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13 Oct 2008 : Column 546

“Let me set out to the House the detail of today’s announcement, which covers both liquidity and capital. Turning first to the funding of the banking system—or liquidity—the Bank of England will continue supplying sufficient short-term funds. This will include, from today, an unlimited amount of dollar funds available to banks to be swapped for sterling funds and continued loan operations through the special liquidity scheme.

“Additionally, today I have announced details of the government guarantee scheme for new lending between banks—an essential part of banks resuming lending to people and businesses. The guarantee under the scheme will be provided by Her Majesty’s Treasury directly. It will be temporary, covering new lending issued during a six-month period, but this period is renewable. It will be priced on commercial terms, which can be varied at the Treasury’s discretion, but initially set at a premium of 50 basis points above the recent average cost of default insurance for each of the participating banks. It is risk-based. The guarantee scheme will be available only to those banks and institutions which participate in the Government’s recapitalisation scheme, as I made clear last week.

“The banks taking part in this scheme are given the option of raising capital in the open market in the usual way or through the Government’s bank reconstruction fund. When raising capital through the reconstruction fund, the participating banks receive an investment from the Government in return for shares.

“Let me outline, in turn, the position of each of the eight major UK banks and building societies which agreed to the recapitalisation proposals last week. Santander has agreed to transfer £1 billion of capital into its UK operations. Barclays will raise more than £10 billion by next spring, through a combination of preference and ordinary shares, raised from private sources and other measures.

“HSBC announced last Friday that it will raise £750 million of new capital for its UK operation in the open market. Standard Chartered has announced that it has already met its agreed capital requirements. Nationwide Building Society has announced that it will increase its capital base by £500 million.

“Let me now outline how HBOS, Lloyds TSB and RBS will be recapitalised through the bank reconstruction fund. Subject to take-up by existing shareholders, the Government will take significant shareholdings in these banks, in one case a majority stake. In line with normal commercial practices, the Government on behalf of taxpayers will have appropriate representation on their boards. These shareholdings will be managed on a fully commercial basis by an arm’s-length body with a precisely defined remit to act in the interests of taxpayers.

“Government support in respect of these three banks is tied to conditions covering executive pay and dividend policies. Conditions have also been agreed with them on the level of lending to small businesses and homebuyers. We are making it clear that there will need to be a strong focus at these recapitalised banks on making available lending for

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small business and homebuyers. These conditions are set out in the individual agreements with the banks, copies of which will be placed in the Library.

“In the case of Lloyds TSB and HBOS, the Government will purchase both ordinary and preference shares once the merger is complete. HBOS will receive up to an £8.5 billion investment into newly issued ordinary shares on completion of the merger. The Government will also invest up to £4.5 billion into newly issued ordinary shares of Lloyds TSB at completion. At the same time, we will invest up to an additional £4 billion in preference shares in the merged institution, with £3 billion of which being invested in HBOS and £1 billion in Lloyds TSB.

“In return for this investment, which potentially represents around 44 per cent of the proposed merged bank, the Government will appoint two independent board members. No cash bonuses will be paid to any board member this year. Directors in HBOS will be asked to relinquish their rights to bonuses and directors in Lloyds TSB will receive restricted stock instead of cash for any 2008 bonus entitlements. The availability of lending to homeowners and small businesses will be maintained to at least 2007 levels, and greater support will be given to people experiencing difficulties with mortgage payments to help them stay in their homes.

“For RBS, the Government will take up to £15 billion of ordinary shares and £5 billion of preference shares. This potentially represents a 63 per cent interest in the bank, in return for which the Government will appoint three independent board members. Again, no bonus will be awarded to any board member this year, and any bonus paid next year will be in stock and linked to long-term growth in the bank. Mortgage and SME business lending availability will be maintained at 2007 levels, to the benefit of people up and down the country. These steps will help put RBS on a stronger footing and allow it to build on its core retail banking operation.

“These announcements represent a total recapitalisation of just under £50 billion for the eight major banks, in line with my announcement on Wednesday. And as I said then, more capital is available to smaller institutions, should they need it. The Government do not want to run Britain’s banks; they want to rebuild them. The long-term future of UK banks lies in the private sector. We will aim to sell the public share in the participating banks as soon as feasibly possible. Our objective today is to stabilise and rebuild, and we will maintain our stake for as long as it takes to do that.

“I want to say a few words about the Icelandic banks. I met the Icelandic Finance Minister in Washington at the weekend, and I made it very clear that it is imperative that we work together to resolve the position of creditors in this country. Our authorities have set up an arrangement, agreed in principle, for an accelerated payout to depositors. We are also working with the Icelandic authorities to facilitate claims by UK charities and local authorities on their deposits held at these Icelandic banks. In

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addition to this, the Bank of England is today providing a short-term secured loan of up to £100 million to Landsbanki to help maximise the returns to UK creditors.

