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It has taken the Government and the Bank a long time to get to this position. The US Federal Reserve Bank liberalised its collateral requirements over a month ago, and in the UK the various attempts to date to inject additional liquidity have achieved little, and LIBOR has remained stubbornly high even when the bank rate has been reduced.

In general, the UK has been behind the pace in dealing with the credit crunch as it has unfolded. The Minister will need no reminding that the Government’s dithering over Northern Rock was in large measure responsible for the end result; a nationalised bank with a £100 billion balance sheet underwritten by the taxpayer. We have no timetable for the so-called temporary ownership to end that, so the taxpayer will be standing behind that balance sheet for some time to come.

I mention Northern Rock to put today’s announcement of a further £50 billion in context. It looks rather modest. Furthermore, I understand that the total amount of bank and building society debt that needs to be refinanced this year could be as high as £750 billion, so there has to be a serious question over whether today’s move will be sufficient. The Statement implies that the £50 billion facility may be increased. Under what circumstances will the Bank of England extend the facility beyond the first £50 billion? What will trigger this? Will Parliament be informed?

The Government’s spin on today’s news is that it will help those with mortgages. The Statement referred to tomorrow’s meeting between the Chancellor and the Council of Mortgage Lenders as if that will solve some of the difficulties facing lenders and borrowers. The Chancellor needs to be aware that the Council of Mortgage Lenders’ response to the Bank’s announcement this morning was:

No joy there, then. The Financial Times Alphaville site said:

The cost of the special liquidity scheme is linked to LIBOR, but LIBOR is part of the problem of rising mortgage interest rates. Can the Minister explain how a LIBOR-related lending facility will help the mortgage market? There is no requirement for the banks to use the proceeds from this facility to reinvest in residential mortgages, so if the Government really have an objective of supporting the mortgage market, how will they ensure that they get value for money from taxpayers’ backing of this new facility?

The “haircuts” that the Bank proposes to use are very large. In the extreme case, a fixed interest rate, 10 to 30-year own name covered bond for which no market price is observable, denominated in euros or dollars, could pick up a haircut of 35 percentage points. Haircuts are a way of expressing risk. Can the Minister explain how the Government and the Bank have arrived at their risk percentages? Does this

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represent a view that the mortgage market in the UK and the rest of the EU is carrying risks of up to 35 per cent in loss of value?

Let me be clear, we support the prudent use of taxpayers’ money, and if 35 per cent is the Government’s appraisal of risk, that is what should drive the haircuts; but the Government must come clean on their risk assessment. Will the Minister tell the House what view the Government have on the risks inherent in the current mortgage book of UK banks and building societies and their European counterparts?

The eligible collateral is restricted to AAA-rated securities, but the Government have been critical of the rating agencies. The Prime Minister said that we need to,

What changes have been made to sort out the credit rating agencies to stop them making mistakes? I am not aware of any changes, so what credence can we place on the AAA ratings that are required? Is this a tacit acceptance that the Government can come up with no better way of appraising the quality of the securities that taxpayer money will be backing?

The eligible securities within the special liquidity scheme seem on the whole to be sensible, and we support the exclusion of securities linked to US mortgages, but can the Minister explain the inclusion of credit card-backed securities? Why have the Government allowed US credit card-backed securities to be included? What is the rationale for excluding US mortgages but including US credit card debts?

Will the Minister say how the Bank of England is going to make sure that this new facility is propping up sound banks and not another Northern Rock? The Financial Services Authority is responsible for banking regulation and the Bank has little information about individual banks. Will the Bank be carrying out due diligence on banks before it agrees to deal with them at the window? Does the FSA have any role in this? If it does, how can the Bank and the Government be sure that the judgments made by the FSA are sound, especially given the outcome of the report on its disastrous handling of Northern Rock?

Tackling inter-bank liquidity is important but so too is the strength of banks’ balance sheets—the Minister referred to this in his Statement. We have heard about the possible rights issue by Royal Bank of Scotland. What are the Government and the FSA doing to ensure that banks play their part in strengthening their balance sheets, whether through additional capital or retained profits? We heard in the Statement about international discussions, but what practical steps are the Government taking in this country?

