Previous Section Back to Table of Contents Lords Hansard Home Page

We welcome the competition measures which are a part of today's announcement. Our clear policy has been to ask the Competition Commission and the OFT to carry out a review of the impact of consolidation on competition in the banking sector.

Mr Stephen Timms said last April that my party was,

This morning, the Lobby briefing reported that the Chancellor told the Cabinet that there was not enough competition among banks. Well, all I can say is that I am glad that the Government are now on the right side of the argument. Will the Minister now admit that the Prime Minister was wrong to promote the Lloyds/HBOS merger and that the Government were wrong to bypass competition law at the time?

The sad thing is that the Government have not come to this position by themselves. They have had it imposed on them by a Commissioner in Brussels determined to make her mark in the dying days of the current Commission. For our part, we are not convinced

3 Nov 2009 : Column 142

that it is enough, and our policy will remain that a competition review for the UK banking sector remains essential.

Of course the Statement makes the usual obeisance to restoring lending with a few embellishments such as a customer charter, but businesses, particularly SMEs, are clear that banks either do not want to lend to them or will do so only at a high cost. The banks have been trying to present the lack of lending as a lack of demand, but that ignores the evidence to the contrary from small and medium-sized businesses the length and breadth of our country.

The plain fact is that the Government have failed to restore sufficient credit to the economy. The latest evidence is that the flow of lending to the business sector has fallen for the seventh consecutive month. It is no surprise that our economy, uniquely among the major economies, remains in recession when our businesses cannot get the credit that they need.

The Government's bewildering array of schemes has also delivered little. What is the point of a £5 billion scheme to deliver trade credit insurance if it provides only £13 million? What is the point of a £2.3 billion automotive support scheme if nothing actually gets paid out from it?

Indeed, the question that really cries out to be answered from today's Statement is: what is the point of this Government?

4.29 pm

Lord Newby: My Lords, we are grateful to the Minister for making this Statement, particularly as it is in reality his Statement, rather than the Chancellor's. He is the man who negotiated this and, therefore, it is fortunate for your Lordships that we have an opportunity to ask him questions, because I suspect that he, more than anyone else in government, knows the answers.

My first comment on the Statement as a whole is the extraordinary scale of all the figures involved. Possibly the smallest figure involved is £700 million. After a while, one comes to believe that the figures are in the normal run of one's daily business. I suspect that in the negotiations, and more generally, the banks almost lost sight of the scale and implications of the recklessness of their previous management. We are dealing in figures which, if we were talking about health, education, aid or any other area of government, would be deemed extraordinarily large, but here they are tossed off as though they were commonplace.

The Statement is in two parts. The first deals with the Asset Protection Scheme and the way in which the banks will continue to be run, as though there were no restructuring. The second deals with the restructuring. As far as concerns the Asset Protection Scheme, the change in the detailed arrangements makes sense for RBS. I have some concern about the provision of £8 billion-again, the figure is tossed in as though it were of relatively little consequence-which it might be necessary to provide in the event of a severe downturn. This is a significant additional figure given everything else that has been done with RBS, and raises issues about the ongoing underlying health of RBS. Will the Minister tell us more about the stress tests that were undertaken by the FSA, which have caused the

3 Nov 2009 : Column 143

Government to make this significant additional figure available? It is worrying that, despite everything, RBS may still need an additional £8 billion. How likely is that, and on what basis has the decision been taken?

The Statement then talks about the lending levels of the banks, which the noble Baroness mentioned. I share her concerns. RBS is going to increase its lending capacity, but it does not say that it will increase its lending levels. The Statement says that RBS will,

However, RBS's briefing earlier today said that it would continue to "work towards" meeting its lending commitments. There is a big difference, because it is not meeting them. The reason that the banks give, as the noble Baroness said, is that there is no demand. The reason that businesses give is that the banks are piling on charges, fees, requirements for additional collateral and other charges and requirements that make it practically impossible for them to accept the additional lending even though they want it. The banks are still in denial about the level of pent-up demand for loans from small and medium-sized businesses.

The Statement then talks about bonuses. I know that the Minister has been fighting in the trenches on this matter. However, it is difficult to believe that what is in the Statement is a revolutionary development. All that is happening-even though it has taken some time to get to this point-is that bonuses are being paid later, or in a different form from what was originally envisaged. There is no suggestion that the total quantum of potential benefit available under bonuses is being reduced, and it is that quantum of benefit that causes so much anger among the public.

