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8 Oct 2008 : Column 234

The Earl of Listowel: My Lords, surely the more any Government invest in the development of prison officers, the more humane our prisons will be. In the past 10 years, what investment have this Government put into the continuing professional development of prison officers? What percentage of prison officers now have a degree-level qualification? How many prison officers are working towards a degree or equivalent-level qualification? I recognise that this is a specific question, but the more educated prison officers are, surely the more humane they will be in their practices.

Lord Bach: My Lords, I do not know the factual answers to the noble Earl’s question, but it gives me the opportunity to say that we appreciate greatly the huge service that prison officers and others who work in the prison estate perform for this country. I am glad to be able to say that since this Government came to power the amount of money that officers earn and the way in which they are treated are, we believe, much improved, but so they should be, as these are important guardians of our safety.

The Lord Bishop of Liverpool: My Lords, one of the recommendations of the inquiry following the murder of Zahid Mubarek was that there should be a risk assessment of every young offender sharing a cell. Will the Minister confirm that this is happening at Feltham and, indeed, in all our young offender institutions?

Lord Bach: My Lords, I am not sure that I can confirm what the right reverend Prelate says. I want to be careful in what I say on this but I shall, of course, write to him. On Feltham, where this dreadful murder took place, Her Majesty’s Chief Inspector of Prisons carried out a follow-up inspection in June 2007. As the House will know, the young offender institution had a very mixed record, if I may understate the issue. The chief inspector stated:

“Feltham has benefited from strong management, considerable investment and protection from some of the more damaging effects of overcrowding. Overall, staff have responded well, and it is a long way from the establishment described in our earlier reports and in the Mubarek inquiry. Indeed, some of the work and the approach is a benchmark for other young offender institutions”.

Banking: Lloyds TSB and HBOS

3.30 pm

Baroness Kingsmill: My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In doing so, I declare an interest as an adviser to a banking group.

The Question was as follows:

Lord Davies of Oldham: My Lords, decisions on mergers are generally taken by the competition authorities based on whether there is a substantial lessening of competition. This generally provides the most effective method of protecting consumers. In this particular

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case, and in the light of the extraordinary stress in world financial markets, the Secretary of State considered that there was urgent need for additional action. He therefore laid an order in the House on 7 October that will enable him to take the final decisions in this case and allow him to consider effects relating to the stability of the UK financial system alongside any competition issues.

Baroness Kingsmill: My Lords, I thank my noble friend for that reply. Obviously, in these times of trouble in the banking community, stability should come first. However, does he agree that the proposed merged group will have a very dominant position in the British banking scene, holding as it will more than 30 per cent of the current accounts in the UK? What measures do the Government feel they should introduce for the longer term to protect consumers’ interests?

Lord Davies of Oldham: My Lords, I am grateful to my noble friend for her opening remarks. On consumer protection, as well as the other emergency measures we have taken in the past few days, the Government are about to introduce the Banking Bill, which will reconstitute the regulation of the banking system. The interests of consumers and taxpayers will form an important part of that Bill. As the House will recognise, the Bill has been introduced in the other place and will come before this House in the not too distant future.

Lord Bilimoria: My Lords, there is a saying that good judgment comes from experience and experience comes from bad judgment. What lessons have the Government learnt from the nationalisation of Northern Rock—which, after five months of indecisiveness, was nationalised in a rushed-through manner in three days? Here we are eight months later: we have no permanent major reform to the Bank of England, which is desperately needed.

Lord Davies of Oldham: My Lords, the Banking Bill has been the subject of very extensive consultation, and so it should be for a measure of such supreme importance to the British economy and the British people. I note that the noble Lord sustains his critical stance on the government action on Northern Rock. Others will think that the Government acted entirely appropriately. But all, even he, will rejoice in the fact that Northern Rock is beginning to pay back, ahead of time, its debts owed to the Government.

Lord Lang of Monkton: My Lords, I declare an interest in both these banks: I am now rather a small shareholder, and a depositor in one of them. By what principle do Her Majesty’s Government justify the guaranteeing of all British deposits in a foreign bank but not doing the same for British deposits in a British bank?

