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The regulation of capital is fundamentally an international matter and tomorrow I will present our plan to European Finance Ministers in Brussels. I hope we can agree similar proposals there. Because this financial crisis is affecting every country in the world, it is crucial that other countries also take steps to support their banking sectors. We cannot risk a damaging worldwide spiral of weakened confidence and national-only policy decisions. Stronger international collaboration will be strengthened with the arrival of the new US Administration. We must not give way to financial protectionism which could be every bit as damaging now as it was to trade in the 1930s. Instead, we must look at the causes of this international financial

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crisis. We must strengthen the supervisory and regulatory system here and internationally. I shall publish proposals on the regulatory framework for the banks in the spring together with the FSA’s own review. Internationally, we will be actively pursuing this as part of our presidency of the G20 through 2009. Our objectives in the G20 will be to continue to take action jointly to support the world economy, to act together to restore the flow of credit and to improve the international regulatory regime. This is a continuing effort. Countries all over the world are united in supporting their economies, maintaining lending and protecting jobs. We are ready to do whatever it takes”.

My Lords, that concludes the Statement.

6.18 pm

Baroness Noakes: My Lords, I thank the Minister for repeating a Statement made by the Chancellor in another place. I also thank the Government for finally recognising, de facto if not in terms, that their action last October was far from sufficient to save the banks, let alone to save the economy or, to use the Prime Minister’s memorable phrase, “to save the world”. The Government accompanied their October announcements with a lot of fierce words about banks resuming lending. The banks did not do so. The lack of credit in the economy is accelerating the depth and length of the recession in which we find ourselves after a decade of irresponsible and reckless economic management. Of course there is a global banking crisis but the way that it is hurting our economy is a direct result of economic management, or indeed mismanagement, of the last decade. So we start with an economy that is not well prepared for a downturn and this has been exacerbated by a lack of credit to support it. Instead of concentrating on credit, the Government embarked on futile gestures, such as the VAT reduction, which has had absolutely no impact. So we must be grateful that the Government are now focusing on the real issues.

We support much of what has been announced today, though with some provisos. We have argued for a long time that the use of preference shares carrying a coupon of 12 per cent was counterproductive in the original package. It positively worked against increasing lending. At least the RBS will now be freed from that. The Minister said nothing about the similar millstone around the neck of Lloyds TSB/HBOS. Will he do so? Is it that Lloyds TSB does not want any more equity shares to be held by the Government, with which we could have some sympathy? If so, what will that mean for Lloyds TSB’s lending?

What impact will today’s Statement have on government borrowing and debt figures, which are already at record levels? To put it another way, how much more taxpayers’ cash will be paid to the banks? The asset purchase facility appears to involve further borrowing of £50 billion. How much else is involved? Related to that, will the Minister say more about the Bank of England asset purchase facility? We are told that this is to buy high-quality corporate debt, but investment-grade borrowers have access to finance at the moment; the problem is borrowing below investment grade. How will this affect the borrowing for corporates that are below investment grade?

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The first £50 billion will be funded by Treasury bills, but this morning’s announcement opens the way for the MPC to use asset purchases for monetary policy purposes. Will the Minister confirm that this means that the Government are opening the way for quantitative easing, or, in ordinary parlance, for printing money? We can see that, in extremis, quantitative easing may be necessary, but it will be the most damning indictment of the Government’s handling of the economy if it comes to that.

Secondly, how is the MPC involved in this? The committee has no control over the Bank’s printing presses. Do the Government intend to change the monetary policy remit of the Bank of England? If so, how, and when will they do so? What mechanisms will be involved, and, more importantly, what involvement will there be for Parliament?

On the contingent liabilities that will come with the Statement that the Minister has repeated, will he say how much is at stake for the taxpayers in a worst-case scenario? There are virtually no figures in the Statement. The Chancellor denied on the radio this morning that this was a blank cheque, but how do we know, because the Government will not give the figures? Is there any limit on the amount that will be exposed in the economy as a result of this Statement?

We have concerns about the open nature of the plans that have been announced today. I have some detailed questions for the Minister on the asset protection scheme. The press release that was referred to this morning talked about information on the assets being made available to the Treasury, but no mention was made of such information being made available to Parliament, and since this is an open-ended commitment, it is important that proper information is set up. We have called for a full and independent audit of what the taxpayer is now being asked to ensure. What is being done to value assets before their risk passes to the taxpayer?