I turn to the restructuring. The Statement is a play in two acts when it deals with the main banks, but there is a little intermezzo in the middle into which Northern Rock is inserted. The Minister points out that the Government intend to split the bank into two. The Statement does not say that the Government also intend to sell off the good bit of Northern Rock, presumably under a quick timetable. We on these Benches are concerned about the pace at which the Government plan to sell off part of Northern Rock. We believe that they may not get the best deal and that the timescale is politically driven. Will the Minister reassure us that the Government have their eye on the bottom line rather than the headline when it comes to selling the good bit of Northern Rock?

With regard to the other two banks, the Government announce what they are doing as though it is a result of their decision-making. However, as the noble Baroness said, the truth is that it is the result almost exclusively of decisions taken in Brussels. Unlike the noble Baroness, we do not think that this is necessarily a bad thing, not least because in our view, if it were left to the Government, no restructuring of these banks would currently be planned. Although we have some concern about the timetable, in that the parts of the two banks that are to be hived off should not be sold too soon or in a fire sale, it seems that the Commission has beneficially stepped in here in a way that the Government might well not have done. I know that to save her life the noble Baroness cannot admit that this might be a good thing, but on these Benches we think that it is

3 Nov 2009 : Column 144

probably a positive development. However, regarding the four-year period that has been proposed before the sell-offs can take place, can the Minister assure us that there will not be any political drive to sell off parts of these banks prematurely before the election to prove a point when the Government will almost certainly get poor value for money from any sale?

Finally, the Statement does not deal with what we consider to be the most fundamental issue concerning the state of the big banks going forward-namely, the extent to which the whole gamut of activities from utility to casino can be carried on under one roof. It does not address the issues raised by the Governor of the Bank of England or the arguments that are raging about the desirability or otherwise of splitting the banks on that basis.

The Chancellor made it clear on the radio this morning that the Government remain the lender of last resort to the banking sector despite these changes today, and that, if there were another crisis, the Government would still have to step in in respect of not only, say, Barclays' deposit-taking but its entire portfolio of activities. Therefore, does not the Minister agree that it would be appropriate to expect the banks to pay some insurance premium for the cover that they are still recovering from the Government?

Lord Myners: My Lords, I thank the noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, for their contributions and observations. The noble Baroness is on the horns of a dilemma. Her comments are in many cases contradictory, and I shall point out some of them in the time left available to me. Let us remind ourselves that the Conservative Party rejected the support provided to Northern Rock: it was not willing to step in and provide that support. It was hesitant about the recapitalisation in October-it simply did not know how to react to it-and it was totally confused by the asset protection scheme. Having listened to Mr Mark Hoban on the "World at One" today, the Conservatives seem to me to remain confused by the further refinements to the asset protection scheme as announced today. We have a picture of inconsistency and contradiction.

The noble Baroness suggests that the extra money invested exceeds the amount that we indicated in the Budget as a worse-case scenario. I wonder whether she has forgotten some of her professional training at the auditing firm of KPMG, because importantly we are investing here to acquire assets, not losses. The numbers are big, as the noble Lord, Lord Newby, said, but the important numbers are coming down: the contingent liabilities are coming down; the first losses are going up but the Government's exposure is coming down. I have said that the Chancellor of the Exchequer is confident that in the PBR he will give the House good news about reduced public exposure to the losses arising from these schemes. The schemes have worked: they have stabilised the banking system. The share price of Lloyds has quadrupled since January as a consequence, and that is why we are being paid £2.5 billion for an insurance policy on which no claims have been presented.

The noble Baroness again completely contradicted herself by saying that Lloyds could not wait to get out of the insurance scheme because the pricing was punitive.

3 Nov 2009 : Column 145

If it was punitive, I make no apologies because I have always fought to ensure that the deals with the banks are done on terms which deliver good value to shareholders. The fact is that it has withdrawn from the scheme because it believes that it is in its shareholders' interests and it is able to raise private capital. Goodness me, I thought that the Conservative Party was in favour of private capital. Here we have a solution which brings private capital to bear and the noble Baroness cannot bring herself to congratulate us on securing an excellent outcome. The noble Baroness refers to Lloyds wriggling out of the scheme. Far from it, Lloyds has found an elegant way to recapitalise itself through markets which are willing to provide capital, plus an innovative scheme which we have structured with it which involves a number of novel elements and which is much admired-I hang my head in shame here-by many investment bankers.

