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Let me turn to one or two wider issues. Is the Minister saying that he believes that this is enough? Is he saying that these are the Government’s policies to deal adequately with the credit crisis and the restrictions on bank lending that we are witnessing? Will he not accept that there are two quite fundamental difficulties? First, there is the conflict between the Government and FSA policies that banks should improve their capital ratios, which is clearly inconsistent with pressure on the banks to lend more. Secondly, will he accept that with the collapse of the Icelandic and Irish banks there must have been a significant reduction of capacity to lend in the UK economy, so that even if all the banks, whether those under the Government’s control or the other UK banks, maintain their lending at levels similar to those of last year or the year before, there must clearly be a significant shortfall? How do the Government propose to cover that?
Will the Secretary of State indicate whether the Government are considering as we move into the spring what the Tories would call “printing money”, but what the economists refer to as “quantitative easing”? Are the Government contemplating kick-starting the mortgage-backed security market with any government guarantees? Are they considering the option of establishing a bank owned by the taxpayer into which all so-called “toxic” loans could be put, thereby freeing up lending from the other banks? It would be very helpful to your Lordships if the Government could indicate whether any of those options are being considered.
Bearing in mind that the Government now have 100 per cent control of at least one lender and majority control of two of the clearers, are they considering taking into 100 per cent majority control either HBOS or Royal Bank of Scotland to ensure that the taxpayer not only takes the risk on government policy but in due course obtains the reward?
3.56 pm
Lord Mandelson: My Lords, on the subject of being present in this House, I first say to the noble Lord, Lord Hunt, that it is very nice indeed to see him back—I know that he has experienced a period of bad health. We have missed him and it is very nice to see him back in his place.
It is true, however, that I really like this place, that I like being here and that I can barely be kept away from it, but, sometimes, colleagues prevail over me. I shall try to make sure that I am successful in resisting their blandishments in future and that I am here whenever I want to be.
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Lord Mandelson: My Lords, there is very little difference between the number of times your Lordships want me to be here and the number of times I wish to be present, because I take the responsibility of Ministers to this place very seriously.
In response to the noble Lord’s other charge against me, that I have spent the past 24 or 48 hours rubbishing the Conservatives’ proposal, I say that I would have found it very difficult to do that because I found it very difficult to pin down exactly what their proposal was. I knew that it had a name and had a very big figure attached to it, but, beyond that, I had not the faintest idea what it would do, what it was focused on, what it would target and whom it would help.
The noble Lord said that the measures that are going live today and which I have described in the Statement are too little and too late. I would prefer to describe them as being genuinely substantial and here in real time. I shall not detain the House by going through the lists of people and organisations who welcome them, including the Forum of Private Business, the Institute of Directors, which says that today’s announcements are admirable, the General Secretary of the TUC, who welcomes today’s scheme, and the Engineering Employers Federation, which says that it kick-starts the credit markets. Everyone, as far as I can see, has been extremely generous to and welcoming of the Government’s announcements today, with, of course, the predictable exception of the opposition spokesman from the other House, Mr Alan Duncan, who may be campaigning for a purpose other than to help small businesses in the UK economy. He has called again and again for a further, bigger, wider scheme, while demanding that it be kept simple. With all the hyperbole that has poured forth, a proposed guarantee of loans that would seem to encompass everything from Woolworths to BP could not be kept simple.
The noble Lord raised a number of specific questions. He asked how the Government will select businesses to qualify under the enterprise finance guarantee. The guarantee is open to all businesses with a turnover of less than £25 million. It is aimed at smaller and medium-sized businesses, and all can come forward and apply. A small number of sectoral exclusions apply—agriculture and coal—due to state aid restrictions, but the banks will make the decision of whether or not to lend, not the Government. That is only right: the Government will not be involved in making individual lending decisions.
The noble Lord asked whether the scheme will be available to foreign firms or to British companies. All schemes will be available to qualifying firms that are domiciled in the United Kingdom. However, banks will ultimately make lending decisions. This will inevitably take into account where the security, or otherwise, of a business might be.