Lord Davies of Oldham: My Lords, I will shortly have the pleasure of repeating the Statement that the Chancellor made in the other place about our arrangements for British banks and strengthening the British banking system in this time of crisis. I hope the noble Lord will recognise that we have not adopted as a principle the issue with regard to foreign banks and

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the action that we have taken in the particular case of the Icelandic bank. That was a very specific banking failure and the Icelandic Government are in a particularly parlous state in relation to that failure. That is why, in the interests of protecting British depositors, the British Government saw fit to act.

Lord Razzall: My Lords—

Lord Borrie: My Lords—

The Minister of State, Department of Energy and Climate Change & Department for Environment, Food and Rural Affairs (Lord Hunt of Kings Heath): My Lords, there is time for both questions if we start quickly.

Lord Borrie: My Lords, will my noble friend consider asking the Office of Fair Trading to investigate in, say, 12 months’ time whether the merger between Lloyds bank and HBOS, if it takes place, has adversely affected the consumer interest through the restriction on competition, which, as my noble friend suggested, inevitably takes place as a result of such a merger between major banks?

Lord Davies of Oldham: My Lords, the Office of Fair Trading will produce its report to the Secretary of State before he takes any action, and he anticipates that that report will be before him by the end of this month. Of course the OFT retains an interest in competition issues, and what my noble friend has suggested is bound to be an issue for it when a bank has such a significant stake in the market.

Lord Razzall: My Lords, I am sure that the Minister will accept that today’s events mean that things have rather moved on since the HBOS/Lloyds proposed merger. Does he accept that we are looking to the Government for a clear statement on two fundamental issues of policy? First, what conditions will the Government impose on banks that receive capital from the taxpayer to ensure that the money is spent for the benefit of customers and consumers? Secondly, does he accept that the wider government announcement today will inevitably lead to some suspension of competitive protection for consumers? Without wishing to press the Minister for the detail of government policy on this topic, will he undertake to make a statement to the House shortly?

Lord Davies of Oldham: My Lords, the Chancellor’s Statement, made earlier in the other place, answers a great number of these questions. The noble Lord will have a chance to question that Statement very shortly. The issues that he raised were exactly those which have exercised the Government.

Planning and Energy Bill

Read a third time, and passed, and returned to the Commons with an amendment.



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Counter-Terrorism Bill

The Parliamentary Under-Secretary of State, Home Office (Lord West of Spithead): My Lords, there has been some slight confusion as the Motion has already been agreed to. I will therefore not move it today.

Motion not moved.

Banking: Financial Stability

3.38 pm

Lord Davies of Oldham: My Lords, with the leave of the House, I shall repeat a Statement made in the other place earlier today by my right honourable friend the Chancellor of the Exchequer:

“Mr Speaker, with your permission, I would like to make a Statement on the proposals I announced this morning. I hope the House will understand that it was necessary for me to issue a statement this morning ahead of the markets opening, for obvious reasons.

“As I said in my Statement to the House on Monday, the disruption in global financial markets has intensified over the past few days and weeks. I also said that government are ready, with the resources and the commitment, to do whatever is necessary—in terms of liquidity and capital—to maintain stability in the banking system. That is why today I put forward measures designed to restore confidence in the banking system and put banks on a stronger footing.

“There are three strands to what I have outlined today: first, to provide sufficient liquidity now; secondly, to make available new capital to UK banks and building societies to strengthen their resources and restructure their finances, while maintaining their support for the real economy; and, thirdly, to ensure that the banking system has the funds necessary to maintain lending in the medium term.

“My proposals today, as well as supporting stability in the financial system, will protect depositors, safeguard the interests of the taxpayer and play an important part in the international response to this global crisis. This, in turn, should help people and business, as well as support the economy in these extraordinary times.

“Let me set out to the House further details and the purpose of our measures. First, the Government and the Governor of the Bank of England will take whatever action is necessary to ensure that the banking system has sufficient funds, or liquidity, to function properly. This is a crucial measure, needed to allow money to flow through the banking system. To this end, I have agreed further immediate liquidity measures with the governor.

