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5.45 pm
Lord Higgins: Effectively, the valuation principles which the independent valuer will have to use may, as my noble friend has just pointed out, be in conflict with the views of the independent valuer. More particularly, the compensation scheme order, again set out by the Government, will presumably specify what the principles are which the independent valuer has to apply. In short, the Treasury is writing the rule book. The independent valuer is told he has to do this or that, apply average values or values on specific dates, and so on. This seems to be far more restrictive than ought to be the case. The matter ought to be dealt with by the independent valuer; I should have thought that there is a well established body of opinion on how this ought to be done.
Like my noble friend Lady Noakes, I have some doubts with regard to subsection (4). It says:
“Valuation principles may require or permit an independent valuer to make assumptions; such as, for example, that the bank—
(a) has had a permission under Part 4 of the Financial Services and Markets Act ... varied or cancelled”.
I would not have thought that this is something one makes an assumption about. I would have thought it is a fact: either such an order has been varied or cancelled or it has not. If not, I do not see that the independent valuer can then be compelled to say otherwise.
Similarly, while I can see that one may need to make assumptions about whether a bank is able to continue as a going concern—that seems reasonable—it seems odd to make an assumption about whether it is in
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Lord Blackwell: I understand why this clause has arisen but, like other noble Lords, I have come to the conclusion that the Bill probably does not require it. The issue I have most sympathy with is whether the valuer should be required to make the determination of whether the bank would have been viable in the absence of government action. That is a decision which, under the Bill, we are requiring the FSA, in the first place, to make. The independent valuer is required to rely on the judgments that have been made but, in fact, under Clause 7, the institution will be in this process only if the FSA has determined that it does not pass, or is unlikely to pass, the threshold requirement of continuing as a financial institution. In effect, therefore, the valuer can start with the presumption that it is not a viable ongoing entity without this being spelt out by the valuation principles.
The other aspects of the principles that the Treasury or others might want to put to the valuer are perfectly reasonable parts of the evidence that the valuer would be perfectly entitled to take into account. They do not need to be laid down as principles which are required to be taken into account. The problem is that, in order to satisfy the Treasury that all these principles are going to be considered, the clause leaves open such wide scope for the valuer to be dictated to that the whole notion of an independent valuer begins to be undermined.
If this clause is to remain in the Bill, I should like to understand how the dictation of these valuation principles affects any grounds of appeal. Would an appeal be able to take account of whether the valuation principles that had been dictated were appropriate, or would it have to start from the basis that the valuation principles were outside the appeal process?
Lord Stewartby: I hope that the Minister will have another look at this clause in the light of this debate and the points that have been raised. I think that one matter of language could be improved. When I first read Clause 57(3), I was confused as to what was to be disregarded. The text says that,
- “an independent valuer must disregard actual or potential financial assistance provided by the Bank of England or the Treasury (disregarding ordinary market assistance offered by the Bank on its usual terms)”.
I was not sure whether this was a double negative, so I looked at the Explanatory Notes, which say, in paragraph 147 on page 22, that the subsection requires the valuer,
- “to disregard actual or potential financial assistance provided by the Bank of England or the Treasury (other than ordinary market assistance offered by the Bank on its usual terms)”.
The language in the Explanatory Notes seems clearer and would be more easily understood than the text in the Bill. It is only a small change of a word or two, but it would remove the ambiguity.
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Lord Davies of Oldham: On that last point, if that is what the Explanatory Notes achieve, we will look at them with a view to amendment. I am not sure that I agree with the judgment of the noble Lord, Lord Stewartby, on that point, but I will reserve my position, look at the matter carefully and act accordingly if he proves to be right.
Several of the representations that have been made have been founded on a basis that is contrary to the Government’s thinking on this clause. Although issues were raised on matters of detail, I am not too sure that we are not colliding on a matter of principle. The clause is being attacked because it is thought that it somehow compromises the independence of the valuer, which we were at pains to establish when we were discussing the earlier clause. That view has been translated into the belief that the valuer is bound to have his independence affected because of the role reserved for the Treasury in this clause. I just do not accept that. The independent valuer will be established on the criteria of independence that we discussed at length only a few moments ago, but he will work within a framework established in law, as indeed he should.