“All the operations of the Bank Reconstruction Fund will give the Government a capital stake—an investment—so the money we borrow is exchanged for valuable assets, and because some of these shares are purchased on preferential terms, the Government are better protected and get a better return. The Government guarantee to support new lending between banks will be charged on full commercial terms, ensuring that the taxpayer is appropriately rewarded. The injections of liquidity, through the SLS 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. So any additional borrowing and debt incurred by the Government as a result of these proposals is either in return for assets charged at commercial rates, or in the form of a temporary loan to the banks. So, as was the case with the temporary nationalisation of Northern Rock, the most appropriate measures of government borrowing and debt to judge the position of the public finances will be ones that exclude the Government’s stake in the banking sector.

“The principles which I announced last week are now being adopted across the major world economies. It is essential that Governments work together, decisively and quickly, not only to stabilise the system today but also to take action to prevent these problems happening again in the future. That is why we have to work together to improve international supervision. Tomorrow, this House will see the Second Reading of the Banking Bill, a further step towards making our system more robust.

“Today’s announcement is a necessary and significant step to restoring confidence in the banking system and making it resilient in the future. These proposals fully respect the rights of existing shareholders, and despite current market conditions, the UK banking sector can have confidence about its future. These are very turbulent times in financial markets, but I believe these measures are essential to stabilise the financial system and help the UK economy. We are committed to do whatever it takes to stabilise the banking system, protect savers and taxpayers, and support the wider economy”.

My Lords, that concludes the Statement.

7.06 pm

Baroness Noakes: My Lords, I thank the Minister for repeating yet another Statement on the financial crisis, made by the Chancellor in another place. The Minister will not expect these Benches to rejoice in the fulfilment of the Labour Party’s 1983 manifesto threat to take one or more banks into national ownership in order to control their lending and other policies. Nevertheless, we acknowledge that these are extreme times and that extreme actions are necessary, and we will continue to work constructively with the Government, including on the Banking Bill, which will reach us soon. Last week, I wished the package that was announced

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well, but said that I wished I was confident that it would succeed. Clearly it did not, which is why we have ended up with the part nationalisation measures today. For the sake of our economy, I also wish today’s measures well, and I hope that they will succeed.

Will the Minister say how the Government measure success? We believe that success cannot be scored unless the real economy is protected from recession, or at least from a prolonged one. However, the Government have continually refused to update their official growth statistics, and the lack of a growth forecast is a real problem, and this is despite the fact that all the emerging statistics and the professional consensus are in comprehensive disagreement with the Government. Will the Government now come clean on the economic prospects for the country, because we believe that Parliament and the country as a whole should be informed of the forecast and what difference this package of measures will make?

Last Wednesday, the Government announced that they would invest up to £50 billion in preference shares in UK banks. There was no hint of taking equity stakes of such dimensions that the end result would be outright control of one major UK bank and a de facto controlling interest in another. Were the Government not in possession of the full facts last week? Can the Minister explain the Government’s change of mind?

I hope that the Minister will also clarify the nature of the obligations that the banks which are taking the Government’s equity support will have. This morning’s announcement referred to,

This was described as “madness” on FT Alphaville, while the Council of Mortgage Lenders doubted whether it would be “either prudent or desirable”. Are the Government really saying that they want to hardwire those heady days of 2007 lending, including the house price bubble, into the system? Do the Government take a different view from most of the market; namely, that the banking system must be deleveraged? Indeed, is that not what would normally result from the significant increases in tier 1 and core capital that the banks are now embarking upon?

Today’s announcements deal with the capitalisation of the largest banks, and this will cost taxpayers £37 billion. The others will take self-help measures, doubtless to avoid the interference that the Government’s shareholdings would involve. This morning’s announcement stated that the Government would stand ready to provide similar support to all eligible institutions. Can the Minister say how much taxpayers’ money the Government expect to spend on other banks? Has the FSA concluded its discussions on capital requirements with all other eligible institutions? There are obvious dangers, if only to the confidence within the banking system, if there are still unresolved issues. Can the Minister say whether the FSA is now content with the capitalisation plans of all eligible institutions and, if not, when we may expect that process to be concluded?

There is anger outside the rarefied world of the City and the Treasury about the massive amount of

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taxpayers’ money which is being poured into the banking system. What can the Minister say about protecting taxpayers’ interests? Does the “precisely defined remit” that was promised for the shareholdings extend to when taxpayers can expect their money back?