The noble Lord asked on what basis the Government might decide to buy the shares of any company. The enterprise finance guarantee is a guarantee scheme for lending to SMEs. It does not involve the Government buying shares in businesses. For the capital for enterprise fund—the possibility for companies when restructuring their balance sheets to convert debt to equity—government money will go into a fund or funds, which will in turn
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The noble Lord asked whether the £10 billion guarantees for working capital will be self-financing. The Government have made a prudent provision, as I said in the Statement, in case of loan defaults. We have invited banks to present loan portfolios to us, and we will then negotiate a price with them on the basis of those portfolios’ risk. The pricing will be assessed portfolio by portfolio.
The noble Lord makes a good point about the prospects for larger companies. The attention and focus of many concerned about credit in the corporate sector will move from SMEs to bigger companies, many of which will be undergoing the renewal of credit and lending facilities during the course of this year. The working capital scheme that I have described provides guarantees on portfolios of working capital loans for businesses with an annual turnover of up to £500 million. We are not just talking about small businesses, but about sizeable ones with a lower risk than in the case of the enterprise finance guarantee for SMEs.
The noble Lord, Lord Razzall, asked whether all this is enough. The answer to that is: I do not know. I suspect not. I suspect that we are some way from the end of the road in navigating our way through the biggest and most complex shock that the global financial system has ever experienced. You just have to look at what President-elect Obama is proposing to bring forward in the United States. Incidentally, despite its size and scale, many American commentators are describing it as probably inadequate for the purpose. I am talking about $700 billion-worth of government intervention and stimulus to the US economy. During the course of this year, we will see that we are far from the end of the road in sorting out the crisis in the banks. Indeed, my right honourable friend the Chancellor, Alistair Darling, is currently talking to the banks about a number of further measures that will have to be taken and about a number of refinements of those measures that we have already introduced in order to see our way through this. However, I can say that, contrary to the advocacy that I heard on the radio yesterday by Dr Vince Cable speaking on behalf of his party, at the moment the Government do not have plans to implement one of their earlier manifestos and nationalise all the banks in the country.
4.06 pm
Lord Bilimoria: My Lords, I welcome the Minister’s Statement. Over the months of this credit crunch and financial crisis, I have been calling for greater scale support from the Government. The £1 billion announced during the Pre-Budget Report was woefully inadequate, but today we are talking about serious sums, and I greatly welcome that.
Will the Minister address a major concern I have about the working capital guarantee scheme? My understanding is that if a bank makes a loan of £1 million under the scheme to a business, the Government will guarantee £500,000 of it. Can the Minister confirm
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Lord Mandelson: My Lords, the noble Lord, Lord Bilimoria, reflects the sentiments and concerns of many people about the way in which the banks are now treating risk in the economic conditions we are facing. He is right that we will be offering a guarantee of 50 per cent, but it will be on a portfolio of loans, not on individual loans. However, the essence of how he described the scheme is right. The point of the Government providing a guarantee against those portfolios of loans is to enable the banks to reduce the amount that they have to put aside against them. That freed capital can be redeployed either to sustain existing lending facilities or to make new lending facilities for other companies.
The scheme will operate on the basis of clear understanding, negotiation and conditionality between the banks and the Government. We will not be offering our guarantee or delivering our side of the bargain unless we are absolutely sure that there is additionality: a clear commitment to maintain existing credit that would not otherwise take place or to offer new lending as a result of the operation of this scheme. It is important for me to stress that this negotiation between the Government and the banks about the operation of the scheme will be followed in considerable detail.
Lord Taylor of Blackburn: First, my Lords, when does this come into operation? Secondly, my noble friend refers to “new” borrowing, but what about the renewal of old borrowing? What is the situation there?
Lord Mandelson: My Lords, the working capital scheme I have described is designed to support £20 billion- worth of new and existing lending, which covers my noble friend’s second point. The enterprise finance guarantee will come into operation straight away—it is open for business. The working capital scheme kicks off today too, but with an invitation to the banks participating in the scheme to bring forward their portfolios of loans in order to start that “negotiation” between the Government and the banks to operationalise the scheme. That second scheme will require an amendment to the Banking Bill that will be introduced shortly. I expect the first £1 billion tranche from the working capital scheme to start flowing in about six to eight weeks’ time but, before that, there has to be considerable negotiation and business between us and the banks concerned.