This announcement is a helpful step forward. It remains to be seen whether it will have the effects that the Government desire and it raises as many questions as it answers. I hope that the Minister will answer the questions that I have put to him.



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3.52 pm

Lord Newby: My Lords, I, too, thank the Minister for repeating the Statement. I think that all noble Lords would agree that we are now in a rather bizarre situation. After years in which the banks were trying to persuade all of us to take out bigger and bigger overdrafts, the Government have now in effect created a massive overdraft facility for the banks. We are seriously concerned that in doing so the Chancellor has exposed the taxpayer to the risks of a massive bank bail-out.

As to how we got to this position, a number of things are clear. The banks have in some respects been helpful about it. By their own testimony through their representative body, the Institute of International Finance, they have been guilty of,

including massive levels of pay, bonuses up to 10 times basic salaries and serious shortcomings in the management of risk. They are not simply passive victims of bad luck. British banks lent too much too quickly and too carelessly. The big losses with which they are now faced must be identified by them and then covered by bank shareholders. That is the way in which trust will be restored and interbank lending resumed at acceptable levels. However, it is clear that going back to the shareholders is an extremely unpalatable option for many bank executives, not least because they fear that they may lose their jobs if they do. It is much easier to go to the Government and get a bail-out from them.

The Chancellor has pointed out that the taxpayer is protected because bank assets will be transferred at a discount. The noble Baroness asked a number of questions about this, but we need to know how big a discount we are talking about. Given that the IMF has judged that the housing market may be 25 per cent to 30 per cent overvalued, any discount of less than 30 per cent appears at face value to place the taxpayer at significant risk. Can we therefore have an assurance that the discount will be at least at that level? The Bank of England has said that it expects that the initial take-up will be £50 billion. Is there any sense anywhere of what the final take-up will be? Have the Bank and the Government in effect given an open-ended commitment that they will make available as much money as the banks need?

If there is to be any departure, as it appears there may be, from the traditional terms on which the Bank of England lends to the banks, it is only reasonable that new tough and binding conditions should be placed on the banks rather than the extremely vague assurances about future behaviour that we have heard today. We suggest three conditions for the new facility. The first is that bank shareholders, not the taxpayer, should pay for the losses from previous bank lending. This means rights issues to raise shareholder capital. It appears that the Royal Bank of Scotland is taking the lead in taking such a step, but our view is that other banks should be eligible for funding from this source only if they also commit themselves to the same course of action. Otherwise, the banks simply pocket the Bank of England’s money to boost their reserves rather than lending it on.



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Secondly, the banks must be willing to sign up to a set of procedures that prevent large-scale repossessions and that are binding not only on the larger and more socially responsible banks, which would probably do this anyway, but on every bank that takes advantage of this facility. We are grateful that the Government at least now acknowledge for the first time that there may be a repossession problem, but it is important that, having acknowledged it, they work with the banks to ensure that repossessions are kept to a minimum.

Thirdly—this is a more long-term point—surely boom-and-bust lending cycles must be countered in future by more proactive intervention by the Bank of England that requires the banks to hold higher reserves during boom periods. The Government cannot prevent the current housing bubble from bursting, but they must ensure that these bursts of irresponsible lending do not happen again.

The Bank of England is giving generous support to help banks to get out of a mess that is entirely of their own making, but the banks must now take the firm action that is needed to return to sound banking practices to ensure that they do not repeat the excesses of recent years.

3.56 pm

Lord Davies of Oldham: My Lords, I am grateful to the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, for their comments on the Statement. On this occasion, I am particularly grateful to the noble Baroness, who both prefaced and summed up her remarks by saying that she supported the Bank of England’s initiative. I will endeavour to answer her requests for reassurance as fully as I can.