The noble Baroness inquired about the tax deal. The tax undertakings offer taxpayers uncertain future revenues at an unknown time. We had to agree to that because RBS could not afford any other way of paying. That was why I put the tax agreement into the structure. It no longer has to do that, so removing the tax undertakings from the deal in exchange for a higher first loss, increased transparency, and a lower pool of risk assets covered has meant better value for the Exchequer and far more visibility and transparency in the scheme.

The noble Baroness chooses to take her financial information from the Evening Standard. I can assure her that bonuses have not been capped at £2,000. We have been very clear: cash bonuses for employees on the front line earning £39,000 or less and no cash bonuses for any other employees in RBS or Lloyds.

The noble Baroness seems to forget our Competition White Paper which was issued before the Summer Recess. It clearly stated that we believe that there needs to be more competition in the British high street for banking services. I remind the noble Baroness that competition has declined over 25 years since the Conservative Party encouraged the reckless demutualisation of building societies.

I say to the noble Lord, Lord Newby, that the numbers are large but they are improving. The contingent capital will earn us a generous fee of 4 per cent per annum. Again, those are excellent commercial terms for the Government. The details of the stress test were detailed by the FSA in May. It is called the 1980s extreme U test. As I have already mentioned, the lending agreements which RBS and Lloyds are continuing to maintain will provide what is necessary to support the UK economy. The banking system is stabilised, stronger, more commercial and better able to meet the needs of its customers as a result of this extraordinarily good package which we have been able to announce today.

4.42 pm

Lord Lamont of Lerwick: My Lords, I thank the Minister for this comprehensive and highly significant Statement. However, is the reality not as he stated in his initial remarks that the banks do not need the insurance scheme, but that they cannot afford it and

3 Nov 2009 : Column 146

that that is why they have had to restructure it? While it is indeed welcome that the pool of assets to be insured is to be considerably reduced, is there not a danger that the banks carrying a higher proportion of the risk may not recognise the full extent of the impairment of bad loans on their books? If that is not faced up to, we will be left with a problem that is not being solved and with a problem with which this crisis began. Although more competition in the banking sector is very much to be welcomed, are not these measures, which are being forced on the Government, an absolutely tiny mouse compared with the elephant in the way of competition which the Government put there when they facilitated the merger of HBOS and Lloyds with disastrous results?

Lord Myners: My Lords, I must disagree with the noble Lord. Quite clearly, Lloyds is able to exit the APS by raising some £13.5 billion of new equity from its shareholders, plus converting tier 2 and innovative capital instruments into a contingent capital instrument which has allowed it to exit the scheme. It has done so with its own resources and with its own advisers, supported by the Government and endorsed by UKFI. It could certainly afford to participate in the APS, but it judged that it no longer needed the protection that the APS afforded. I believe that one of the reasons was that the management of Lloyds has a much better grasp of the assets that it acquired when it merged with HBOS and much better judgment about the probability of default and any loss in the event of default.

Work to support the announcement made today in respect of Lloyds and Royal Bank of Scotland has clearly required extremely detailed review by the FSA, by the Treasury and by our own advisers. I can say with a degree of confidence that we know much more about the assets of Royal Bank of Scotland than the old RBS knew about the assets for which it was responsible. There was an intolerable failure of corporate governance by that board that was a consequence of abominable leadership by the chairman and chief executive of that company. But that is now behind us-we have new management in that bank which we are supporting and a much better knowledge of the assets held. Furthermore, the underwriters to the Lloyds issue will have looked very carefully at the quality of the Lloyds asset book before entering into the largest equity underwriting that this country has ever seen. While the noble Lord raises perfectly appropriate and correct questions, I want to reassure him that there is a reality in the view that the management of RBS and Lloyds now have about their businesses.

Baroness Turner of Camden: My Lords, I thank the Minister for repeating the Statement. However, I am most concerned about the headlines screaming that thousands of people are being made redundant by RBS. Quite frankly, the management must surely realise that making all these people redundant is no help to the economy. These people cease to be taxpayers and become recipients of benefits. Really, management should not be encouraged in any way to get rid of staff-they should endeavour to keep them wherever possible.

3 Nov 2009 : Column 147

Lord Myners: My Lords, I am grateful to my noble friend for her observation. It is of course worth noting that had we not stepped in to support Lloyds and the Royal Bank of Scotland, those banks would have failed and there would have been no jobs. The 3,700 job losses announced yesterday by Royal Bank of Scotland are deeply regrettable. Nevertheless, it is the view of the management of RBS that the vast majority of those job losses will be covered by natural wastage and there will be little, if any, need for compulsory redundancy.