The vehicle for the asset protection scheme may well be an entity that is established or designated by the Treasury. We have seen with UK Financial Investments how the use of a special vehicle that is set up by the Treasury lacks a specific statutory accountability framework, which means that what happens within that organisation can be very difficult for Parliament and others to track. Will the Minister commit to ensuring that full accountability of that body to Parliament is established? The Statement this morning was not stuffed full of detail; nor was the Minister’s repetition of it. It is clear that much still remains to be decided. When will full details of this scheme be made available?

The test of this package will be whether credit is restored to the economy, but it is important that lending is realistic and not of the reckless variety that helped the banks to get into the mess that they are in. Most commentators believe that the valuation of the housing market has not yet reached its trough. To what extent is it not reckless to encourage individuals to start borrowing again when values are still going down? The Statement referred to Northern Rock starting to lend again. I am not at all sure that using a state-owned bank that was not known for prudent lending practices is a particularly good vehicle for that, but will the

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Minister say what instructions the Government are giving to Northern Rock on its lending criteria and how much they will allow it to lend?

More generally, allowing mortgage-backed borrowing by the banks, as recommended by Sir James Crosby, will be acceptable only if it means meeting the standards of transparency and quality that the Government set out today. The Minister said that £50 billion will be available. How does that compare with former volumes of mortgage-backed securities? What impact will this have on the market? We would be concerned if this scheme were so large that it led to a return to the price inflation and lending criteria that got the banks into this mess in the first place.

Lastly, the Statement referred to the FSA’s separate statement on capital ratios. Will the Minister explain the reference in that statement to amending the variable scalar method of converting internal credit risk models? Will this allow the banks to reduce their risk-weighted asset requirements, as commentators have suggested, and hence to reduce the amount of capital that they are required to hold? Does that not leave the way open for our banks to become even riskier than they are already?

6.25 pm

Lord Newby: My Lords, I am grateful to the Minister for taking time out from the Banking Bill to repeat the Statement. It is, however, a very depressing Statement, because it makes it clear that the banking system is in even greater crisis than was apparent in the autumn, that it is creating a real economic crisis of alarming and growing proportions, and that the first bail-out was completely inadequate. We obviously hope very much that this bail-out is more successful. The Statement, however, gives rise to as many questions as have been answered, and I hope that the Minister will not mind if I ask him a few questions now.

The Minister points out quite correctly that there has been a dramatic fall in the capacity of the banking system because the foreign banks have largely withdrawn their lending. Have the Government assessed the quantum of lending that has disappeared from the UK financial sector, and has that figure informed the amounts by which they are now asking the banks to increase their lending?

Secondly, will the Minister confirm that the £50 billion of net assets that are being available will be funded by an increase in government borrowing? As the noble Baroness, Lady Noakes, said, this is another £50 billion to add to the ledger. When he says that the Monetary Policy Committee will keep under review whether this facility could be used as an additional way of meeting the inflation target, can he explain what on earth that means? Again, as the noble Baroness asked, can he explain whether we will need an amendment to the Bank of England Act to change the MPC’s formal remit to do that?

We welcome the fact that Northern Rock will no longer pursue a policy of rapidly reducing its mortgage book. Does that mean that it will carry on reducing its mortgage book, or will it seek to increase it, given that the Government will encourage it and other lenders, in a manner about which we are yet unclear, to make mortgages available to those who can afford deposits of less than 25 per cent?

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The Government now own 70 per cent of the RBS. Does that not mean in effect that it is a nationalised bank, and would it not be more straightforward to turn it into a state bank so that the borrowing and lending policies that it pursues can explicitly follow public objectives? The RBS is in a slightly bizarre situation in that the Government are directing it to make specific policy changes to its lending while professing more generally, and certainly in the context of the Banking Bill, that when they take shares in banks—and particularly when they take over a bank—they will do so at arm’s length. They profess this; yet we have a detailed proposal from them on how the RBS will extend its lending activities in the future.

On the other banks covered in the Statement, the Government have undertaken to negotiate a lending agreement with each bank. Will all the banks agree to such a lending agreement? What will the sanction be if they do not? There is a problem in reaching these agreements and putting in place the new scheme to insure, as the Government coyly put it, “certain bank assets”. How do you value these bad assets? Values in, for example, commercial property are still plummeting. When the Government say that countries all over the world are considering similar proposals around bad assets and that we will work with them to take action together, are they seeking to find a common basis for valuation? Or are they just going to have a chat with all the countries doing similar things?

