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Financial Stability

Volume 474: debated on Monday 21 April 2008

With your permission, Mr. Speaker, I would like to make a statement about this morning’s announcement by the Bank of England to improve conditions in the financial markets. This scheme has been developed following extensive discussions with the Treasury and the Financial Services Authority. I also want to report on the recent G7 meeting in Washington on restoring financial stability to financial markets. I will also report on the measures that we are taking here at home to strengthen the stability of the banking system, as well as to help home owners with their mortgages.

Before I set out in further detail the Bank of England’s special scheme, let me remind the House of the background against which it has been developed. The financial markets throughout the world remain turbulent, following the problems that arose in the US housing market last year. Functioning financial markets rely on banks and building societies being able to raise finance from each other, and from other investors, including through securitisation markets and through inter-bank lending markets. These funds can then be used to finance lending to businesses and to consumers, including the provision of mortgages.

However, global financial markets are currently not functioning normally. Across the world, there is a lack of confidence in credit markets, most notably in mortgage-backed securities. That lack of confidence was prompted by the downturn in the US housing market, and in particular by the problems associated with sub-prime mortgages there. Banks are reluctant to lend to each other, and as a result lending to customers is more expensive and more restricted.

Along with other central banks, the Bank of England has, over the past few months, made additional funding available to the markets through its regular market operations. The UK financial system remains fundamentally strong, and the Bank of England’s action has helped to take some of the pressure out of the system by giving banks additional liquidity to continue their usual banking operations. Indeed, last week the Bank of England made a further £15 billion available, over three months, as part of its open market operations, and the Governor has said that he is committed to providing the liquidity assistance that the system as a whole needs to enable it to function normally.

Here at home, the economy continues to grow. Last week’s figures confirm that unemployment remains low and employment high. That, and the recent interest rate cuts, will provide wider support for the housing market and the wider economy. As banks here and across the world disclose their losses and strengthen their financial positions, which will help to rebuild confidence, the Bank of England can now take action to ease conditions in the financial markets, particularly in relation to mortgage-backed securities.

The special scheme announced today by the Bank of England is a further step towards tackling the problems that have become more evident in recent weeks with the increasing cost and decreasing availability of lending by banks and building societies. Under the new scheme, for a six-month period the banks and building societies, and other institutions that are eligible for the Bank’s standing facility, will be able to enter into agreements with the Bank of England under which they exchange high-quality asset-backed securities for Treasury bills. They can then hold these bills or trade them in the markets. Each exchange agreement will be for a maximum of a year but can be renewed at the Bank’s discretion, so that the exchange could be ultimately for up to three years. The arrangement is available only for assets existing at the end of December last year and does not apply to new lending since then.

At the end of the scheme, the banks will return the Treasury bills to the Bank of England and will receive back the securities that they provided as collateral. This means that the banks will continue to hold the risk on the securities that they provide, so it is they, rather than the Bank of England, that will be exposed to any fall in value. At all times, the banks must provide as security to the Bank of England assets worth significantly more than the Treasury bills they receive in return. If the value of their assets falls, the banks must provide more assets to the Bank of England or return some of their Treasury bills. They will be charged a commercial rate, so there is no subsidy to the banking sector.

The Bank of England expects the initial take-up to be £50 billion. It will monitor the position daily, both to check new bids from banks and to track the value of the assets exchanged as collateral. The Treasury is supporting the scheme announced by the Bank of England by lending to it—at a commercial rate—the Treasury bills which it will then exchange with the banks and building societies. As the House will know, the Government stand behind the Bank as its sole shareholder, and we are making this clear by providing an indemnity. The Bank of England believes that these measures will support the banking sector during the present period of uncertainty and will help to restore the stability that the financial markets need both now and in the longer term. This will help to alleviate the problems that have seen banks reluctant to lend to each other, and, in turn, support the provision of new mortgage lending.

Maintaining economic and financial stability is a key objective. In addition to the Bank of England’s announcement, I can confirm to the House that the Government will take further action at home, and internationally, to restore stability in financial markets. It is important that banks continue to make full disclosure of their exposure to losses, and that they do so as soon as possible. That is why, at the G7 and International Monetary Fund committee meetings in Washington, we agreed that banks should be as open as possible—as quickly as possible—in order to remove the continuing uncertainty as to their true positions. This process has started throughout the world, including here in Britain, with banks disclosing their losses and making proposals to rebuild their capital position.

