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The Chancellor's Statement does not explain the effect of the proposals on the measurement of public sector borrowing and national debt. Can the Minister do so? The special liquidity scheme will presumably remain as a financial transaction on the Bank of England’s balance sheet, but how will the extra £50 billion of capital and any other amounts paid out by the recapitalisation fund be scored?
I turn to the guarantees of deposits, which we have already discussed this week in your Lordships' House, and to which my noble friend Lord Hamilton referred earlier today. We welcome the fact that the Government are prepared to act as they have in the case of the Icelandic banks, but we are getting increasingly confused—as, I am sure, the depositors are—about what gets protected and why. Can the Minister explain the detail of the Icesave guarantee? The Chancellor said that no depositor would lose money. Does that protect depositors holding more than £50,000? Does it, for example, protect local authorities which, I am told, had large amounts of money invested in Icesave? What does that do for moral hazard, given the evident risk premium that was being paid on Icesave accounts? Who will pay? Do the Government expect the financial services compensation scheme to cover that, because it is not ordinarily covered by the scheme?
We now have a patchwork of protection. The banks which take guarantees from the recapitalisation fund will be able to gain 100 per cent guarantees for their wholesale borrowing. Their retail deposits, however,
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Finally, we welcome the action taken by the Bank of England, in line with other major central banks, to cut interest rates by 0.5 per cent. The business community has been asking for that for some time, but the European credit markets, at least at lunchtime today, are so far unconvinced, with markets not moving in line with the rate cut because they continue to see liquidity, not the cost of money, as the issue. Stock markets, including our own, are also down. At the end of the day, markets will determine the success or failure of the Government's package.
We wish these measures well because it is the health of our economy, not the health of our banks, which is at stake, and we hope that the package will succeed. We wish that we could be confident that it will.
3.57 pm
Lord Newby: My Lords, I join the noble Baroness in welcoming the Statement. Like her, we give it support in principle. We believe that it offers the best balance between supporting the banking system and protecting the taxpayer. The key issues that arise now are the conditions that attach to the new arrangements—in particular, the extent to which they may be used to change some of the more unacceptable aspects of banking behaviour in recent times.
The point at which the banks are coming to the Government cap in hand for their bail-out for their new capital is the one at which the Government have the maximum leverage in effecting change in this area. In his Statement the Chancellor says that the Government will be looking at executive pay, dividend payments and lending practices. That seems a very weak statement. We do not want them to look at them; we want them to be changed. Some, in particular, need to be changed quickly rather than in the medium term. I think particularly about the situation facing many small businesses, which as we speak are worrying about whether they will be able to pay wages at the end of the month.
Noble Lords will be aware that many banks have summarily changed the terms facing small businesses, either by ending overdrafts altogether or by significantly increasing the rate at which they are charged and/or by charging fees of various sorts. Can the Government give us any assurance today that these practices will be brought to an end as part of the conditionality of the government bail-out?
On the interest rate reductions, we welcome the reduction today, although we suspect that it is probably not large enough and that more reductions will be needed in the relatively short term. We welcome the fact that it is co-ordinated and we hope that this co-ordination on interest rate changes today will set a precedent. Will the Minister say what role the Chancellor played in co-ordinating this response? When my colleague
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Finally, many millions of people are now thinking, “The Government have bailed out the banks but we are in considerable personal difficulties. What might they be able to do to help us?”. I am thinking particularly about those who may, in the months to come, be in difficulty with their mortgage payments. Will the Minister and his colleagues in another place discuss with the Justice Secretary how to ensure, for example, that court procedures reflect the desperate circumstances in which many people are finding themselves and that repossession is treated as a last resort?
With today’s decisions, the crisis may be moving from the financial sector to the real economy where we can now see the beginnings of a significant recession. Even if today’s measures are successful, this is not the beginning of the end; it is at best the end of the beginning. I trust that the Government realise that today’s measures are only the first and not the last steps towards economic recovery.
