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“With your permission, Mr Speaker, I would like to make a Statement regarding developments in financial markets. The events in America over the past few weeks, and in Europe over the past few
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“What started in America last year has now spread to every part of the world and the disruption in global financial markets has intensified, especially over the past few weeks. People are rightly concerned about what is happening and I have made it clear that we will do whatever is necessary to maintain stability.
“Along with Governments across the world, I have a responsibility to support a stable and well-functioning banking system. Financial transactions are at the heart of everything we do. They allow people to buy goods, pay for services, buy homes, save for pensions, and invest. So it is essential that we take action both to support the banking system as a whole as well as being ready to intervene in particular cases when it is necessary to do so. It is not a case of doing either one or the other. Both general support and individual intervention are necessary. And we need to work with other countries to tackle the causes of these problems as well as dealing with their consequences.
“Let me briefly remind the House what we have done to stabilise the banking system as a whole. Since April, the Bank of England, with support from the Government, has introduced the special liquidity scheme providing funding to the banks. The Government have made available in excess of £100 billion of long-term funding to be lent through the scheme, and the Bank of England has extended it until January. I am willing to make further resources available as necessary. The governor has made it clear that:
‘In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity’.
“The Bank of England has also continued to inject substantial funds into the markets through its normal operations, and it will continue to do so. Tomorrow it will put in another £40 billion, taking a wider range of security, and these operations will continue into November. We also need to deal with specific problems as they arise to maintain stability. In February, we took special powers to bring Northern Rock into public ownership, now seen by most people as the right thing to do. I can tell the House that Northern Rock has now paid back more than half of the taxpayers’ money that was lent to it, and continues to repay its loan ahead of schedule. In August, I announced that the Government would swap up to £3 billion of outstanding debt for equity, if required, to strengthen Northern Rock’s capital position.
“In September, we amended the competition regime to allow the interests of financial stability to be considered in the merger between Lloyds TSB and HBOS. We took this exceptional measure because financial stability had to come before normal competition concerns. And 10 days ago, we had to deal with the problems at Bradford and Bingley. We transferred the savings business, the branches and
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“I have made it clear on many occasions that our priority is to maintain stability, protect the interests of depositors, and safeguard the interests of the taxpayer. I want to set out what we have done so far here at home and to deal with the developments in Europe over the weekend. The Financial Services Authority has announced a further increase from tomorrow to the compensation limit for retail bank deposits to £50,000 per depositor, which means £100,000 for joint accounts. This measure will ensure that 98 per cent of accounts are fully covered, and the FSA is consulting on whether to increase this limit further to ensure that arrangements here continue to be comparable with international best practice.
“I have always been clear that each country needs to do whatever is needed to deal with its own particular circumstances. However, I also believe that wherever it is possible to do so, countries should work and act together to maintain stability. This afternoon the European Union member states have reaffirmed the need to take whatever measures are necessary to maintain the stability of the financial system, whether through liquidity support, action to deal with individual banks or enhanced depositor protection schemes. In light of what has happened over the weekend, it is especially important that EU member states work far more closely together, so tomorrow I will meet European finance Ministers in Luxembourg to further discuss how we bring stability to the system and protect depositors. This further demonstrates that every country in the world, Europe included, is being affected by these problems.
“In the United States, Congress has now approved measures to support the banking system, which we welcome. Our approach has been different, but what has happened in America emphasises yet again the need for countries to take whatever action they believe is necessary and also to work closely together, not just to resolve these problems but also to try to prevent them happening again.
“Later this week I will attend the G7 and IMF meetings in Washington. Our aim is to reduce uncertainty and improve confidence in financial markets by increasing the openness of financial institutions' exposures. We also want to change to improve the effectiveness of credit rating agencies. These measures are now being implemented but we must move far more quickly.
“Here at home, there are a number of specific steps that are necessary. First, the Bank of England will continue to do whatever it takes to make cash available for banks to lend. Secondly, the banking Bill will be introduced tomorrow, building on the special powers we took in February to allow us to intervene quickly and decisively. It will also give the Bank of England a statutory role to maintain financial stability to complement the role of the FSA. Thirdly, just as at the international level lessons need to be learnt, we need to ensure our regulatory system
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“And as recent events in financial markets have shown us, regulation should be about liquidity as well as capital. That is why the FSA is considering changes to liquidity requirements. It is also looking at remuneration structures in the institutions it regulates.
