Examination of Witnesses (Question Numbers
260-276)
RT HON
ALISTAIR DARLING
MP, MR DAVE
RAMSDEN, MR
MARK BOWMAN
AND MR
ANDREW HUDSON
30 MARCH 2010
Q260 Nick Ainger: But, if you look
at the figures on page 42, the gross figures which you are going
to use again, there is only a small increase for the Lloyds Group
from £38 billion to £44 billion and for RBS from £41
billion to £50 billion, but in fact the net lending for RBS
last year actually fell by £6.2 billion. Are we going to
see genuinely a significant increase in the availability of credit
to business by using these targets? How were the targets actually
arrived at?
Mr Darling: Let me go back to
last year, first of all. Those targets, if you recall, were agreed
over the weekend and the days ensuing the recapitalisation, so
what we were doing was putting in place something very quickly,
we had never done this thing before, net lending was something
that we could measure and we thought it was the right thing to
do. Let me tell you what happened last year, if you look at RBS.
RBS lent out, its gross business lending, £41 billion. The
repayments were £59 billion. Now, with the best will in the
world, a bank can hardly say to someone, "Sorry, I don't
want you to repay your loan", and indeed in RBS's case I
would be very distressed if it did say that. Now, that gives you
your net lending of minus 6.2. For Lloyds, it was 38 gross and
they had 33 repaid, so it was a slightly better position, but
overall, as you rightly say, the net figure was negative. Now,
this year the RBS figure for gross lending is 50, Lloyds 44, total
94 billion and then, on top of that, there is additional residential
lending. What we did was to try and reach an estimate of what,
we thought, the banks could lend, given their general positions,
and, what we thought, the SMEs' requirement might be and that
is how we reached those figures, but the gross figures, I think,
are a better measure of what is going into the economy, if you
like, although obviously you do need to keep your eye on what
is happening next because that represents the stock of what is
out there.
Q261 Nick Ainger: But it is the net
lending that we are interested in.
Mr Ramsden: Can I just amplify
what the Chancellor is saying because I think in last year's economic
conditions, we saw a very large fall in business investment reflecting
the kind of global collapse in confidence, so if you could postpone
an investment decision and, if you chose to, to repay some borrowing,
then many businesses did that. What we are seeing in the future
is that we expect that business investment will start to recover,
so you should see fewer of the kinds of repayments that we saw
last year. As confidence returns, there is less uncertainty and
you are going to be thinking, "Do I repay my debt or do I
invest in terms of future capacity?" so that is how we imagine
the context will change as well, which is the backdrop to these
commitments.
Q262 Nick Ainger: But the incentive
to invest is limited in the main to the annual investment allowance,
which I appreciate is a great benefit to a small business, but
for large businesses, who are looking to invest tens or hundreds
of millions in certain instances, it is not a great incentive
because the maximum allowance is only £100,000.
Mr Darling: That allowance is
essentially aimed at the medium and smaller-sized firms. If you
are dealing with a large multinational, the £100,000 is not
going to make much difference here or there. Last year, we raised
the annual investment allowance for larger firms, and that was
a one-off thing,[1]
and of course firms can offset investment decisions against the
tax they ultimately pay. Coming back to the bank lending, larger
firms, generally speaking, last year found it easier to raise
money on the bond market, for example. I think the economic priority,
therefore, in the Budget was the smaller and medium-sized firms,
which is why I doubled the annual allowance which directly affects
them. Coming back to your bank lending point, there is a number
of things I would say. Firstly, there are, inevitably, in a recession
a number of things in play. Some people are paying back their
loans because they think, "Well, I can repay it, so why should
I be exposed to the bank when I don't need to?" As Dave Ramsden
was saying, equally, one of the things that we have had to wrestle
with in the last year is that you get firms saying, "Well,
I'm not sure whether I will invest this year because there is
a lot of uncertainty about". What you want to be sure of
though, as we come through into recovery, is that firms say, "Well,
actually I'm going to take on someone or I'm going to buy a new
piece of plant or machinery", and this is something for which
they need to go to the bank, and will the money be there? I think
all of us have to deal in our constituency experience with cases
where firms will come to you and say, "Look, the bank's being
really difficult and I can't get lending", and, when you
look into these things, sometimes they are absolutely right, and
I can think of a number of cases in my own constituency where
I have been able to persuade the banks to take a different view
and there are other cases when you discover something about the
firm which was not immediately apparent and you say, "Well,
I can see why it might be more difficult". That is why we
set up this independent mediation service to try and break through
some of that.