The Chairman of the Financial Services Authority, the noble Lord, Lord Turner of Ecchinswell, at lunchtime today on the radio said:

“Many lessons have been learned over what has gone on in the last 10 years ... we probably allowed a boom to go on for too long”.

We agree with that and we know who was in charge for the past 10 years. The Government are all too ready to blame the US or global conditions for our current problems, but the fact is that our economy was ill equipped to cope with the bust that inevitably followed the boom.

The £300 billion package that the Government are committing to the equity plus guarantee package is roughly 19 per cent of our GDP. This is a higher percentage than any of the packages announced by any of the other countries in the EU and is nearly four times the 5 per cent that the US is committing. Can the Minister explain how it is that the crisis was nothing to do with us but is costing us the most?

The Chancellor said in his Statement that we should not count the extra borrowing to fund this package as government borrowing. Does not the Minister agree that it is clear that the ONS will do just that? The Institute of Fiscal Studies estimates that adding in all the extra borrowing since the Chancellor’s last Budget, including these latest measures, will push borrowing above 50 per cent of GDP. Does the Minister recall the last time that this happened? It was in 1976, when the Labour Government went cap in hand to the IMF. Do the Government have any idea when they expect to return debt to more manageable levels?

I appreciate the Minister’s difficulties—he is not a full-time Treasury Minister—in responding to detailed questions, but I am not alone in having been disappointed last week with the Minister’s rate of non-response to the questions that were put to him. I hope that today he will give a more comprehensive set of answers but, if he is unable to do so, will he commit to replying in writing to the questions that Hansard will show that I and others have put to him?

7.13 pm

Lord Newby: My Lords, we, too, are grateful to the noble Lord for coming to the House for the third time in a week to repeat a Statement on the banking crisis. I hope the current rate of Statement-giving now rapidly diminishes.

We welcomed in principle the Statement that he made last week and we welcome today’s Statement in principle as well. We are pleased to see that the Government are acting on bonuses at the banks they are directly recapitalising. The noble Baroness talks about anger at the Government’s funding of the banks, but there is real anger at the fact that bankers have been taking huge bonuses while driving their banks into the ground. I am sure that the country will expect the Government to be very hard on that. Will the Minister say whether this bearing down on bonuses

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will go beyond the banks which the Government are directly recapitalising and cover all the banks covered by the recapitalisation scheme? They are set to benefit hugely from guarantees and one would hope that the Government impose at least some of the same conditions on them as on the banks they are directly recapitalising.

I have one concern about the language in the Statement concerning the banks having agreed to maintain lending at 2007 levels. This is obviously welcome for small businesses but, given that 2007 levels of lending on mortgages were fuelling an unsustainable boom in house prices, is that really what the Government mean? I suspect it is not but it would be useful if the Minister could clarify that today.

Have the Government sought any assurances from the banks about the terms on which it is lending to small businesses? The problem is not simply that the lending has dried up but that the banks have been imposing arbitrarily significantly higher interest rates and charges to small business borrowers which, in some cases, have been almost as damaging as if the facilities had been withdrawn.

The Government are taking powers to appoint non-executive directors to the banks which they are directly recapitalising, and that is surely right. Although we on these Benches have no great faith in the Government being a banker, we have not huge faith in bankers to be bankers either. Therefore we are relieved that the Government are putting some of their own people in place.

My colleague in another place, Vince Cable, has suggested that now the Prime Minister has got back his Stalinist approach to life in dealing with the banks, he needs a Beria to organise a purge of failed bankers. We are pleased to see that a number of bankers seem to have taken the revolver out of the drawer, but we hope there may be further progress on this front before too long. Let me make one suggestion about who might replace them. There are a number of highly respected executives from the mutually owned building society sector who have not been seduced by the exotic and risky products which have brought the high street banks low; perhaps they might get a call over the coming days. The Statement says that the shareholdings will be managed on a commercial basis by an arm’s-length body. Can the Minister say what kind of body and who its members are likely to be?

When we discussed the first of the Minister’s three Statements last week, I spent a little time speaking about the need to put a great deal of emphasis on co-operation at European and international level. We are very pleased that that has happened. This weekend, the Prime Minister was able to have a major influence on EU members by talking to the euro-zone Finance Ministers. This was a unique event. The Chancellor was not at that meeting and will not be at future meetings of the euro-zone Finance Ministers. It is absolutely clear that that is the body that takes a decision and then goes to the rest of the EU and, in effect, says, “Chaps, this is what we are doing”. The UK Government have no place on the body and, while I do not want to excite Members on the Conservative Benches by mentioning the word “euro” at this time of

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night, do the Government believe there is any scope for a permanent involvement of the UK Government in the euro-zone group of Finance Ministers given that they, at long last, seem to be getting their act together in the co-ordination of European financial policy?