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Lord Lamont of Lerwick: My Lords, I welcome the measures taken by the Secretary of State, particularly the guarantee scheme. However, I return to the question of the scale of the measures. The Secretary of State said that the guarantee scheme would have set against it £225 million, which seems to be a bargain in return for releasing £20 billion-worth of lending. Could the scheme not therefore have been doubled to £40 billion at a cost of £450 million, as the CBI, not just the Conservative Party, has requested? Would that not be a much better use of money than the £1 billion spent on the fiscal boost?
Lord Mandelson: My Lords, I do not accept the noble Lord’s last point. It is as important for us to do what we can to stimulate demand in the economy as it is for us to do what we can to create and extend credit. I am grateful for his welcome to what I have announced today. He asks a reasonable question: if the scheme is such a good idea, could it not have gone further and been mounted on a bigger scale? I would rather see how we go. We are designing a brand new monetary instrument of intervention, and I would like to see how it succeeds before we judge whether we can expand it further in due course.
Lord Lee of Trafford: My Lords, we have talked about starting the scheme and about the guarantees, but there is no mention in the Statement of the duration of the overall package. Has the Minister given any thought to that, or are the guarantees and loans essentially open-ended?
Lord Mandelson: No, my Lords. The enterprise finance guarantee will operate for a year in the first instance. I would hope to see the working capital scheme, which covers short-term working capital, fully operational in the next six months or so. As I said in response to the noble Lord, Lord Lamont, we will be able to judge then how well it has worked, what might work better and differently and where we might go after that.
Lord Jones of Birmingham: My Lords, I, too, congratulate the Secretary of State on a package that is at last talking about some real numbers and real help. On the eight weeks, to which he refers, to get it filtering into the economy, anything that can be done to get it in in February will be really helpful to business. There is a crying need for urgent help. I urge the noble Lord to go to his colleagues at No. 11 and be big enough to say that the VAT reduction attempt has failed, to put it back to 17.5 per cent and to use that money to increase this package by even more, so we can get even more help to small business.
I would welcome clarification right now on the noble Lord’s point that the cost of affording the guarantee would come at a charge to the banks, which was open for negotiation. If that is the case, will the banks pass that on proportionately when they extend their guaranteed lending; in other words, will they pass on the cost to the consumer, which is the business? If so, could the noble Lord assure this House that that will not be allowed in the case of the banks that we all own?
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Lord Mandelson: My Lords, I understand why the noble Lord is asking the last question. It is a reasonable question, but it is one to which I cannot at this stage give an answer, and I shall not attempt to respond on whether we can distinguish in pricing structures and the passing-on of charges between banks that have been recapitalised, in which the Government have a stake, and those in which we have not. I cannot answer that specifically, but I shall give him a response in due course.
With respect, I strongly disagree with the noble Lord on the subject of VAT. I tend to share the view of Mr Kenneth Clarke on this subject, who more than once has called for a fiscal stimulus to take the form of a reduction of VAT. He said that it was the fairest and quickest and likely to be the most effective way in which to deliver the fiscal stimulus, and I think that he was right. After all, a fiscal stimulus delivered in that form puts spending power into the pockets of both taxpayers and non-taxpayers. If you simply operated the stimulus by reducing income tax, not only would that take considerably longer to come into effect, it would not actually increase and enhance the spending power of those who do not pay income tax.
Lord Barnett: My Lords, I strongly welcome the creative way in which the scheme has been calculated by the Government. The noble Lord told us just now that the final decision on the loans will be made by the banks, on commercial grounds—I think those were the words he used. In other words, they will be arm’s-length transactions. Will there not be occasions, however, when many small businesses seeking loans will simply not be worthy of being given them? In those circumstances, can we assume that particular pressure will not be put on the banks to lend, even under guarantees of this kind?
While I am about it, can I ask about the bureaucracy referred to by the noble Lord, Lord Razzall? Of course, it is understandable in one sense, in that you cannot just give people the taxpayers’ money. There has to be some form of bureaucracy or whatever you wish to call it. How will you get banks to lend in the good cases rather than simply refusing loans in the bad cases?
