
Q206 Chairman: To clarify, if the
2006-07 levels of housing activity were only reached on the basis
of all these self-certified mortgages under 25%, why would we
want to go back to them?
Mr Macpherson: I do not want to
get too hung up on that. I would not want to see a repetition
of some of the extravagant lending of a couple of years ago or
so, and I would want all banks actually to approach these issues
on the basis of rather better risk-management than they have in
the past, but the fact is that the capacity of the economy continues
to grow, potentially, and over time people's incomes will go up
and it is not unreasonable to expect that people with decent credit
records should be able to access lending in a reasonable way.
Q207 Mr Love: If I may so, Mr Macpherson,
you are not doing much of a job of defending the Government's
stated position of saying that the availability of finance should
be at the levels of 2007. Would you agree?
Mr Macpherson: I do not know if
I am here to defend, I am certainly here to explain government
policy, and what I am saying is the Government wants to use its
position as a potential shareholder in these institutions really
to push the banks to make credit available. We are making capital
available; we are making guarantees available; the Bank of England
is providing liquidity. In my view, it is a perfectly reasonable
ask to expect these banks to lend. What we do not want them to
do is lend in an incoherent way. The challenge through this period
is to keep the pressure on them to lend but also to put pressure
on them to run their banking arms in a way which takes the right
attitude towards risk.
Q208 Mr Love: I want to separate
out the small business part of that because I think it is answered
and focus on mortgages. From what the Chairman has said and indeed
Mr McFall, it is likely that there will be a significant reduction
in lending. It is already obvious from the statistics that have
come out and from what the CML have said. How are you going to
hold them to account? How are you going to monitor whether they
achieve what it is you have asked them to do?
Mr Macpherson: They made commitments
in the announcements last Monday that they would make this funding
available. We are going to monitor what they are up to very closely.
We have also made clear that the government will appoint directors
to their boards. I would expect the government appointed directors
to have a role in ensuring that these issues are being discussed
at board level. We have also made clear that these banks will
report annually on for example what their approach to SMEs is.
They have also undertaken to do things around for example repossessions
and we want to ensure that we minimise some of the potential social
cost of a housing downturn. In addition we are going to have this
arms' length body which I hope will be playing an active role
in these areas and indeed will have people whose job it will be
24 hours a day to ensure that the banks are—
Q209 Mr Love: Let us ignore the point
the Chairman made about do we really want to sell mortgages in
the way we did in 2007. If we do decide that we want to spend
that amount of money, then you would be asking the banks to go
out as they did in 2007 and sell, but all the evidence suggests
that that is the last thing they are going to do. How are you
going to keep them up to the mark?
Mr Macpherson: One way or another—it
may not be through us—these banks are raising a great deal
of capital. Some of that is obviously necessary to deal with previous
bad debts but on any basis the British banking system is going
to be very well capitalised from the turn of this year. It really
should be in the power of the banks to make lending available,
to ensure that there are products which homebuyers and businesses
can access. If there is no demand there, there is probably not
a huge amount we can do. Supply can create its own demand and
I see this as a critical part of getting the economy back to a
sensible place. Alongside that, interest rates have come down.
I certainly do not want to cut across the Bank of England's independence
but the market is suggesting that interest rates will come down
a whole lot further in the coming period. Commodity prices have
been falling extraordinarily quickly over the last six weeks or
so. Purchasing power will come back. Demand will come back and
the critical thing is to ensure that the supply is there to meet
that demand.
Q210 Mr Love: Let me come on to the
issue of repossessions. I want to pick up what Mr Cousins said
earlier on. You are asking those banks that are seeking funding
from the recapitalisation fund only to repossess property as a
last resort; yet all the figures that are coming out suggest very
strongly that Northern Rock, as a matter of policy to redeem some
of the funding that you set as a priority, are repossessing at
a much higher rate. Is there not a contradiction there?
Mr Macpherson: Northern Rock have
repossessed more. That is true, although I am not certain that
their rate of repossession has increased. I have the figures in
front of me. On 31 December last year it was 2,215; 30 June, 3,710;
30 September, 4,201. It rose by 1,500 in the first six months
of the year and 500 in the last quarter which if anything suggests
a slight deceleration but it is still very serious. The issue
is less about how many properties the banks possess; it is more
about what they do with the properties when they have ended up
possessing them. For example, if they get into the rental business
or, with the government's help, the shared equity business, there
is a potentially easy way out. It is never easy and I do not underestimate
the personal and social costs this creates but there are several
things which the banks can do which go with the grain of helping
the individual in question get out of the problem that they have.