“Fourthly, we must do everything we can to ensure that not only do banks have the confidence to lend to each other but also that lending is maintained to the mortgage market, businesses and individuals. I shall publish shortly Sir James Crosby’s recommendations on options for improving the functioning of mortgage finance markets.
“These are exceptional times. I am in no doubt as to the size of the task facing us and Governments around the world in bringing order to the financial system. The process of change will necessarily take some time to work through, and because we are dealing with international institutions and international markets it will require action not only at a national level but also concerted international action.
“It is right that we look at every aspect—liquidity, capital and regulation—with other countries and of course with the financial sector itself. But it would also be irresponsible to speculate on the specifics of future responses. Indeed, providing a running commentary could add to uncertainty in the already febrile market conditions. But all practical options must remain open to us and I have made it very clear that the Government stand ready—with the resources and the commitment—to do whatever is necessary. And I will keep the House informed.
“Mr Speaker, our priority, at home and abroad, is to bring stability to the financial system, ensure depositors and savers are protected and defend the interest of the taxpayer. I commend the Statement to the House”.
My Lords, that concludes the Statement.
4.09 pm
Baroness Noakes: My Lords, I thank the Minister for repeating the Statement made by the Chancellor in another place.
When we departed for the Recess in late July, none of us could have foreseen the turmoil in the financial markets that has occurred. I do not think that we were alone in hoping that financial life would gradually get better and that confidence would creep back into financial markets. We would not have predicted the virtual elimination of the investment banking sector in the US, the nationalisation of the major US insurer and mortgage lenders and a US$700 billion rescue plan. Having lived through the ignominy of Northern Rock, we would not have foreseen the suspension of ordinary competition principles as a dowry for the forced marriage of one major UK bank or the nationalisation of another. There have been financial
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We believe that there needs to be action to deal with three areas: liquidity, asset quality and bank capitalisation. I listened hard to the Chancellor’s Statement. I heard a bit about liquidity but not much else. On liquidity, we support the Bank of England’s extension of the Special Liquidity Scheme. We hope that it will be sufficient but, if not, we will continue to support the Bank’s taking the action that it deems appropriate. We support the FSA’s decision to increase the bank deposit protection to £50,000; indeed, we have been arguing for that for some time.
We are now in a wholly different ballpark, with the consequences, intended or not, of the unilateral action taken by other countries to protect their own liquidity. The Irish, the Danes and the Greeks have given complete guarantees and the Swedes have massively increased their guarantees. We do not yet know what Chancellor Merkel has actually agreed to do in Germany. Latest reports indicate that there will be no new legislative backing for the apparently open-ended guarantees that were first reported. Does the Minister have any definitive information on what is happening in Germany? Anecdotally, money started to shift to Ireland last week. The position in Germany may cause even bigger flows. Do the Government have a response to such developments?
The last few days have shown what the European project is worth when national issues come to the fore. Just when we thought that we might see some benefit from the EU in co-ordinated action to respond to the turmoil in financial markets, we got the most telling unilateral demonstrations of how the EU is not a coherent whole. Do the Government expect tangible benefit to come from EU action? If so, how will that be achieved against the overriding interests of nation states, which have been so clearly expressed in recent days?
Secondly, on asset quality, the Chancellor said that he wanted to improve the effectiveness of the credit rating agencies. The Prime Minister threatened to sort them out some six months ago and I asked the Minister then what that meant. We have no more substance today, so I repeat: what does this mean in practice?
The Government’s Statement is silent on a matter that is much discussed in the US and in Europe: the impact of mark-to-market accounting on valuing banks’ assets. I know that the Chancellor has expressed some scepticism about that and, as an accountant, I have some sympathy from a technical perspective. But in the real world, where markets are not working efficiently, there are questions about the relevance of financial measurements, based on imperfect markets, that then feed through to the calculation of regulatory capital and tighten the squeeze on banks. The International Accounting Standards Board, which is based in London, is meeting this week to discuss the issue. What are the Government saying to the IASB, or are they simply ignoring the issue?