Lord Mandelson: My Lords, I was remiss in not addressing the point made by the noble Lord, Lord Razzall, about the bureaucracy, as he termed it—I would not, of course, use that term—that surrounds the Government’s small firms loan guarantee scheme. I have heard many such complaints of the sort that he offered, and I think he may well have a small point. It will be our job to ensure that access to the enterprise finance guarantee does not involve the same sort of labyrinthine processes associated with the small firms loan guarantee.
I assure my noble friend that there will be no strong-arming on my or any other Minister’s part to place banks under duress to give loans to undeserving or uncreditworthy businesses. That is not our job and it is not their job to do that, and it will not happen.
Lord Renton of Mount Harry: My Lords, I very much appreciate the general terms in which the Minister has spoken this afternoon. I come back briefly to the
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Lord Mandelson: My Lords, I agree strongly with the noble Lord, Lord Renton, on this. There would be absolutely no point in creating a system of this sort which operated such exorbitant charges as to make the scheme prohibitive for small firms to access. In the discussions we will be having about the pricing structures, we shall certainly reflect the concern that he has expressed, and which I share.
Lord Mackay of Clashfern: My Lords, can the noble Lord help us on the effect the recent changes in interest rates will have on the amount of money that banks will have available for lending that they have taken from depositors?
Lord Mandelson: My Lords, people are still saving. Money is coming into the banks from savers. The interbank lending system is not working as it should because wholesale capital markets are less replete than we would like them to be and difficult to draw on; therefore, we have designed the working capital scheme to offer our 50 per cent guarantee against portfolios of loans to enable banks to free up their capital for subsequent lending. We have designed this scheme as we have precisely because we recognise the very issue the noble Lord raises, which we are seeking to address.
Lord Eatwell: My Lords, does my noble friend agree that central to the scheme is the idea that the banks have resources to lend but are deterred from doing so by a perception of risk, which the Government are seeking to mitigate? Given the virtual collapse of the wholesale money market, which provided £700 billion to the British banking system last year, is he confident that the banks have the resources to lend and will therefore be suitably stimulated in this case?
Lord Mandelson: My Lords, am I hopeful? Yes. Am I certain? No. My right honourable friend the Chancellor is currently discussing with the banks on a number of aspects of the instruments we introduced in the autumn to see whether they might be refined or adjusted to stimulate the creation of further resources for later borrowing. The Financial Services Authority believes it is operating its own capital requirements in a way that will make adequate capital available. I am sure that will be kept under constant review.
Lord Bates: My Lords, how do we target these resources where they are most needed? Has the Minister seen the results of the Equifax data for year-on-year business failure? They show that in the south-east year-on-year business failures are running at 8 per cent above; in the east of England they are running at 18 per cent above; and in the north-east of England they are running at 57.8 per cent above. Is he aware that this differential needs to be tackled, and that this
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Lord Mandelson: My Lords, Northern Rock is not a business lender. That is not to say that it might not conceivably ever be, but there are no plans for it to become one. However, I take the noble Lord’s point about the north-east, for obvious historical and sentimental reasons. If I can find a way of acting on his request I will, but that will not override the basic criteria of first come, first served or the judgment of the banks and their assessment of risk as regards the viability and credit worthiness of the businesses concerned.
Lord Tyler: My Lords, given the significance of this very important Statement, given that frequently in the past your Lordships’ House has had to interrupt its business to have repeated a Statement made by a Secretary of State in the other House, and that business managers in the other House can insist that an urgent question be made a Statement, why was the Secretary of State not able to insist that he made a Statement to your Lordships’ House first and that his junior Minister made a Statement later? Would that not be a much better way to deal with it? If we are to have a Secretary of State, a Cabinet Minister, in this House, should not he make a Statement to this House first?
Lord Mandelson: My Lords, there is understandable rivalry or competition between the two Houses on these matters; but, to be perfectly frank, I have enough to do in my day job without taking on the role and responsibility of the usual channels in resolving these matters. I look to the usual channels to do so in the usual and normal way.
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