Then there is the approach which involves literally turfing them
out of the property which creates massive problems all round.
That is a potentially rich seam which we have to start mining
in the coming period to ensure that there are ways in which it
would result in a sensible outcome, although I would not say it
is a win win, because this is hardly a victory. We have been talking
to the Council of Mortgage Lenders. We are talking to banks and
I am quite certain this Committee will want to come back to this
issue. It will be a priority for us.
Q211 Mr Love: The chairman of Northern
Rock said to us when he came before the Committee that it had
a good mortgage book and we should not assume that there was a
lot of sub-prime activity in there. Therefore, you would not expect
their level of repossessions. We are asking all the other banks
to respect the guidance that is given by the FSA to only repossess
as a last resort. Are we giving that same advice to Northern Rock
and are we monitoring it, or are we saying that the first priority
for Northern Rock is to pay back the loans to the government?
Mr Macpherson: Northern Rock is
not a special case where we want it to be more vigorous in pursuing
people behind in their payments than other banks. We would expect
them to operate in line with the code and I think they generally
are. They did have a good mortgage book but sadly what looked
like a good mortgage book a year ago in any bank looks slightly
less good now and that is the challenge across the industry and
the challenge for the economy. Your point is absolutely right.
This is important. We are set to own a good proportion of the
banks and this is an issue of huge importance. I am sure you will
want to come back to this on many occasions and I think you have
the Chancellor and others appearing before you very shortly.
Q212 Mr Brady: Last year when I asked
you about the Lisbon goals, you agreed that it would be challenging
to meet them by 2010. Given that there is no explicit target of
making progress towards the goals in the CSR targets, has the
government given up?
Mr Macpherson: No, it has not
given up. I think the spirit of Lisbon is more important than
ever. The experience of the last year is that it is even more
important that Europe is making progress on productivity, employment,
that it is getting a more sensible approach to regulation, that
it is getting a single market really operating as a single market.
And the recent experience of banking reinforces that even more.
We have not given up but some of the rather optimistic targets
in Lisbon—I cannot remember whether it was 1998 or 2000,
but whenever it was—clearly are not going to be met.
Q213 Mr Brady: Would we not be more
likely to make progress if there were some targets?
Mr Macpherson: If only setting
a target would deliver the outcome. Sometimes it can when you
have levers but the target we had on Lisbon goes back to an earlier
phase in government targeting. From a management point of view,
if you have an objective, it is kind of nice to have a target
because it concentrates the mind. With things like inflation or
indeed public finances, it is generally very easy to tell whether
you are making progress or not. This is one of the more amorphous
areas and, although Lisbon matters, my guess is that, in terms
of what the Treasury does as a finance and economics ministry,
it will be about focusing on the immediate challenges of now rather
than spending all our time looking at a particular target around
Lisbon.
Q214 Mr Brady: Lisbon remains an
aspiration?
Mr Macpherson: It remains an aspiration
and I think it is really important. It certainly informs our approach
to Europe which is to try to get a more dynamic market economy
but we are not going to hit that target.
Q215 Mr Brady: During the last year,
you commissioned a report into the efficiency of the Barnett Formula
which is due to be published I think in June. Has that work being
completed?
Mr Macpherson: I think it is continuing.
Q216 Mr Brady: When is it going to
be completed?
Mr Macpherson: I hope reasonably
soon.
Q217 Jim Cousins: Not too soon?
Mr Macpherson: It is the sort
of thing you might want to ask my colleagues when they come back
at PBR time but I am happy to send you a note on it.[2]
Q218 Mr Brady: We might hope for publication
before the end of the year?
Mr Macpherson: I could not say.
I just do not know.
Q219 Chairman: One of the other targets
is the government's child poverty target. In your report you report
slippage on this target and the Child Poverty Action Group last
month said it would take another three billion to get this target
back on track. Are they going to get the three billion?
Mr Macpherson: I do not know.
That will be a decision for future pre-Budget reports and Budget
and spending reviews. Clearly, resources are always constrained.
They are likely to be rather more constrained I would imagine
in the coming period but I think it is fair to say that even in
the last Budget, when resources were reasonably thin on the ground,
quite a lot of money was allocated to child poverty. If you look
at the last three PBRs and budgets, the measures contained therein
were to lift something like half a million children out of poverty
compared to what otherwise would have happened. It is a challenging
target. There are a lot of forces at work in a global economy
which are stretching the income distribution. I think we have
done quite well to make progress on child poverty. It is not just
me who thinks that. There was quite a good report yesterday from
the OECD which says that Britain has made some progress in this
area.
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