4.02 pm
Lord Davies of Oldham: My Lords, I am grateful to both noble Lords for their broad support for the measures taken today. I emphasise that the Government, in the arrangements that they are making to improve the capitalisation position of the banks, are seeking to ensure that the banks are on a more secure footing and have the confidence to lend to each other. They are doing so, however, against a background in which the taxpayers’ interests need to be safeguarded. That is why the issue of preference shares arises; the taxpayer will get a proper return on the investment. In the same way, with regard to the liquidity scheme, there will be proper market rates for the repayment of money borrowed. The system is currently at a standstill because of a lack of resources, and the Government’s main purpose is to make those resources available while safeguarding the interests of the taxpayer.
Beyond that, it is clear that we have broader objectives which I hope the whole House shares. We never want to see this scale of calamity again. Therefore we need to put in place a structure that guarantees that banks act more responsibly. It means increasing the effectiveness of the regulatory system. It is the basis of the Banking Bill, on which the Government were criticised earlier today for taking a long time to produce. The Bill is fundamental to the future of the banking system in this country, which is why it was right to carry out the fullest consultation on it.
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The noble Baroness again shows her preoccupation with the problems of public debt and public finances. She will know that the Office for National Statistics will take the decisions on the nature of the categorisation of this debt. It is not an immediate issue, nor would we expect the ONS to produce a decision in a matter of weeks. It will take time, but judgments will be reached. If underlying the noble Baroness’s point is the fact that the Government are involved in committing additional resources in this time of crisis, of course the Government are doing that. What would have been the criticism from every part of the House if the Government had not seen the need to take action to safeguard the banking system?
The noble Lord, Lord Newby, was slightly more generous in his welcome for the proposals. A great deal of co-ordinated activity has gone on. The Prime Minister and the Chancellor have emphasised the necessity for, in global circumstances of a global crisis, such co-ordinated action. The noble Lord is seeing the fruits of that, not only in the schemes we have produced for the British banking system, but also, as he went on to comment, on the general position of co-ordinated activity on interest rates. We all know that in these circumstances the one sure road to catastrophe is unco-ordinated action on a basic beggar-my-neighbour principle. The Prime Minister has spent more than a decade arguing that in the world of global economics such co-ordination is necessary. Therefore, we are seeing the Prime Minister and the Chancellor playing a significant role in this co-ordinated action in Europe, through the institutions of the European Community, and in transatlantic decisions.
I should emphasise that I always accept the gracious way in which the noble Baroness expresses her support for those limited government measures for which she is able to show support. On this occasion, she has been less fulsome than I would hope because of this factor: it is not that I do not recognise the responsibility of the Opposition to scrutinise our proposals and our intentions. I have no doubt that the Banking Bill will undergo full scrutiny when it appears before the House. The noble Baroness will also know that confidence is of the greatest significance. We are facing a global economic crisis, which could have calamitous effects on all the people we seek to serve. The Opposition are part of that process of restoring confidence, which is why we have the right to look to them certainly to play their critical part, but also to recognise the strength of these measures as bringing forth the necessary degree of confidence in the system. I look forward to the co-operation of opposition parties.
4.09 pm
Lord Barnett: My Lords, I join all those who broadly support the proposals. I am not sure what the noble Baroness would have said if she had not broadly supported them and whether it would have been much different. I recognise that there is still much to be done with one-on-one negotiations with individual banks before my noble friend will be able to say precisely what will happen.
On the preference shares referred to by the Chancellor, my noble friend repeated that the public should share in any upside. Normally, however, preference shares
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With regard to the other modest little amount of £250 billion in guarantees, the Government are obviously hoping that banks will lend to each other. In those circumstances, the guarantees are hardly likely to be a cost to the Exchequer in the sense that they will not be needed as the banks are never likely to go bust again.
