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Northern Rock

Volume 468: debated on Thursday 29 November 2007

4. If he will publish the letter of advice that he received from the Governor of the Bank of England on support for Northern Rock. (169066)

As I said to the Treasury Committee on 25 October and in my statement to the House on 19 November, I do not believe that it would be in the public interest to publish the letters at this time. But I will keep the position under review, as I said then.

How, precisely, are the Government funding the £25 billion support package for Northern Rock? If that support is, as we are told, coming from the “contingency fund”, how much is left in that fund?

The money provided by the Bank of England comes directly from it, but of course the Government stand behind the Bank of England to provide the necessary support. However, I say this to the hon. Gentleman: when I authorised the Bank of England to provide support for the Northern Rock bank, that was widely welcomed; indeed, the Leader of the Opposition said that he wholeheartedly supported it. I am sorry that many Conservatives are now trying to run away from that decision. I believe that it was absolutely right then and it remains the right thing to do now.

Does the Chancellor of the Exchequer recall that way back in February 1974, the Government had to intervene on another giant, Burmah Oil? They had to take it over because otherwise it might have caused a run in various other areas. The result was that Burmah Oil’s price rise was enormous in the following months, when Margaret Thatcher’s husband decided to sue the Government because he wanted the elevated price rather than the price when Burmah Oil collapsed and—

I do remember Burmah Oil, but not in sufficient detail to be able to comment on what my hon. Friend has said. As I said a few moments ago, it was absolutely right to support Northern Rock when it got into difficulties because of the wider interests of maintaining financial stability in the system.

Does the Chancellor not appreciate that his lack of transparency on all these issues gives further rise to the suspicion that his actions in mid-September were driven more by keeping his own heartlands in the north-east happy and by his having an eye towards what was going to be an early election? Does he not realise that transparency is now of key importance if there is to be general confidence in his actions on Northern Rock, going forward?

The hon. Gentleman makes light of the importance of Northern Rock to the north-east of England. It is a very important company that employs more than 60,000 people. It was decided that we should intervene to support Northern Rock because of the threat to the wider banking system if it had gone down. I repeat that I was absolutely right to authorise that support and, having authorised it, we need to see it through. A lot of Opposition Members are now trying to run away from that decision, which they initially supported. It was the right thing to do because it was important that we maintained confidence and stability in the banking system. That is why we will continue to do whatever is necessary to ensure that that happens.

Can the Chancellor clarify the exact level of security that the Government have on their £24 billion loan to Northern Rock? Is it not the case that while half of it has good security, the other half is optimistically secured against the bank’s free assets, the value of which is now under question in the falling housing market?

As I said when we last discussed these matters in the House, the Bank of England’s lending is secured against assets currently held by Northern Rock, as we would expect. I am not sure whether the Liberal position is that we should or should not have intervened; that is not terribly clear to me. However, having decided to take the action to support Northern Rock, it is important to see it through. At the moment, discussions are taking place with Virgin with a view to a possible acquisition, and clearly I will keep the House informed. Having decided on a course of action, the important thing is to see it through to ensure that we can maintain stability in the wider system as well as ensuring that we do everything that we can to help the position in relation to Northern Rock.

Given the huge amount of taxpayers’ money now pledged, rumoured to be about £25 billion, why should the actual amount of the loan, the terms of the loan and the repayment schedule continue to be kept secret from Parliament?

For the very good reason that if central banks provided what would in effect be a running commentary on such support, they would find it difficult to be able to intervene. The hon. Gentleman is a member of the Treasury Committee, and one of the questions that it is considering for the future is how the Bank of England and other central banks provide effective support. There has been a lot of discussion about that. Providing a running commentary on what central banks happen to be doing at times such as this would not be a very good idea, but, as I said when I appeared before the Committee, I know that it is considering the matter, and I will be happy to consider any recommendations that it has.

The protection of the position of the depositors and shareholders of Northern Rock is of pre-eminent importance, but does the Chancellor agree that while the liquidity crisis of the world’s largest banks continues, consideration should be given to an easing of the regulatory capital requirement under the Basle agreement?

I agree with the hon. Gentleman that protecting depositors is important; that is why I provided the guarantees that I did when Northern Rock got into difficulty. In relation to the wider issues, I also agree that it is not just capital adequacy that is important but the availability of liquidity. The House may be aware that the Bank of England announced this morning that it is injecting additional sums into the system through its market operations, especially as we approach the year-end, when banks will be reporting. I think that the Governor made a statement to that effect when he appeared before the Treasury Committee earlier today.

I am sure that many people will welcome the fact that the Bank has said that it will make that facility available and that it stands ready to take whatever action is appropriate to ensure that overnight bank lending rates remain as close as possible to the Bank’s current rate.

The Chancellor previously told the House that he could not publish the letters from the Governor of the Bank of England and the chairman of the Financial Services Authority because although the Governor agreed to his letter being published, the chairman of the FSA did not agree to his letter being published. Question 4 asks the Chancellor to publish the Governor’s letter. Will he ask the chairman of the FSA if he has any objection to the Governor’s letter being published, and if he does not, will the right hon. Gentleman give the House a commitment that he will publish it?

As I said in my initial reply, I will keep the matter under review, but I have also said that the Governor’s letter, the letter from the chairman of the FSA and my reply to them have to be seen as a whole. I do not think that it is in the public interest to publish them at the present time.