The principle is important. I understand the general anxieties expressed by the noble Lord, Lord Newby, but I thought that I had made it clear in my Statement, as I will seek to do when I refer specifically to the questions asked by the noble Baroness, that the Bank is taking scrupulous care to ensure that the banks, not the taxpayer, will take responsibility for the situation in which they find themselves. The Bank of England will ensure that the collateral that is provided is in excess of the resources made available to the banks in order to ensure that there cannot be a bill at the end for the taxpayer. That is the principle on which the scheme will operate. In articulating that obvious anxiety, which the Government share and which the Bank of England has taken care in its proposals to allay, the noble Lord should accept that the risk will be taken by the banks and their shareholders and not by the British taxpayer. I emphasise that point particularly as it is the principle that underpins the scheme.

I also hear what the noble Lord says about the mortgage market and the difficulties that individuals are in. That is exactly why my right honourable friend the Chancellor is holding meetings tomorrow with the mortgage lenders. He will discuss with them the impact of the tightening position on credit, particularly as it affects those on fixed-term mortgages that are coming to an end. It is expected that these discussions will be fruitful on how we can enhance protection for banks and building societies so that they can offer various

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strategies to mortgage lenders to help to minimise repossession. The noble Lord will recognise that repossession levels are low in comparison with the housing crisis in 1991. Nevertheless, they are increasing and any increase is worrying. It is important to have strategies that reduce the likelihood of repossession. I want to assure the noble Lord on that.

The noble Baroness asked me a number of questions and made a number of statements, one or two of which I felt were a shade controversial. I do not accept that there was dithering over Northern Rock. As we discussed at the time—

Noble Lords: Oh!

Lord Davies of Oldham: My Lords, if noble Lords opposite had been able to identify dithering, they would also have been able to produce a solution that the Government could have adopted at that time. However, they clearly did not, unless this side of the House is being asked to believe that noble Lords opposite—not too explicitly, but secretly—hoped for the early public ownership of Northern Rock, which is a contention that I find somewhat dubious, to put it at its mildest. Noble Lords opposite only ever emerged with the suggestion that Lloyds TSB had a proposal way back last August that would have solved all the problems. Such a proposal would have fallen at the first fence of state aid in Brussels. It was never realistic. Therefore, anyone who believes that noble Lords opposite, their party or their leadership in the other place have ever put forward a credible proposition to deal with the situation earlier than we did, under the terms that we have and guaranteeing stability for the bank and the wider financial system, is living in cloud-cuckoo-land. Noble Lords opposite can make those contentions but those contentions are treated outside with the derision that they deserve.

Nevertheless, the noble Baroness was right to ask me about the relationship between improved and increased liquidity, the mortgage market and the position for the ordinary mortgage holder. We have two objectives. One is to secure financial stability so that the banks can carry out interbank trading, which we all recognise is restricted in a way that is causing grievous difficulties for all forms of credit. But there is a particular problem for the mortgage market and mortgage holders, which is why the Chancellor has made it absolutely clear that he is taking additional measures on this and why we are having discussions with mortgage lenders tomorrow.

There will be a second broad outcome from these proposals beyond the improvements in financial liquidity that will feed through the system and improve the capacity for loans at lower rates. In addition, there is a specific problem for mortgage holders and a short-term problem for many as their mortgage terms come to an end, which is why we are holding discussions with mortgage lenders to seek to make provisions that take into account the short-term needs of such individuals.

The noble Baroness asked about credit rating. She will appreciate that there is no instant solution to the issue that some triple-A credit rating worldwide has

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looked considerably more dubious than would have been anticipated. That is why we intend to take action on credit rating. However, it is a worldwide issue, which is why what action to take is being discussed at the international level. The problem is not easy to resolve. Given that, while the noble Baroness has the right to ask me the question, she is also obliged to recognise that there is no flip answer.

So far as the Bank of England is concerned, it will be necessary for it not only to take as collateral only that which is highly rated according to existing credit rating, but in addition to become involved in further searches beyond that. The Bank cannot automatically assume that a triple-A credit rating provides the safeguard and benefit that otherwise we would have hoped it did. In other words, the Bank is all too well aware of the issue. When taking these positions as collateral, it will be obliged to examine them with the greatest care—and that applies to all the other aspects of credit rating. The noble Baroness referred in particular to credit card-backed securities. Some of those can be entirely secure, and the Bank of England will be reassured on that front. Where there are doubts, the Bank has made it clear that, when it takes more collateral, the value of that collateral will be higher than the resources that it makes available in order to safeguard the public and the taxpayer against any default.