On capital adequacy, it seems that the FSA and the Government have accepted that the current capital adequacy rules are inadequate. Are they in effect tearing up the bar rules unilaterally, or is the Chancellor going to Brussels tomorrow to ask that they be revoked, set aside temporarily or replaced? It is not clear from the Statement.

Finally, what in broad terms does it mean when the Government say they will publish proposals on the regulatory framework for the banks in the spring? Might they, for example, be contemplating a Glass-Steagall approach, or is this just a raft of technical issues?

6.31 pm

Lord Myners: My Lords, I gave up counting the number of questions asked in 13 minutes and doubt whether I will be able to answer them all in the customary seven minutes that remain. I will do my best. This is an important announcement, following the announcements made in October that were highly effective in reassuring customers and depositors of British banks of the strength of those banks and their ability to honour their commitments.

Contrary to the comments of the noble Baroness, Lady Noakes, banks have continued to increase their lending in a number of important areas. In the various meetings I had over the weekend with most of the chairmen or chief executives of our British banks, a number expressed considerable confidence about the outlook for lending in the United Kingdom. This is in the light of action taken by the Government—in both the Pre-Budget Report, as a consequence of lower interest rates and, importantly, because of the measures we announced this morning.

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The noble Baroness questioned whether we were in a strong enough position economically to cope with these extraordinary changes. I remind noble Lords that these are global challenges. As I and the Chancellor of the Exchequer have said, there is no economy in the developed world, or indeed in the major developing economies, which is not now experiencing significant contraction in output and demand. Yet in six of the past seven years the United Kingdom was either the strongest growing or second strongest growing economy in the G7. Over the past 10 years, we achieved the highest growth in GDP per capita in the G7. We approach these challenges from a position of considerable strength after the achievements of the past decade.

The noble Baroness asked about the Lloyds Bank Group and the “millstone” of preference capital. The preference capital was agreed with the board of Lloyds. It may well reflect on changed circumstance and wish to talk to the Treasury and the UKFI. If it does, those representations will be received.

On the impact of today’s Statement and in particular the amount of cash that is going to the banks, the strong feature of this announcement made by my right honourable friend the Chancellor of the Exchequer is that it involves little cash. The exchange of preference shares for ordinary shares is a non-cash item. The attachment of guarantees in accordance with Crosby is a non-cash item. The extension of the discount window facility at the Bank of England is a non-cash item. The extension of asset protection through an insurance scheme is a non-cash item at first. It may be a cash item in due course; that would depend on the experience of the insurance policy and would have to be offset against the premium received.

The noble Baroness asked whether we are giving a blank cheque to the banks. That is not the case. On the contrary, establishing the asset protection scheme will take six to eight weeks. It will involve a huge amount of data analysis. I envisage well over a billion items of individual data reviewed for each bank that approached us in that connection. We will be drawing on the support of external advisers—accountants, actuaries and lawyers. We will determine appropriate attachment points based on value-at-risk calculations and ensure that the premium reflects the risk, taking into account the lending commitments we would receive from the bank as a consequence.

The Bank of England asset purchase facility will involve investment-grade bonds. The noble Baroness lives in a different world from me in her assertion that investment-grade corporations have no difficulty obtaining loans. That is simply not the case from the contact I regularly have with the finance directors and chief executives of major companies. The appetite for banks to lend to major corporations has deteriorated substantially. The measures we have taken will address that.

This is not a prelude to quantitative easing, but it creates the architecture that would be needed for that. If the Bank of England and Monetary Policy Committee conclude that that is the right thing to do, an appropriate framework will be set in place. That would include an exchange of letters between the Chancellor of the Exchequer and the Monetary Policy Committee. The

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noble Baroness does not reject the concept in certain circumstances—presumably at a point where interest rate reductions no longer have the effect they otherwise previously did at higher levels. There will not be a need to change the Bank of England Act.

There were observations about the lamentable record of Northern Rock management, disregarding the fact that the management of Northern Rock has changed. The current instruction to the board of Northern Rock is that it should no longer regard its asset book as in run-off.

The noble Lord, Lord Newby, asked for data on the extent to which foreign banks’ withdrawal is impacting on the availability of credit. It is quite significant in particular sectors of the market. The withdrawal of the Icelandic and Irish banks, the ending of securitisation and a general retreat to home which tends to happen in these circumstances have meant a serious reduction in credit availability. This programme is designed to address that.