Lord Davies of Oldham: My Lords, I am grateful to my noble friend for introducing a rather more positive response to the Statement than we have had hitherto. The Government have opted for the preference shares for the obvious reason: they offer a degree of security to the taxpayer for the investment that would not be the case with the straightforward taking up of equity. But my noble friend is right that this will be the subject of negotiation between the authorities and a bank applying for these resources. We are, at this stage, able only to adumbrate the principles that we want security for the taxpayer as well as a proper return for the public investment. Different positions will obtain in different circumstances, but the principles are quite clear. The reason for opting for preference shares is because of the crucial issue of security for the taxpayer’s investment.
I agree with my noble friend on his second point. We are making this facility available because we are conscious of the extent to which banks are worried about their capital base at present, and that degree of insecurity is blocking the system. The underwriting of the position by the Government should instil that degree of confidence which frees the system and may mean, therefore, quite limited take-up of the substantial sum of money which the Government have indicated could be made available.
Lord Blackwell: My Lords, while joining in the general welcome, I should like to ask a few questions of detail about the guarantees on bank lending and, I assume, by corollary, the counterparts—wholesale inter-bank deposits. As the Chancellor’s Statement made clear, while the underlying problem is one of bank capital and solvency, the immediate crisis is one of liquidity, and that is a question of confidence. Therefore, I believe that the third item—that of underwriting loans—may be the most important aspect of the Statement.
Are the loans to be guaranteed just loans and deposits between banks—inter-bank funding? Secondly, what is the definition of “new”? As loans and deposits roll over, will they automatically become new and therefore will the whole of inter-bank funding become new in a period of time? Thirdly, how has the amount of £250 billion been estimated? What percentage of inter-bank funding does that represent and how quickly do the Government believe that it will be used up? Fourthly, if all new inter-bank deposits and funding are to be guaranteed, how do the Government intend to stop international inflows into the UK in order to participate in the guarantees for deposits made against bank loans?
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Lord Davies of Oldham: My Lords, I am grateful to the noble Lord for identifying the key principle behind this part of the government proposals, the credit guarantee scheme, which is about increasing liquidity. That is why the Government are offering for an interim period a guarantee to assist in refinancing maturing debt. The scheme has a limited timescale. It is debt which with a guarantee will cover instruments for up to three years. However, we anticipate that it will create for banks a degree of security, beyond what we have indicated with regard to retail depositors, for lending and loans, which are much more substantial and are in many ways critical to the liquidity of the system. The principle we are following is exactly the one identified by the noble Lord and we will be able to develop the details in due course, but I want to emphasise the fact that this is related to comparatively short-term debt and is about tackling the crucial issue of bank liquidity.
Lord Dearing: My Lords, as a humble Cross-Bencher, may I say that the action the Government are taking is doubly welcome, not only in support of the economy but in support of a banking industry which has made a massive contribution to our well-being over the years? I have two points for the Minister. The first relates to the interests of the taxpayer and follows a point made by the noble Lord, Lord Barnett. I remember that in my youth there were things called participating preference shares. Those who took a risk had not only the first shot at what money there was, but also a share in success. Secondly, in so far as we are particularly concerned about Britain, to what extent did the issue arise in the discussions the Government have had with overseas interests and our own banks about the extent to which much of this money could just flow overseas and thus benefit overseas banks and economies rather than the UK economy?
Lord Davies of Oldham: My Lords, on the latter point, we are identifying the institutions that will qualify for access to the resources. I am all too well aware that the noble Lord understands fully the complexity of international lending, but the authorities will be lending to banks which are clearly identified participants in this scheme—they are British banks and building societies—and in them will be taken preference shares to safeguard the position of the taxpayer. I hear the noble Lord when he says that the Government would be wise to think in terms of participatory preference shares as well. These issues will be matters for negotiation with the banks, but we have emphasised preference shares because the Government are properly concerned about the security of the return to the taxpayer in due course.
On the more general matters raised by the noble Lord, let me assure him that in our discussions with the crucial banks which were able to participate yesterday evening and, I might add, through a good deal of the night, these issues have been worked through in broad and general terms. However, it is recognised that separate negotiations will take place with each of the participating institutions.