Transparency is an essential part, along with other steps that we are taking, of stabilising financial markets. In Washington last week, the Financial Stability Forum agreed a range of actions—some to be implemented in the next three months, and others for the longer term. We agreed to strengthen the oversight of risk management, including capital and liquidity, clearer standards for valuation and transparency, and changes in the role and use of credit ratings. We will strengthen international co-operation so that we are better able to prevent crises and deal with problems that occur. We are also working with the IMF to allow it to play a greater role in providing early warning of the threats to financial stability, so that the relevant authorities can take early action to prevent these actions in the future.

Here at home, we are about to finish consulting on the reforms to the banking system that I announced in January. These reforms will make it easier to intervene in the event that a bank gets into trouble, in order to protect depositors and maintain the stability of the financial system. Because it is important that we get this right, I will continue to hold discussions with the industry on the detail of these proposals before bringing forward legislation. We will also want to make changes to the Bank of England to emphasise its role in maintaining financial stability.

The responses that we have received so far to the consultation have made it clear that, given the importance of these reforms, it is crucial that we have further discussions. Once those are completed, I can confirm that it is our intention to introduce legislation this Session to strengthen financial stability and depositor protection. The legislation needs to be on the statute book early next year, when some of the provisions of the Banking (Special Provisions) Act 2008, which we passed in February, are due to expire.

Finally, we are determined to do everything that we can to help home owners, so I am meeting the Council of Mortgage Lenders, the Finance and Leasing Association and major lenders tomorrow, along with the Chief Secretary to the Treasury and the Minister for Housing. Since 2004, mortgage lenders have been required by statute to treat their customers fairly, and at our meeting I will be discussing how banks and building societies can help people whose fixed-rate mortgages are coming to an end, as well as helping people who may get into difficulties in repaying their mortgages. Banks and building societies have a duty to treat their customers fairly and, in the light of everything we are doing, I want to discuss how they can pass on the benefits of falling interest rates as well as wider Government support to mortgage holders.

The Government will continue, along with the Bank of England and the Financial Services Authority, to do everything they can to maintain stability. The announcement by the Bank of England this morning will help to resolve problems in the wholesale financial markets, which have a subsequent impact on the retail markets, and so help businesses, individuals and, in particular, the mortgage market. I commend this statement to the House.

I thank the Chancellor for prior sight of his statement, and the Governor of the Bank of England, who phoned me yesterday to explain in advance what he was proposing to do. On a lighter note, I welcome the hon. Member for Sheffield, Hillsborough (Ms Smith), who is still in her place—the call from the west wing clearly worked, although judging by the Prime Minister’s face, that was the last time that they will talk.

It is nine months since the credit crunch began. We know from the recent International Monetary Fund report, to which the Chancellor referred, that Britain has been left more exposed than any other European country: it has the highest Government borrowing in the developed world and the highest personal debt on record. Of course we welcome any international moves to improve stability. Such moves should include reforms to the Basel accords. Surely it is time to look at counter-cyclical capital rules, so that we try to avoid this boom and bust in debt and asset prices in future.

I know that the Prime Minister was with the Kennedy clan last week. Perhaps he should borrow a phrase from President Kennedy: next time, let us fix the roof “when the sun is shining.” In the meantime, the Bank of England has to pick up the pieces. I broadly welcome the liquidities scheme that it announced this morning. [Interruption.] Indeed, we were recently calling for it. The difference between a well-judged intervention and a bail-out lies in the details and in the protection offered to the taxpayer.

Will the Chancellor, on the record today, give us his personal promise that as the man entrusted with the nation’s finances, he believes that the guarantees are such that there will be no loss to the taxpayer? Would not the risk to the taxpayer be reduced still further if the Government had not agreed to indemnify securities backed by credit card debt as well as those backed by mortgages? Why has he done that? Perhaps he could explain that to the House, because we are trying to keep people in their houses, not prop up credit card lending. According to the market notice issued by the Bank this morning, the British taxpayer is underwriting securities based on United States credit card debt. Could the Chancellor confirm whether that is the case? Has he calculated the extent to which that will expose the taxpayer to developments in the US economy?

The Chancellor is calling on the banks to be more transparent about their liabilities—I agree with him on that—but can he confirm that the Treasury has insisted that the scheme be designed to keep the taxpayer exposure off the Government’s balance sheet? Is it true that the swaps are for 364 days because if they were for a day longer, £50 billion of debt would be added to the national debt? Crucially, what steps is he taking to ensure that the main lending banks will use the facility to pass lower rates to borrowers? Has he had any commitment from the banks that they will do that?