The noble Lord also asked whether the Royal Bank of Scotland is now a nationalised bank. No discussions with the Royal Bank of Scotland have ever discussed nationalisation. The Chancellor was clear in his Statement to the other place that he regards our banks as best owned in the private sector. However, with the board of the Royal Bank of Scotland and other shareholders, we have commenced a programme to improve the quality of management and leadership there. Noble Lords will no doubt have seen the appointment of Sir Philip Hampton to join Mr Stephen Hester as respectively chairman and chief executive of that bank.

Questions were asked about the Crosby review and the guarantees. Again I remind noble Lords that the attachment of guarantees to residential mortgage securitisations does not involve a cash payment. It enhances the quality of the credit and is a non-cash cost. Crosby was very clear that he did not believe that this programme would create any costs for the Exchequer, but rather would be a source of income. We have also committed, as a part of this programme, to ensuring that London becomes a centre for a new form of securitisation that departs from the weaknesses and failures of the last, which did not have appropriate disclosure or risk sharing.

I hope that I have managed to respond to most of the questions put by the noble Baroness and the noble Lord.

6.40 pm

Lord Elystan-Morgan: My Lords, the accusation has been oft repeated that there was indeed a failure three months ago on the part of the Government to make the bail-out of a proportion sufficient to be effective. Is the Minister satisfied that those banks that have received massive subventions from public funds have, since the beginning of October last year, been entirely candid with the Treasury and the Bank of England with regard to their contingent liabilities? I shall put it another way. Is this latest crisis due in any way to the deliberate failure to make a full disclosure of those liabilities, or is it due to unforeseen and unforeseeable events?

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Lord Myners: My Lords, the action taken in October was not a bail-out; it was designed to put beyond reasonable doubt questions about the capitalisation of British banks. Issues around asset valuation are primarily for boards of directors and external auditors to address. Nearly all our major banks have a December year-end, and they will now be going through the process of completing their accounts. The Royal Bank of Scotland made it clear that its announcement this morning of quite frightful losses was a consequence of that work. It is absolutely incumbent on boards of directors, particularly chairs of audit committees and external auditors, to be clear on the need to be honest about the state of the assets they own.

Lord Barnett: My Lords, we are in danger of forgetting that this stems from the incompetence or even worse of bankers who, to some extent, the Government are now depending on to run the banks. The losses are so huge that frankly we do not know what they are, and indeed I am not sure that anyone knows. Certainly I am not sure that the directors of these banks, their auditors, Ministers, or anybody else can answer questions about values because we know what has happened in the past. Clean certificates were issued by auditors but, days or perhaps weeks later, billions were written off. The situation is so incredible that it is hard to believe. If we do not know the figures, is not there a real danger that guaranteeing the banks could be self-defeating in the sense that once the bad and slow payers know about it, they will become even slower so that situation is even worse, and we will see real bad debts, not possible bad debts?

The Government now have 100 per cent control of some banks and at least 70 per cent of others. We assume that that is the end of it, although one begins to doubt if it will be. I appreciate their desire to leave the running of these banks to at least some bankers, although again, I am not sure which ones. Can the Minister tell us whether any of those bankers who decided to buy ABN AMRO and now have to write off God knows what—£10 billion or £20 billion—are still going to be allowed to run their banks at arm’s length? Is it really the case that the running of banks in which the taxpayer has more than a 70 per cent interest as well as interests in the form of guarantees and insurance is going to be left to those self-same bankers? Is that really the Government’s decision?

Lord Myners: My Lords, many of my noble friend’s questions focus on the Royal Bank of Scotland. I remind noble Lords that very significant changes have been made to the leadership of that bank. A new chairman is to be appointed and a new chief executive is in place. Two or possibly three of the executive directors have left, and there is a general agreement that the board needs to be further refreshed. Certainly, very serious questions need to be asked not only by the board of directors and the senior management of some of these businesses, but also by institutional investors who, from my recollection, voted—inasmuch as they voted either for or against the acquisition of ABN AMRO—by a margin of over 90 per cent in favour. Noble Lords will no doubt recall that a competition was held for the ownership of ABN AMRO. Barclays

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failed, and perhaps now regards itself as truly fortunate. In putting the performance of banks into context, it is only fair to note that, on Friday evening, Barclays announced profits well above market expectations. It would be wrong to castigate all bankers.

The value of assets, as I said earlier, is a matter for directors, who must know what the assets are worth. Valuation is not a precise exercise, as we discussed very recently in the context of the Banking Bill, but there is no excuse for failing to address valuation. When it comes to providing insurance, we will form our own views on valuation; that is, we will take a bank’s data and form our own views on how much of the risk we will take.

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