“Until markets stabilise, the Bank of England will extend and widen its injections of funds into the system to build on the £40 billion it put in yesterday. The Bank of England will continue to lend these funds to banks, in both sterling and dollars, by taking a wider range of security in exchange. Today, I have increased the amounts

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available to the Bank of England to lend through the special liquidity scheme to a total of at least £200 billion. By injecting this short-term funding into the system, the banks will be better able to conduct their daily business with their customers. Importantly, this form of funding, which allows banks to swap assets for government securities, keeps the risk of losses with the banks, not with the taxpayer. The Bank next week will bring forward its plans for a permanent regime underpinning banking system liquidity, including a discount window facility.

“The second step is to help the banking system become stronger so that it can better deal with the current turmoil in global financial markets. Banks will do this by raising the level of capital they hold. A healthy banking system is the cornerstone of the economy—strong banks underpin a strong economy. But many banks, all over the world, do not have sufficient capital, and banks need adequate capital so that they can keep on lending to people.

“This is why today the Government have established a bank recapitalisation fund—to allow UK banks to increase their capital position. The eight major UK banks have today announced that, in aggregate, they plan to increase their capital by £25 billion. Banks can raise this capital in the open market, in the usual way, or they can raise it through the newly created bank recapitalisation fund. Other eligible banks and building societies can also take part.

“Through the fund, the Government stand ready to buy preference shares in the participating banks. Preference shares rank above the stock of ordinary shareholders. The Government will receive a fixed regular payment for holding the shares and will get better protection against future losses. In addition to this, the fund will be ready to provide at least another £25 billion of capital to strengthen the balance sheets of any interested bank. The taxpayer, therefore, will be fully rewarded for this investment.

“Additionally, the Government are prepared to consider standing behind the issuance of new shares by any bank taking part in the recapitalisation fund. The fund will cover a wide range of financial institutions—from UK-based multinational banks to high street branches and regional building societies.

“Through these measures, UK banks will be strengthened to above the standards required by international conventions, and it will put the banks on a stronger footing, making them better able to deal with future shocks and more willing to lend to people, families and businesses.

“This brings me to the third element of the Government’s proposal today. The root cause of today’s problems is that, because banks all over the world are worried about each other’s positions, medium-term lending between them has frozen up. Many banks have simply lost confidence in each other. If banks do not lend to each other, they will also not lend to people and businesses up and down the country. So to free up bank lending, and reduce dependence on overnight lending, I want to remove one of the key barriers by offering a temporary underwriting for any eligible new debt issued by banks.



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“This means that participating banks can start having confidence in each other again, because they will know that the Government are standing firmly behind them when they want to issue new debt. This guarantee aims to unblock the system, so that banks can go about their business of lending to people and businesses and, because it will be priced on commercial terms, taxpayers will be rewarded for the risk they take on. The guarantee is expected to cover an amount of around £250 billion, but we will keep the total under review. Over time, the cost of lending between banks should fall, reducing the need for a guarantee.

“The freeze in global markets is a problem for all countries. Yesterday, at the meeting of European Finance Ministers, we agreed to work together to rebuild confidence in the banking system. I believe that the measures announced today are an important part of that. I shall be having further discussions with Finance Ministers. When I go to Washington this weekend, we will discuss extending these proposals as well as continuing with our work towards strengthening the system of international supervision. The Prime Minister has agreed with other major countries on the need for a meeting of heads of government.

“I believe these measures are essential for the economy, but let me deal with the implications for the Government and the taxpayer of these new proposals, as well as others announced previously. When we nationalised Northern Rock, the Government lent it about £30 billion, but it has now paid back more than half of that, ahead of schedule. When we nationalised parts of Bradford & Bingley, I was clear that we would run off its assets in an orderly way and get back as much as possible of the money provided to cover liabilities to depositors. The injections of liquidity, through the special liquidity scheme and other operations, simply allow banks to swap securities with the Bank of England, so the risk remains with the banks not the taxpayer. In other words, we get the money back.