Let me get this clear. Are noble Lords who have spoken about this critically suggesting that the independent valuer should approach the issue as if no public resources of any kind were at stake? We are talking about a situation in which a bank or financial institution is in such serious trouble that action has had to be taken. That action may have involved—indeed, it is likely to have involved—considerable resources of public money.
The Government are concerned to ensure that the evaluation criteria take account not of the double negative that the noble Lord, Lord Stewartby, suggested existed; there is no double negative, as it is absolutely clear what has to be taken into account. What the valuer cannot do is identify the value of the institution as if the authorities had not put in any resources to support that institution. That cannot be contended. In the evaluation procedure in this Bill, there were bound to be criteria relating to the safeguarding of public resources. I venture to say that if this Bill had been introduced by an opposition Member, opposition Back-Benchers would not be voicing criticism of this proposal, as they would be four-square with the necessity of having such safeguards.
Of course the Treasury may specify valuation principles to which the independent valuer must have regard when conducting the exercise to assess the amount of compensation, if any, payable in respect of a transfer of powers. That is a cardinal principle behind the concept of the action that the Government are carrying out under special resolution procedures. The valuer must disregard,
to the failing bank, as to include that in the framework would make the bank look more valuable and more viable than it could possibly be if it were not for the public interest at stake because of the resources committed. That is the significant point that I want to establish with regard to these issues, although I recognise that noble Lords have made a number of additional points about the scheme.
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Baroness Noakes: It may help the noble Lord if I remind him that I specifically did not challenge subsection (3). I am not at all sure that it is necessarily the case in every valuation that significant public resources will have been committed to the organisation; it is quite possible that a bank will not have received any financial assistance before being put into the special resolution regime. I said that I did not challenge subsection (3), although I accept that some of my noble friends have done so. The Minister said that some additional points had been raised. The only points that I raised were other than in relation to subsection (3), so I hope that he will respond to them.
Lord Davies of Oldham: I intend to do so. The noble Baroness will have noticed that I commented on other contributions to the debate but not on hers; I had not addressed myself to her comments and was in no way, shape or form including her within the framework of my remarks.
The Treasury may need to specify assumptions that the independent valuer must take into account in conducting the valuation exercise. These principles set out the parameters that the independent valuer must adhere to in making his determination. This in no way undermines the independence of the valuer. The European Convention on Human Rights recognises that such parameters may be established by the state in circumstances where compensation arrangements are being considered and where the state has been active in terms of public resources.
I emphasise that I am seeking to defend properly, as I was seeking to do in relation to the earlier amendments, the independence of the valuer, while stating that Clause 57 accurately outlines the parameters within which the valuer is bound to work.
Without the clause, the work of the independent valuer would have to take place with no principles or parameters. That would surely be open to the sharpest of criticism. I point out that the detail of the valuation principles, which will be set out in a compensation order made about a bank resolution, would be subject to full parliamentary scrutiny through the affirmative procedure. I reiterate the obvious point that parliamentary scrutiny is necessary for the order. That is an important part of the legislation.
I emphasise that the clause is a crucial part of the legislation. It is consistent with the European Convention on Human Rights. We have considered the provision with the greatest care. We are working within that framework. If we did not have parameters on which the independent valuer—I hope that in our discussion on previous clauses we have established the independence of that valuer—would act, the Bill would be severely deficient. I emphasise again how important that provision is to the Bill. I hope that the noble Baroness accepts that point.
Baroness Noakes: The Minister has not explained why, in his words, the Treasury “may need” to specify assumptions. What need is there? The Minister said that valuations need parameters. Why do they need parameters? If you appoint an independent valuer to value X, why can the independent valuer not go away to evaluate based on the facts and on ordinary valuation principles?
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We have to remember here that the Treasury is specifying some powers in granular detail, such as how to use averages or which valuation methods to use. We are not talking about high-level issues; we are talking about some very detailed matters. The Minister has not explained why the Treasury needs to do that, why parameters have to be set and why the Bill would be lacking if it did not contain those subsections.