The noble Baroness asked me a number of other pertinent questions. She emphasised her concern about the rise in assessments for haircuts. We all know that this is an important aspect of the scheme, so I say to her only that the Bank of England, which is used to managing these issues, will need to take great care in this area. It is the Bank’s business to do so. I emphasise that this is a Bank of England scheme in which the Bank takes responsibility on behalf of the public for the assessments that it makes on the scheme’s operation. The noble Baroness asked how the FSA can be trusted in its role, given its past record. I hope that she and her colleagues will pay due regard to the action taken by the FSA to improve the quality of its work.

I apologise to the House. The noble Baroness asked me a volley of questions, but I have exceeded my time and I must abide by the rules of the House. I therefore also apologise to the noble Baroness and undertake to write to her on the points that I have not covered.

4.08 pm

Lord Barnett: My Lords, the Chancellor is to see the banks and mortgage lenders tomorrow, so perhaps I may raise a number of points that might be put to them. For example, should we not also be talking to the accountancy bodies? Has my noble friend noticed that the banks, which I agree should be more transparent, published accounts with clear audit certificates but within a short time of doing so wrote off billions of pounds? Can he try to find out why a clear audit certificate was given? Moreover, is he aware that mortgage lenders are charging householders up to £1,000 for renewal of mortgages? That surely seems excessive, although perhaps he should also talk to solicitors

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about their charges; here I beg the forgiveness of many in your Lordships’ House. There is one other point that the Chancellor may think worth considering during his discussions with mortgage lenders. The point about repossessions was made by the noble Lord on the Liberal Democrat Front Bench. Will the mortgage lenders be able to give any assurances on that front during the meeting tomorrow?

Lord Davies of Oldham: My Lords, one of the crucial issues to be discussed tomorrow is how action can be taken by mortgage lenders to limit repossessions to the absolute minimum. We all recognise that there may be circumstances in which houses need to be repossessed; we also recognise that that cuts off the flow of repayments from the individuals concerned when it is better for society for them to retain their homes and perhaps to have temporary assistance until circumstances improve and they are able to resume repayments. These issues will be discussed with mortgage lenders tomorrow.

On the more general issue of what is wrong with a range of professions and professional activity in our society, I am not sure how much of that can fall within the framework of this rather humble Statement, but I hear what the noble Lord says that part of our difficulties may have occurred from the fact that the audit of banks has been less rigorous than it might have been. I also hear that his next target may well be solicitors who arrange mortgages. But sufficient unto the day is the evil thereof. I have already indicated what action the Government intend to take on the broad issues consonant with his statement.

Lord Higgins: My Lords, would it not clarify these matters if, instead of talking about billions, the Government were to talk about hundreds or thousands of millions, or, better still, what the figure represents in any given case to an average taxpayer? As the banks cannot get rid of their mortgage-based assets because other banks do not believe what they say they are worth, how will the Bank of England decide how much collateral concerns any particular securitised package? Further, has the National Audit Office been considered for an appropriate method of valuation?

Secondly, where will these figures appear in government figures? Thirdly, as it is likely that much of the refinancing of the banks is going to come from sovereign wealth funds overseas—which may mean that the effect of this crisis is that huge chunks of the British banking system and the City of London are taken into foreign ownership—have the Government any specific proposals on policy with regard to sovereign wealth funds?

Lord Davies of Oldham: My Lords, I hear what the noble Lord says. I have some sympathy about the necessity of translating figures into those which the ordinary person in the street is rather more familiar with. He will appreciate that when we are talking about the amount of liquidity that will be made available to the system through this scheme of the

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Bank of England we have got to give a ballpark figure of the total sum involved. The £50 billion indicates that. It is not a fixed final limit; it is an indication of the amount of money that is likely to be made available to the banks against the collateral which they are likely to be able to provide.


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