“For all the operations of the recapitalisation fund, we will be charging the banks on full commercial terms. We will hold a capital stake as part of the investment. That will include the payment of dividends on shares and the appropriate charges for the use of the guarantee, ensuring that the taxpayers are appropriately rewarded. So the implications for the public finances as a result of today’s announcements will be exceptional, and mostly temporary.

“In return for this offer to invest in banks, I will need to be satisfied that the banks have the appropriate policies in place—policies to prevent the irresponsible behaviour that we have seen in some parts of the global-banking system. The public are entitled to share in the upside of these proposals, so in return for our support, we will be looking at executive pay, dividend payments, and lending practices, particularly to home-owners and small and medium-sized enterprises.

“I want to say something about the Icelandic banks, Landsbanki, and Heritable, its UK-based subsidiary. The Financial Services Authority decided

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yesterday that Heritable could not continue to meet its obligations. I, therefore, used powers under the special provisions Act to transfer its retail deposits to ING, which is working to ensure that it is business as usual for all its customers, protecting its savers’ money. The rest of the business has been put into administration.

“On Icesave, we are expecting the Icelandic authorities to put Landsbanki into insolvency. Despite the fact that this is a branch of an Icelandic bank, I have in the exceptional circumstances we see today guaranteed that no depositor loses any money as a result of the closure of Icesave. I am taking steps today to freeze assets of Landsbanki in the UK until the position becomes clearer.

“These actions demonstrate my strong commitment to protect UK retail depositors in these exceptional times. The purpose of these proposals is to get lending started again and the economy moving forward. It is one of a number of measures we are taking to deal with specific cases as well as providing general support, and we are ready to do more whenever it is necessary. Failure to act would have meant far greater risks to the economy and to the public finances in future.

“I made it clear that we will do whatever it takes to maintain stability, to protect savers and to rebuild the confidence to help businesses, people and the wider economy. I commend this Statement to the House”.

My Lords, that concludes the Statement.

3.51 pm

Baroness Noakes: My Lords, I thank the Minister for repeating the Statement made in another place by the Chancellor. We welcome the fact that the Government are taking action, and my party commits itself to work constructively with the Government in their attempts to deal with the turmoil in financial markets. While we have seen only the barest outline of the Government’s package, we give it our broad support. We do not know whether this is the right package because we have not been part of the discussions and analysis with the regulatory authorities and the banks concerned so, for us, the key issue is whether this package works at an acceptable cost to the taxpayer.

The key initial test is whether liquidity returns to the UK banking system and banks return to their essential activity of providing finance to the business sector and the mortgage markets. Will the Minister say how the Government will measure success? How much liquidity is expected to return to the markets and at what cost? What can we expect in terms of additional lending to help to get our economy going again? Put simply, we are potentially committing another £500 billion of taxpayers’ money to the UK banking system. What can taxpayers expect in return?

We do, of course, have some detailed questions for the Minister. The Chancellor’s press release this morning stated that the Government will be taking into account dividend policies and executive compensation practices. Can the Minister explain how that will work? If I am one of the banks named in the statement this morning,

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what sort of commitments will I have to give? Is this going back to a form of dividend control? The one thing we learnt from Labour’s previous dividend controls is that they are fundamentally unworkable, except in the very short term. On executive pay, are the Government proposing something different from that which was outlined by the chairman of the Financial Services Authority a week or so ago?

The press release also stated that the Government,

We fully support the desire to get funds directed to those areas, but are there not difficulties in practice in making banks lend to particular sectors? Is this just a statement of intent or is there some measurable substance behind the words?

More broadly, the banks will be coming to the new bank recapitalisation fund for new capital and for guarantees of wholesale borrowing. Is this a new body, or is it a division of one of the tripartite authorities? Is it a real body or a virtual one? This morning’s press release referred to,

that will issue the guarantees. What is the relationship between this company and the recapitalisation fund and how will it work? Can the Minister explain the relationship between the fund’s new approach to agreeing capital ratios with the participating banks and the normal role of the FSA in carrying out its regulatory supervision of those banks? I hope that the Government are aware of the dangers of supervisory complexity, if it returns to our financial system.


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