Q263 Nick Ainger: I will come on to that,
but, coming back to the banks, obviously a significant proportion
of those repayments were not volunteered necessarily by the businesses
involved, they were actually demanded by the banks because they
were trying to reduce their exposure and so on, so it was not
just a voluntary situation. Let us move on. What sanctions have
you got if RBS and the Lloyds Group do not meet these targets?
Mr Darling: We have binding agreements
with the banks to ensure that the gross lending targets are met,
and I have every reason to believe they will be met. They are
stretching, but I think they can be delivered. What I want to
do though is to introduce an independent service, an adjudication
service, so that all the problems that come up where people say,
"I've got this firm" or—
Q264 Nick Ainger: We will move on
to the adjudication service, but I just want to know, if RBS and
the Lloyds Group do not meet the targets that you have set them
for gross lending, and we do not know what the net lending is
going to be, what sanctions are there?
Mr Darling: One of the sanctions
is on the remuneration of boards. As you will see, it is set out
in the Red Book, one of the things that we can do to concentrate—
Q265 Nick Ainger: That is one of
the things, you can ask the Remuneration Committee?
Mr Darling: To take that into
account, yes.
Q266 Nick Ainger: What if they do
not?
Mr Darling: They are required
to take that into account so that, if the bank does not actually
meet its targets, then they have to do something.
Q267 Nick Ainger: I suppose they
could take £1,000 off somebody's bonus?
Mr Darling: One would hope that—well,
bonuses are being deferred anyway. I think there is no reason
to believe that they would not take the instruction issued to
them seriously and not just regard it as some sort of token thing.
I really am very, very focused on the fact that bank lending is
pretty critical to this sector and it is important actually, if
it became clear that these targets were adrift, it is something
that we would want to be dealing with through the year and not
wait until the end of the year and discover that it had all gone
wrong. At the moment, the Department for Business and Innovation
gets monthly figures, so it knows exactly what is going on and
meets the banks on a very, very regular basis. Remember, it is
not just the ones that we have got shareholdings in, but it is
other banks as well.
Q268 Nick Ainger: Let us move on
to the small business credit adjudicator. Obviously, any small
business that feels that it has been treated unfairly by a bank
wants pretty rapid action because often they are facing possible
foreclosure or whatever. What guarantees can you give that the
adjudication service will respond quickly?
Mr Darling: I hope that it will
do. It has to be legislated for because they need power to get
access to bank information and we want to make sure that it is
properly resourced to do it. They have a system like this in France
and they have had it for about a year now. It does not mean obviously
that, if you definitely go to the adjudicator, you will get your
loan, but it means that somebody independent will be able to form
a view as to whether or not you have been treated reasonably.
Q269 Nick Ainger: What happens though,
and it is already happening in certain sectors, where banks either
are very reluctant to lend, as certainly in the past, perhaps
to the construction industry, for sensible reasons, or they are
factoring into the interest rate that they are charging on the
loan or the charges on the loan the element of risk? If a building
company, which is completely viable, finds its bank does not want
to lend it anything or is charging it what, it feels, is an extortionate
interest rate, what would happen with the adjudicator in the circumstances
like that?
Mr Darling: The adjudicator has
to take into account, or will have to take into account, all relevant
matters. Take your construction company. I met someone recently
in the north-west of England who had built a very high tower block
full of luxury flats which, as far as I could see, were on the
market for £200,000 going up to £700,000, depending
on the view that you wanted. He was complaining that his bank
was not prepared to bankroll him for a second block of flats,
and it did occur to me that the bank perhaps was not being entirely
unreasonable as he had not yet let the first block. Now, I give
that as an example where it just struck me, and I think the guy
actually conceded, that the bank might have had a point. There
will be occasions when a bank will say, "Look, you might
have sold those flats five years ago at that sort of price, but
you're never going to do it now and, therefore, if I'm going to
lend you money, I'm not lending it to you at the rate", or,
if you are HBOS, they might have come to the conclusion of, "Rather
than charge you precious little, we will actually have to charge
you what is now an economic rate", HBOS having lost a fortune
on very conventional lending.
Q270 Nick Ainger: But, Chancellor,
you told us earlier, I think, in response to Mr Mann, about the
need in this country for us to build more houses. The construction
industry is very important, but a fear of many small businesses
involved in the construction industry is that the banks will not
lend to them.
