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Northern Rock

Volume 470: debated on Thursday 24 January 2008

1. What assessment he has made of the effect the run on Northern Rock has had on the attractiveness of the UK to financial institutions; and if he will make a statement. (181406)

2. What assessment he has made of the effect the run on Northern Rock has had on the attractiveness of the UK to financial institutions; and if he will make a statement. (181407)

With permission, I shall answer Questions 1 and 2 together. The United Kingdom remains in a fundamentally strong position. London remains the leader in international financial markets, and we are determined to keep it that way.

Thousands of my constituents work in the City of London. They go up every day on the train. What reassurance can the Chancellor give them that his delay and dithering are not harming their job prospects?

I appreciate that London is important—not just important to the hon. Gentleman’s constituency and the wider south-east of England, but crucially important to the whole United Kingdom.

We should recognise two things. First, what happened to Northern Rock arose fundamentally because of a mistake made by its management, who had a business plan that simply could not operate when the money markets dried up for them. In relation to London generally, it is recognised throughout the world that our regulatory regime is sound and that our approach is right. London is a recognised world centre for much of the world’s financial trade, and I am determined that it should remain so in the future.

Order. I am due to call the hon. Member for Mid-Bedfordshire (Mrs. Dorries). Can the Chancellor assure me that it was made clear that her question would be linked to Question 1?

Is my right hon. Friend aware that many people in my constituency, in the north of England, and indeed in the City believe that the Government’s handling of the Northern Rock crisis has been first-rate? Jobs have been preserved, the bank is being preserved, and we have an opportunity to save the reputation of the financial services on behalf of our country and the economy. Is my right hon. Friend aware that some of us are sick to death of Conservative Members who could not in any way run the proverbial chip shop—

I probably do agree with much of what my hon. Friend has said.

As I told the House in my statement earlier this week, we are in a difficult position to which, in an ideal world, it would have been good to find a purely commercial solution. Our problem, recognised by at least some Conservative Members, is that the very market conditions that precipitated the problems for Northern Rock are continuing, and it will be obvious to those who look at what is currently happening in the financial markets that those conditions are difficult.

I believe that what I set out on Monday was the right thing to do. I want to ensure not only that we protect the interests of taxpayers and depositors, but—importantly—that we maintain financial stability. As I said to the hon. Member for Castle Point (Bob Spink) a few moments ago, we should all bear it in mind that in the City of London we have one of the finest assets in the world.

In view of the Bank of England’s role in the Northern Rock saga, can the Chancellor give any reason why he feels that we should not appoint Mervyn King to a second term as Governor?

I have made it clear that the matter of appointments will be dealt with in due course. As I said on Monday, I intend next week to publish wide-ranging proposals to strengthen our regulatory and supervisory regime.

I know from visits by the Treasury Committee to Washington, Frankfurt and Brussels that the pre-eminence of London as a financial centre is not in doubt, but we need to do two things: reform the tripartite arrangement and address the international dimension. That is the case whether we are talking about liquidity tests, which many countries have not undertaken, or rating agencies. Those two issues are paramount, and I hope that when the Chancellor receives the Treasury Committee’s report on Northern Rock he will not only include it in the consultation exercise, but take our comments on both issues seriously.

I hope very much that we can do that. I understand that the Committee’s report will be published fairly quickly, and once we have read its conclusions I shall accommodate as many as possible.

My right hon. Friend’s other point is equally important. This is very much an international problem. Some of the problems that are affecting banks are affecting them all over the world. We need to look at early-warning systems, and also at the position of the credit rating agencies. As I have said before, I have always regarded them as simply a source of advice for companies, not a substitute for their judgment. We also need to look at the recommendations for the Financial Stability Forum, which we will discuss with Finance Ministers when the G7 meet in Tokyo in a couple of weeks.

The last thing I would say is that although I can see that it is very tempting from the Opposition’s point of view to run down the City, those working in the City and people in the country as a whole deeply resent it when the Conservatives attempt to do that. Actually, the City is very important to us.