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Thirdly, on bank capitalisation, the Minister will be aware of the intense press speculation about the Government injecting capital into banks and taking minority stakes in return. The Chancellor’s Statement was silent on that. Can the Minister give us any more information about the circumstances in which the Government might consider that course of action, how much might be involved and on what terms?
Our preferred position is for shareholders to shoulder the burden of mending weak balance sheets, whether through dividend policy or share issues. We would not rule out government participation as a last resort because we recognise that the health of the UK economy depends on a stable banking system, but if the Government decide to go down that route we shall want to see taxpayers protected, as well as effective measures to constrain any excesses in the system.
The Prime Minister has described the preceding decade as the age of irresponsibility. We completely agree. The Government, in particular the economic stewardship under the Prime Minister, have been irresponsible bordering on reckless. The Prime Minister built an economy on excessive debt, both personal and national. He created the financial supervision architecture that manifestly failed and presided over the massive leveraging of the banking system that is now unwinding.
The measures needed to deal with the age of irresponsibility go beyond the technical banking issues that we are dealing with today. The people of our country will have the last word at the next election but, in the short term, my party stands ready to provide constructive support to the Government in order to get the financial system back to some form of health. That includes working constructively, although not necessarily uncritically, on the banking reform Bill. We care about the businesses, large and especially small, that need access to capital, which has virtually dried up. Without that, our economy will surely do even worse than it is currently doing. Families, too, need mortgage markets to resume ordinary business, which is not the same thing as the business that they were doing before the problems arose. These factors drive our stance.
We welcome the morsels of policy in today’s Statement, but these are no substitute for a full debate in your Lordships’ House on the financial crisis. Will the Minister commit to the Government finding time for a proper debate on these issues?
4.21 pm
Lord Newby: My Lords, like the noble Baroness, Lady Noakes, I thank the Minister for repeating the Statement. It is very nice to see him still in his place; we are sorry that he may not be there for much longer, although I suspect that our sorrow is not matched by his.
The Government have repeatedly said that they will do whatever they have to do to deal with this crisis. Can the Minister clarify one area in which they have already taken action? I refer to depositor protection, where the limit has been effectively doubled. But there remain a number of secondary issues that are very important to individuals where further clarity is still
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In his Statement, the Chancellor said that the FSA is consulting on whether to increase the £50,000 limit to ensure that arrangements in the UK continue to be comparable with international best practice. Is not this a complete euphemism? It is not a question of international best practice; the problem is that we now have a free-for-all internationally, started by the Irish, now taken up by other small countries in Europe, with complete ambiguity regarding the situation in Germany. It may be a bit much to expect the Minister to explain Angela Merkel to us to a greater extent than she has so far been able to do to the German population. Nevertheless, we should accept that it is not a question of international best practice being universally, or nearly universally, adopted; instead, we are searching for such international best practice.
Here I completely take issue with the noble Baroness, who uses this as another occasion on which to say that Europe is inevitably a failure and that, by implication, the UK should be setting a standard that other grateful nations might follow. The truth is that, if we are to deal with a major crisis such as this, with international flows of capital, there will need to be much greater international co-operation. The place to start is Europe. I therefore urge the Minister and his colleague in another place, when they meet tomorrow, to have a sense of urgency about the importance of European co-ordination and to go beyond the photo opportunity of Saturday and make a commitment to long-term working together to put new rules in place at a European level.
The noble Baroness went on to talk about bank capitalisation. We agree with her reluctant acquiescence to the concept of recapitalising the banks based on government support and part-nationalisation. There are other ways of doing it, which she described, but the scale of the emergency and the need for speed suggest that this will be the most effective way of getting the banks back into some kind of order.
Before I move on to my last major point, I must again take issue with the noble Baroness, who gave us a lecture on the evils of credit and bank excesses. We on these Benches have talked about the likely problems of excess borrowing for a very long time. We have done so as a lonely voice for much of that time, so it is interesting and strange to hear the noble Baroness take that line of argument today.