Lord Davies of Oldham: I do not have a great deal to add, apart from the obvious fact that we are not talking about valuations in an exercise of dispute between two private individuals or personages. We are talking about valuation in the context where the state has acted, and may have acted with a substantial commitment of public funds. Within that framework, it is inevitable that the independent valuer, set up with all the clear protection of his independence that I have identified, will work within parameters to protect public resources.
Baroness Noakes: I will not delay the Committee further, because we have other business this evening. However, the Minister says that significant resources may have been put in by the Government but they may not. I have accepted subsection (3), which includes the financial assistance assumption, which seems perfectly reasonable to protect the interests of the taxpayer, but the Minister has not made a case for any other valuation principles being established. We will clearly need to revisit this again on Report but, in the mean time, I withdraw.
Financial Markets
Statement
6.04 pm
The Financial Services Secretary to the Treasury (Lord Myners): My Lords, with the leave of the House, I will now repeat a Statement made in another place by my right honourable friend the Chancellor of the Exchequer.
“The House will, I hope, understand that it was necessary to issue a market notice this morning, in the usual way.
In the past few months, our priorities have been, first, to prevent the collapse of the banking system; secondly, to support the economy; and, thirdly, to ensure we get lending going again. This is also a problem faced by Governments across the world—and it is therefore necessary to achieve the maximum degree of international co-operation. We are taking steps not just to support the banking sector but, importantly, to safeguard the millions of jobs that could be put at risk by the continuing difficulties in the international financial system.
Restoring the banks’ ability to lend is an essential part of the economic recovery so today I am proposing further measures to meet two objectives: first, to begin
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I want to set out these new measures in the context of the strategy we have put in place to steer the country though the worst global economic crisis for generations. Over recent months, banks have faced increasingly difficult conditions, as we have seen everywhere around the world, with Bank of America rescued last week; Citigroup, one of the world’s largest banks, broken up; Anglo-Irish nationalised; Commerzbank rescued in Germany; and, today, the Royal Bank of Scotland reporting substantial write-offs.
Last October, faced with the potential collapse of the banking system, we recapitalised the banks, strengthening their position. As a result, the Government took temporary stakes in two British banks but, as I said then, we have a clear view that British banks are best managed and owned commercially and not by the Government. That remains our position. As a result of the action we took, no savers in UK banks have lost money.
In the Pre-Budget Report, I announced substantial extra help for people and for businesses—lower income tax, more capital investment now and lower VAT—which, hand in hand with interest rate cuts and lower inflation, will support the economy and jobs. There is a clear international consensus that putting money into the economy now to counter the recession and to help people is the right thing to do. The cost of doing nothing would be substantially greater.
In almost every country, fiscal expansion policies have now been agreed—including in Germany only last week. In the US, President-elect Obama has already signalled the scale of their fiscal expansion. But, as the President-elect said only yesterday,
In the UK, the total amount of lending available still falls short of meeting the needs of the economy. Over the past 10 years, lending by foreign banks and non-bank institutions accounted for more than half of new corporate loans and 45 per cent of new mortgages here. A significant amount of lending capacity—by these foreign-owned banks and specialist lenders for example—has been withdrawn or has returned to their home markets, demonstrating again the need for co-ordinated international action.
On top of that, in the past few weeks, the world economic downturn has intensified everywhere—in the US, in the euro area, and now spreading to Asia, including China—all seeing weaker production, companies in trouble and fewer jobs. As we go into what will be a difficult year, dealing with this global financial crisis will need continuous effort.
There is no single remedy; there is no instant solution. We will need a range of measures designed to support lending, help businesses and protect jobs. Together, my measures today remove uncertainty and accelerate a resumption of lending—a necessary precondition for recovery here and around the world.