Mr Darling: I entirely take your
point about the construction industry, and equally I agree with
you that there are occasions when banks have acted unreasonably.
What we cannot do, as the Government, though is to say, "As
a matter of course, you must lend in a particular sector, no matter
how you evaluate that risk". If you do that, you will get
into precisely the problem that HBOS spectacularly, Northern Rock
and the housing market got themselves into where they were making
loans on terms and conditions that made no sense whatsoever and
resulted in bringing down those institutions.
Q271 Nick Ainger: The final point
on that though is that there is a real problem. We want to see
the construction industry, particularly home-building, expanding,
yet we have this problem of banks being reluctant to lend in that
sector. How do you address that?
Mr Darling: We do have that problem,
and I think there is a number of things you can do both in relation
to support for the housing sector, the public sector, in bringing
forward the spending and so on and also the general conduct of
the economy to try and bring about conditions where demand increases,
but I cannot say to the banks, "You must lend this gross
amount". What, I think, is more difficult, subject to the
point I make about the adjudication service where people can say,
"You are acting reasonably" or unreasonably, is that
there will be propositions which come up where the Government
cannot really form a view as to whether that was a good prospect
or whether it was not a good prospect, and I do not see a way
of getting round that.
Mr Ramsden: We have to consult
on how this adjudication service is going to work, but it is likely
that, once it is on a statutory basis, it will have the power
to penalise banks where it finds that businesses have been treated
unfairly, and that can include fines.
Mr Darling: But it does not get
away from the fact that commercial decisions have to be made,
and that is always going to be difficult. Your idea of a good
loan and my idea of a good loan or whatever, they may be different
and that is something where I really do not want to raise people's
expectations that somehow there will be a problem in the future,
whatever your prospects are.
Q272 Mr Brady: Chancellor, this year
the UK contribution to the EU budget will be £4.5 billion
higher than it was two years ago. How do you justify that to the
British taxpayer?
Mr Darling: I think it was part
of an agreement that we reached about three years ago in relation
to the funding of Europe generally. I suppose the answer to your
question is that one of the underlying principles of the European
Union is that we do help the developing countries grow because
in time we will get the benefit of that contribution. There are
other areas though of our contribution to the European Union,
particularly the Common Agricultural Policy, for example, where
the position of successive British governments, ours included,
is that we believe that it needs further and substantial reform.
However, there are many countries in Europe who, for reasons that
we know, take a different view, but essentially we are part of
the European Union and we do pay a contribution into it, but we
get a lot back, not least because it is by far our biggest trading
partner.
Q273 Mr Brady: How much of that extra
£4.5 billion is as a result of giving up part of the British
rebate?
Mr Darling: Well, we have maintained
the position so far as that is concerned. If you want a breakdown
of that, I will have to write to you.[2]
Q274 Mr Brady: I would like to know exactly
how much is attributable to that decision.
Mr Darling: I will happily give
you a breakdown of where our contributions go.
Q275 Chair: Chancellor, can I thank
you very much for your evidence to us this morning. This will
be the last appearance of yourself and your officials, so can
I thank the Department and the officials, who have always been
very helpful and serious in their responsibility to the Committee
over the years, and yourself because you have always been willing
to come at any time to the Committee, and we are grateful for
that. I think the Committee would all agree with me that, in a
personal sense, we wish you well over the coming weeks, months
and years.
Mr Darling: I did not know I had
a choice as to whether I came here or not!
Q276 Chair: Well, we are telling
you now.
Mr Darling: Now you tell me at
this stage of the Parliament! Can I reciprocate, in particular,
by not only acknowledging the work of the Treasury Select Committee,
which has built up a pretty formidable reputation over the course
of this Parliament, but to acknowledge what Mr Fallon does as
your deputy, but particularly you, and acknowledge the work that
you have done over the last four or five years; I think you have
chaired this Committee in an exemplary manner. We have all gone
through some difficult times, but I think the way in which the
Committee has conducted itself has been in the best possible way,
and I think that many people, particularly those outside Parliament,
will see that, despite everything that has happened, there is
a lot in this Parliament that is working very, very well and we
can be proud of.
Chair: Thank you very much, Chancellor.
1 Note by witness: For clarification: the Government
doubled the main rate of first year capital allowances to 40%,
which was of most benefit to larger firms investing over the threshold
of the annual investment allowance. Back
2
Ev 43 Back
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