We have necessarily concentrated today on the availability of credit rather than its cost, but it is clear that we now face not just a financial crisis but a crisis that will hit the whole of the real economy. It is now a question not of whether we are in recession but of how deep it will be and how long it will last.
In getting out of a recession or reducing its severity, interest rates will play a major part. Although we on these Benches have been strong supporters of the independence of the Bank of England, my colleague
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As I said at the start of my comments, the Government have regularly used the mantra that they will do whatever they have to do. When the Chancellor first said a few weeks ago that we were facing the worst economic crisis for 60 years, I think that many thought that it was a bit of an exaggeration. It is now clear that it was not. The Government are committed to doing everything that needs to be done and it is clear that bold action is required. The Government must now take it.
4.28 pm
Lord Davies of Oldham: My Lords, I am grateful to both noble Lords for their contributions to this short debate on the Statement. I think that the House will appreciate the offers of support for those strategies which prove necessary for the Government to pursue. I hope and anticipate that that will extend to the banking Bill, which is critical to the future of banking in this country and which is subject to time constraints. I am grateful for indications of support in those terms despite the fact that the tone of the contribution of the noble Baroness, Lady Noakes, was at times excessively critical. It was critical in hindsight: I cannot recall any of the prescriptions advanced from the opposition Benches today having been advanced during the past few months or years. If ever there were a case of being wise after the event, it is in some of her comments today.
One of the noble Baroness’s big charges was on the consequences of unilateral action. The Government, of course, took early unilateral action on Northern Rock last year. I was able to report, as the Chancellor has in today’s Statement, the progress made in that area. But it is clear that we have moved beyond the immediate issues that confront the British economy to a worldwide tsunami. The crisis that has hit the American banking and mortgage industry dwarfs that of all other parts of the world and is bound to have the most profound implications for our banking sector and financial sector and create very real worries about the real economy. That is why the Chancellor has included in his Statement a clear recognition that there has to be international action. The international financial system requires a number of quite significant reforms, and the Chancellor in his Statement—which I had the privilege of repeating a little earlier—itemises the areas in which reform is necessary.
In addition to that, the charge is being made that the European position is fragmented. There is clearly a danger in that; if it were every country for itself in this situation, there could be the most deleterious effects across the economies of all. That is why it is necessary that discussions take place in Europe on the illustration offered by the Irish action at the weekend, possibly
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My right honourable friend in the other place clearly indicated why he puts such an emphasis on international action. However, that does not alter the fact that, as each individual issue arose, starting with Northern Rock last year and going on in more recent weeks to the Bradford and Bingley and HBOS issues, the Government dealt with those issues expeditiously and effectively. We recognise that there are exceptional aspects to these arrangements, but they have helped to stabilise the position of these very significant institutions, inhibit the possibility of a chain reaction that would be so damaging to us all and, at the same time, give some security to these institutions while protecting depositors and the interests of taxpayers.
We have taken action in the particular. We recognise the necessary action in the general, both in Europe and in relationship to the wider economy in which the United States is bound to feature so largely. The noble Baroness says that it is a pity that Parliament was not recalled. I hope that Parliament would have something a bit more constructive to say than what she managed today, if the Government are going to benefit from the support that the Opposition are offering.
4.35 pm
Lord Barnett: My Lords, perhaps I may follow the Official Opposition’s new supportive line, as followed by the noble Baroness, which I did not note as being as supportive as my noble friend found. He told us that the Chancellor said in his Statement that the Bank of England is willing to take on a wider range of assets. I do not know whether that is to include so called—toxic assets, which I hope he will agree are not always easy to value, given the multiplier effect of many of the doubtful mortgage debts that were apparently being bought and sold until recently. I do not know whether they still are. In fairness to the accountancy profession, it is impossible to value them as nobody is willing to buy them these days. Will he accept that that is the case? Therefore, the case for guaranteeing all deposits is not really made; indeed, it might have the reverse effect on the stability the Government are rightly seeking by reducing the credibility of the banks themselves, which is pretty poor anyway.
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