The Chancellor blames the situation on international turbulence, but it is only in Britain that the threat of nationalisation hangs over a bank, it is only in Britain that there is a run on a bank, and it is only in Britain that £55 billion of taxpayers’ money is at risk. Is that not why the Chancellor’s own advisers, Goldman Sachs, said:

“The Northern Rock factor has badly dented the UK’s reputation for being the world’s pre-eminent financial centre”?

[Interruption.] His own advisers said that. By damaging that reputation, has he not put at risk jobs not only in the City of London but across the UK, as well as tax revenues and economic growth, and all because of his dithering and delay in dealing with this crisis?

Mr. O’Neill is a widely respected commentator, but his view on that particular point is not universally shared. Indeed, many people who work in the City and in London recognise London’s importance to the UK. I said a few moments ago that I thought the Conservatives’ comments were unhelpful, and the hon. Gentleman has duly obliged by emphasising that point.

On the hon. Gentleman’s other points, if he cares to look back over events of the past few months he will see that banks throughout the world have been affected by the current problem. That demonstrates that although there are huge advantages in globalisation, huge challenges can also arise, as we can see only this morning.

Olivant and Virgin were given preferred bidder status on the basis of a main feature of their bid being repayment of £10 to £15 billion-worth of debt. Now that that has disappeared, if another private sector bid comes in and, not having had months of scrutiny of Northern Rock’s books, expresses a wish for the 4 February deadline to be shifted slightly, will the Chancellor look positively on that reasonable request?

First, when Olivant and Virgin put in their indicative bids, that was conditional on their being able to raise commercial sources of finance. That has proved not to be possible for the reasons I set out on Monday. I also said on Monday that if any other institution expressed an interest in participating in investing in Northern Rock, we would look at that. I said I wanted proposals by 4 February, and I do not see any merit in letting this process drag on indefinitely. Regardless of where they start from on this issue, I think most Members take the view that we need to bring matters to a head, not least because the state aid approvals will expire in March. If someone comes along on 3 February, of course we will listen to them, and inevitably in such matters there will have to be negotiation. So far, only Olivant, Virgin and the board have expressed an interest. We will be sensible, but I do not want the process to drag on and on.

Further to that last intervention, is not the risk of a rapid private sale that the Government will either be trampled by an Olivant or shafted by a Virgin? In order to reduce the risks to the taxpayer, will the Chancellor assure us that the security that will be offered against the Government bonds will not include any of the £8 billion dodgy, unsecured loans, or the even dodgier Together mortgages, and that the individuals within the bidding consortiums will each be required to put up at least 15 per cent. of the equity, as specified in Financial Services Authority rules?

That is an interesting piece of analysis, and I shall study the hon. Gentleman’s remarks carefully—particularly the first part of his contribution. I have set out the principles that underpin our approach to any possible solution. As I said on Monday, we should receive proposals shortly, and thereafter we shall consider them. As I also said in the House on Monday, I very much hope we can reach a solution. A period of temporary ownership of Northern Rock remains a possibility, but as I said to the hon. Gentleman on Monday, many of the issues he raises now in relation to my proposals would also be relevant in relation to a temporary period of public ownership.

May I ask my right hon. Friend the Chancellor to avoid a situation in which either Northern Rock goes bust—that would be incredibly damaging to Britain’s reputation—or he ends up as a sort of neo-Mr. Putin, operating Northern Rock as a kind of Gazprom of the north?

I had better be careful there for a number of reasons. Suffice it to say, as I have said on many occasions, both before the Treasury Committee, of which my hon. Friend is a member, and on the Floor of the House, that what I set out on Monday offers a constructive way forward for Northern Rock and that I hope that we can find a solution, but if that does not happen, public ownership remains an option. I would much prefer to find a solution whereby we can get private sector investment in it, because I think that in the long term that would be the better option for the bank, its employees and the north-east.