My final question on the international front is that, given its financial strength, China will be in a strong position as a result of events of recent weeks, but it is not clear why the Chinese Government do not appear to have been at the heart of the discussions which have so far taken place. Is this because they were not asked, or is this because they were asked and decided to leave it to capitalists to sort out the mess first before they come in and pick up the pieces?

The response of the markets today suggests that the worst of the banking crisis may be over, but the crisis of the real economy is just beginning. Having shown that it can help the banks in their hour of need, the challenge now facing the Government is to help those who are facing the loss of their jobs and their homes. This will now increasingly be the focus of our debates over the months to come.

7.19 pm

Lord Davies of Oldham: My Lords, I am grateful to both noble Lords for their response to the Statement and the broad welcome which they evinced in principle. I hope that the noble Baroness will recognise that the Government are approaching this issue not, as she suggested, on the basis of positions adopted more than a quarter of a century ago but on the basis of the real need of the British economy, particularly the finance sector at the present time. Regarding the international dimension to the proposals to which the noble Lord, Lord Newby, referred, there is a great deal of support for the approach that the Government are taking and a degree of emulation.

The noble Lord will know that there is no mileage at this point in talking of membership of the euro, with that happy, throwaway line for the Liberal Democrat Party. I hope that he will give credit for the fact that European Finance Ministers have been very concerned to discuss the British proposals and, in key respects, have taken steps to follow the basis of those proposals in some of the developments for their own banking structure. I reassure the noble Lord that co-operation at that level, which has been a feature of this past week, is bound to continue. In the same way, the Prime Minister and the Chancellor have been active in the G7 and have been very concerned that the Americans fully understand the nature of the British response to the banking crisis and the importance of the Americans following a strategy. Contrary to what the noble Baroness indicated, the Americans were the first to propose the figures involved, not through any doctrinaire position or because of any ideological stance, unless she is suggesting that we have been successful in persuading President Bush of the merits of certain stances of effective government intervention. No. The Americans have been concerned with how they bring the necessary government resources to support a system which was on the brink of collapse.

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The noble Baroness suggested that I could not go into detail when discussing certain areas last week, and of course I could not. It has taken a week of negotiation with the banks. If she thinks that we were supposed to promise significant sums of money without having any basis for negotiation with the banks and getting understandings of what the terms should be, she is being rather more naive than does her credit. It was necessary for the Government to carry out these negotiations.

In giving support for the recapitalisation of the major banks which are involved in the exercise as well as the potential for other banks and financial institutions which may need help, of course we are concerned that they know the terms on which this is to be effected. I reassure the noble Baroness that the Financial Services Authority has today published a document that indicates the nature of the strategies which the institutions will need to follow in order to qualify for government support. They include support for the real economy. What does she think the promise of support for small and medium-sized enterprises is? What does she think that seeking to avoid the repossession of our fellow citizens’ homes and keeping that to an absolute minimum is about if not the relationship between the financial institutions and the real economy? If she thinks it is crying in the wilderness to say that anything can be done in this period of crisis to help mortgage holders, I can only say that there are rather more constructive optimists on this side of the House and, equally importantly, among the institutions which lend as well. That is why we are able to indicate that the terms on which we are reaching the agreement with the banks is a strategy for lending to SMEs and advancing mortgages.

On preference shares, we have been very concerned to emphasise that the very significant sums involved in the recapitalisation of certain banks come with clear terms of government interest in their strategy. It is all right for the noble Baroness to say that people are upset about bonuses to those who have got us into this mess. Let her rest assured that the Government intend that bonuses will be paid not on the basis of the past but on the future position in share options. In that way, there will be rewards for bankers who are successful; such success will be measured in terms of the effectiveness of the bank strategy over a period of time and not these excessively short-term measures which helped to reduce us to the calamitous state that we all face.

I am grateful to both noble Lords for their responses but emphasise that the Government are pursuing a line which the international community is eager, in significant ways, to follow.

7.27 pm

Baroness Ford: My Lords, I welcome the Government’s Statement and, in so doing, draw attention to two aspects of the scheme last week which understandably will not necessarily hog the headlines today. I declare an interest: I hesitate to say this to the noble Lord, Lord Newby, but I earn my living in the capital markets, so he may simply flay me when we go outside. The two important measures—the credit guarantee scheme and the extension of the special liquidity

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scheme—have been exceptionally important. The leadership that my right honourable friend the Prime Minister has shown other countries has been really important.

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