Lord Shutt of Greetland: My Lords, I want to refer to the latter points in this huge document, which contains big numbers that most of us have difficulty with. Some of us can understand the idea of the three new banks and we see that the die is not yet cast. We recall Northern Rock and Cheltenham & Gloucester in their former existence as building societies. The Minister referred to the disastrous demutualisation process and the fact that every demutualised building society is no longer independent. Also in the list of names is the TSB. It is difficult to call what happened to it many years ago "demutualisation", but it was the precursor to the demutualisation. Of course, the TSB was an orphan, yet the Government took the money. It is suggested that these three new banks, which will be set up some time before 2013, will be new entrants to the market. Is there not now an opportunity for the Government to create one modern mutual out of those three new creations?

Lord Myners: There is nothing that I would like more than for a new mutual to be created, but I cannot find a way to do that which would not represent a substantial subsidy from the taxpayer to the members of that new mutual. It would involve a gifting of value to the members. If noble Lords or others can come up with a constructive way to do that, I assure them that I will give it active consideration, but I have struggled to find a way in which it would be possible to create a new mutual on the scale suggested.

That said, we will of course continue to support the concept of mutualisation, as we have through recent legislation. There is a real prospect of brand names such as TSB, Williams and Glyn's and Cheltenham and Gloucester once again reappearing on the British high street. That is not just due to the EU. I salute Commissioner Kroes for what she has done in promoting competition-another great benefit that comes from our partnership as a member of the wider European community-but there are many aspects of this arrangement which the Government have required. In particular, the restriction that those businesses must be sold as a package, rather than broken up; the restriction on existing large players buying any of those assets; and a restriction on Lloyds buying any new business for the next three years have come not from Brussels, but from London, as part of our contribution to increasing the diversity, strength and range of competitive operators in the British banking system.

Lord Elystan-Morgan: It must be clear to everyone here that the European Competition Commissioner must have played an impactive and substantial role in

3 Nov 2009 : Column 148

the ultimate package decided on. With his usual commendable generous candour, can the Minister indicate the distance of travel from when the Treasury came very near to a meeting of minds with Lloyds and RBS and the ultimate result, after the impactive intervention of Ms Neelie Kroes, the Commissioner? It would be of great assistance if he could give some idea of how vast that distance is.

Lord Myners: The Commission spelt out its views on state aid in the late spring. When we announced the asset protection scheme in January, we said that it would be conditional on the Commission's policy position. Of course, the Commission has engaged actively in state aid in Germany, Holland, Belgium, Spain and here in the United Kingdom. We have had extensive and lengthy negotiations-I was speaking to Commissioner Kroes late on Sunday evening to cross the final "t"s and dot the final "i"s-and the outcome that we have been able to secure is very close to what we regard as good for the British system of finance, namely well capitalised banks, viable but with every prospect of new competitive entrants. That will be as a result of that outcome, but also because of new entrants such as Tesco, Metro Bank and lenders from the Far East and Scandinavia coming to the UK market and offering us the prospect of reversing a 25-year trend in competition in the high street, which started under the Government of the party opposite.

Lord Forsyth of Drumlean: My Lords, perhaps the Minister can help me. If the Government's position is that it is in the public interest to have more competition in the high street in the banking sector and to break up the Lloyds Banking Group, does that mean that the Government think that the Prime Minister made a mistake in agreeing to waive the competition rules to allow the merger between Lloyds and HBOS, which had such catastrophic consequences not just for the shareholders of Lloyds but also for its employees?

Lord Myners: Much as I would like to help the noble Lord, Lord Forsyth, I find it very difficult to conclude that those transactions had catastrophic consequences compared with the counterfactual, which would have been the failure of those banks. Remember that back in October, we got very close to a point where the cash machines would not have operated. In HBOS and Royal Bank of Scotland, that was particularly acute.

As for Lloyds, the Government concluded, and made representations to this effect, that a merger of Lloyds and HBOS, if it was the wish of the shareholders of those two companies, would be appropriate in the interests of financial stability. However, we made it clear that that would be conditional upon any EU remedies required in connection with state aid. We understood that there would need to be remedies from Lloyds, but it was a decision by the shareholders of Lloyds to merge with HBOS. I recollect that 97 per cent voted in favour of so doing. This was not a decision made by the Government; the Government merely enabled the shareholders to make that decision if they judged it was in their best interests. They perhaps regret it, but that is where we are now.

Next Section Back to Table of Contents Lords Hansard Home Page