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There are three measures to address the capacity reduction in the banking sector. First, because of current conditions, companies are finding it harder to get loans. So the Government have today authorised the Bank of England to create, for the first time, a new £50 billion fund, which will help increase the amount of funding available to companies by purchasing corporate assets from the banks, enabling them to invest. This will help large companies and complement the substantial measures announced last week by my right honourable friend the Secretary of State for Business, Enterprise and Regulatory Reform to support small and medium businesses. This fund will buy assets from banks, financial institutions and financial markets, with finance provided by the Treasury. The Treasury is also supporting the fund with an indemnity. It will initially purchase high-quality private sector assets, like corporate bonds, commercial paper and syndicated loans, which companies use to finance their business. The assets purchased by the Bank of England will be good-quality investments which will eventually be sold so that taxpayers’ interests are protected. This will enable larger companies to get the funding they need at a lower cost.
The operating remit of this scheme will be set by the Government but it will be run on an independent basis by the Bank of England. When purchasing these assets, the Bank of England will ensure the total amount of money in the economy does not increase. In future, the Monetary Policy Committee will keep under review whether this facility could be used as an additional way for meeting the inflation target, in line with similar operations at the US Federal Reserve. In such circumstances, I will decide the overall scale of the scheme and I will also keep the House informed.
Secondly, in order to maintain some of the capacity being lost in the mortgage market, I have decided that Northern Rock will no longer pursue a policy of rapidly reducing its mortgage book. In addition, looking at when the housing market recovers, I am considering whether—and, if so, how—Northern Rock or other UK lenders can best support prudent lending to creditworthy customers who will need mortgages but can only afford deposits less than 25 per cent.
Thirdly, in order to ensure that RBS, which owns NatWest and a number of other banks, can continue to support lending, I am taking action to strengthen its position. When the Government purchased their stake in the bank in December, a new management team was put in place. The company has announced further losses today, many of which are associated with its investments in the US following its takeover of a Dutch bank, ABN, in 2007. So I have agreed to its request to convert the Government’s stake of preference shares into ordinary shares. The Government could now own up to 70 per cent of RBS. In return for this, we have agreed with it an extension of lending commitments to large companies and an increase in lending of £6 billion in the next 12 months.
As well as taking action to maintain lending capacity, I want to remove some of the barriers and uncertainty preventing the existing banks lending further. In return for this, we intend to negotiate with each bank a lending agreement. These agreements will be specific, covering both the quantity and type of lending made
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In return, banks will get access to support measures. First, under a new scheme the Treasury will insure certain bank assets for a commercial fee against losses on banks’ existing loans. The purpose of the protection is to allow the expansion of lending, so the pricing has to be fair and reflect all our objectives. The banks’ problems stem from uncertainty about the value of their assets. Faced with this uncertainty, individual banks are reluctant to lend to businesses and companies. This will reduce the banks’ exposure to risks and give them the room they need in order to lend more. We will insist on the highest international standards of public disclosure and transparency in the operation of the scheme. Countries all over the world are considering similar proposals. We will work with them to take action together.
The second step towards removing barriers to lending is an expansion of the funding capacity of financial markets. The credit guarantee scheme I announced in October will be extended beyond its current end date of April this year. Instead, it will run until the end of 2009, subject to state aid approval. This scheme guarantees new unsecured borrowing. So far over £100 billion of these guarantees have been taken up. These guarantees have been successful in helping bring down the interbank lending rate from 6 to 2.25 per cent. To complement this, the Bank of England will continue to provide similar types of liquidity support when the special liquidity scheme expires at the end of this month. Until recently, up to half of UK mortgages were funded from the wholesale markets. At the time of the Pre-Budget Report I accepted the recommendations in the Crosby report on mortgage finance markets. I have announced that the Government will provide up to £50 billion of guarantees, initially on new mortgage lending and eventually on other assets. Overall, the liabilities taken on will be backed by financial assets and fees will be charged for guarantees and insurance, safeguarding the taxpayers’ interests.
Thirdly, the Financial Services Authority has today set out its policy on capital requirements. It has set out the level of capital that individual banks need to keep on their books to allow them to withstand the slowdown and maintain lending. It will be a key signal that banks should allow their capital to be used to absorb the losses from investments, while not unnecessarily restricting their lending.
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