Lord Cotter: My Lords, as my noble friend Lord Newby has said, we welcome the Government’s proposals, and it is particularly encouraging that they have mentioned
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Lord Davies of Oldham: My Lords, the noble Lord raises an important point on small businesses. These issues have been to the forefront of the Government’s mind in the development of the proposals and the discussions with the banks. No Government could possibly guarantee that every small business and small investor in the country will receive the automatic benefit of the overall bank rate reduction which happily occurred earlier today. We do not control our banking system in that way, nor do we have any intention of doing so. But it is widely appreciated that such a significant cut in interest rates is meant to be to the benefit of small businesses, borrowers and mortgage holders. The noble Lord will appreciate that the banking system is all too well aware of its responsibilities.
Lord Soley: My Lords, I, too, welcome this decision. Will my noble friend keep the House informed about the important long-term implications for the reform aspects of the international financial regime, particularly the IMF, and how we regulate banking in a global economy? These are complex issues but they are important for the long-term management of such problems in the future; this is not only a national crisis. Will he undertake to keep us informed not only about the Washington talks but about other talks which will address these complex matters in the coming months?
Lord Davies of Oldham: My Lords, I cannot conceive that anyone speaking from the Dispatch Box on these issues will not have the international perspective very much in mind during questions and debates in the House. As my noble friend indicated, this is a worldwide crisis. We are all too well aware that, inevitably, there have been individual responses in various countries, but underpinning it all are problems which are common across the international system. We know that a great deal of the origins of the crisis obtained not in the United Kingdom but in the United States. This has been the burden of the representation on the reform of international finance that the Prime Minister has been conveying for more than a decade. At last he has got listening ears.
Lord Forsyth of Drumlean: My Lords, among a sea of debt, I offer some credit to the Government for this package. Perhaps the Minister can help me with one problem. Why is it that the Government are prepared to rescue, quite rightly, depositors who have placed their money in Icelandic bank accounts, where the responsibility is on the Icelandic Government, and why are they not prepared to say that there is a guarantee for depositors who have made their savings in banks in this country? I listened to the Chancellor
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Lord Davies of Oldham: My Lords, it is not for the Government to say that people’s savings are safe in the bank; it is for the banking system, in the first instance, to prove that the British high street banks are safe and create no concern. The issue with regard to Iceland is quite straightforward: it is an exceptional circumstance where a bank fails and a Government are not able to give assurances that they can underwrite the losses of the bank. The cost of the Government taking no action at all would be the loss to all depositors, small and large, in the Icelandic bank, together with the point that was mentioned in earlier exchanges today: a significant number of local authorities in this country have also invested. That is why we dealt with the Icelandic bank position.
The noble Lord is asking for a complete blank cheque from the Government to banks for future action, and we are not going to do that. We are going to provide necessary support to the system, necessary increases in liquidity and a necessary strengthening of balances, but we are going to do it on negotiated terms that ensure that banks meet their responsibilities. That is the proper way for the Government to act.
Lord Bilimoria: My Lords, I congratulate the Government on what they are doing. Huge steps are being taken over here, and I think we all appreciate the efforts being made.
I have three points for the Minister. With regard to preference shares, as the noble Lords, Lord Barnett and Lord Dearing, mentioned, have the Government considered convertible preference shares? The Minister said that there is no risk to the taxpayer, but surely the underlying loans mean that they could go bad, which means there will be a risk. The taxpayer should be rewarded for that risk.
The second point, building on what the noble Lord, Lord Forsyth, just said, is this: what will the implications be for the British economy of countries like Ireland giving a blanket 100 per cent guarantee? I have already heard of hundreds of millions of pounds, probably billions, that have been withdrawn. I have heard story after story of money taking flight because people want their money somewhere where the Government guarantee it 100 per cent.
My final point is based on what the noble Lord, Lord Newby, said about small businesses. I have heard horror stories about banks calling in overdrafts, increasing terms and making life difficult for small businesses. Surely the implications of all this, looking ahead at the recession that unfortunately is probably coming, are that businesses are going to have to deal with it. What help can the Government give? They already have a small firms loan guarantee scheme; surely they can increase that multifold.
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