We have seen the share prices of the banks go up since word of the scheme was leaked by the Prime Minister on his American trip, but what we have not seen is mortgage costs come down. The last time the Chancellor called for the banks to pass on a rate cut, they all ignored him, even the bank that he now owns, and several actually raised their rates. Let us hope he is more successful when he meets the Council of Mortgage Lenders tomorrow.

Finally, do not the past nine months reveal the folly of a Prime Minister who failed to use the global good times to prepare for the difficult times? A competent Government would be in a position to help people with the rising cost of living. Instead, this incompetent Government’s 10p tax rise will add to the misery of some of the lowest-paid families, who are already struggling with a rising cost of living, and could more than cancel out any help with mortgage costs that this scheme might bring. It is not too late for the Chancellor to back down and stop this tax raid on the poorest. We know from the climbdowns on capital gains tax and non-doms that this Chancellor is for turning. We know from his comments yesterday that he thinks the Prime Minister’s last Budget was such a mess that he has to return to it. If the Chancellor has a concession to announce or if he wants to set out the process towards any concession, he should not leave it to his deputy; he should get up and have the courage to announce the concession at the Dispatch Box himself.

The Bank of England is now playing its part to help families hit by the credit crunch, and it is time for the Government to do the same. It is time for the Government to stop fighting themselves and start fighting for the country. It is time for a Government who are on the people’s side, not on people’s backs.

I note that the shadow Chancellor had very little to say about the Bank of England scheme, just as he has had precious little to say throughout the past few months. Indeed, ever since these problems first arose in the financial markets last summer, what he has had to say has been contradictory. I note his invitation to discuss boom and bust—something that the Conservative party is well qualified to talk about. I prefer to remind the House that because we have a strong and stable economy, with low levels of unemployment and record levels of people in work, we are far better placed than most other economies to see through this period of financial uncertainty and turbulence.

As for the hon. Gentleman’s assertion that we are the only country affected, he must have noticed that banks and other financial institutions in the United States have been substantially affected. So too have banks in Germany and in other parts of the world. This problem is affecting the banking system throughout the world, which is why central banks and Governments have been taking action to try to alleviate it, with a view to getting the financial markets stabilised and returning to normality.

The hon. Gentleman asked several questions. He asked about the Basel regime, and Basel II in particular. I am sure he would agree that it is important that the banks have adequate capital, and the Basel II agreement was meant to ensure that banks are properly capitalised, so that if they run into difficulties they have something to fall back on. Indeed, the evidence of the past few weeks is that several banks throughout the world need to improve their capital position.

The hon. Gentleman asked how the banks will adapt from the present regime to the new regime, and the FSA is considering that. He also asked about the Bank of England scheme itself, which I understand he broadly welcomes. First, the issue of its classification is for the independent Office for National Statistics. Secondly, perhaps I may explain to him further how the scheme will work, although the Governor must have covered this ground in his helpful conversation yesterday. The Bank of England will make available Treasury bills to a bank in return for which it will have to pledge collateral. Most of that will be mortgage-backed securities, but it can include credit card assets, provided that they are AAA-rated, but in any event it will be for the Bank of England to decide what collateral it will accept.

Crucially, as I think the hon. Gentleman acknowledged on the radio this morning, the Bank of England will ensure that it takes far more from the bank than it gives out in Treasury bills. An example is given in the Bank of England press notice today, which shows that if £100 of collateral is pledged, the receiving bank will get between £70 and £90, depending on the strength and value of the collateral. In other words, there will be a margin to protect the taxpayer. In addition, the banks will pay a fee.

The crucial point is that the Bank of England is now able to take action to provide liquidity in the system for a longer period, which will help banks to restore their capital position and be able to start lending to businesses and individuals. That is crucial for this country in terms of improving the mortgage market. We want to ensure that institutions are sound, but we also want to see the benefits of what is happening passing to home owners, because they are entitled to expect not only support from lenders, but that will the Government to do everything they can to support them. We will continue to do that.

This is a strange day for a Labour Government. They are announcing that they are advancing billions of pounds to the banks at the same time as they are taking billions of pounds away from low-paid taxpayers. The Chancellor reminds me a little of a character whom I frequently encounter in the stories I read to my grandchildren—Little Red Riding Hood, who went around trying to be kind and helpful, but ended up being out-manoeuvred and then eaten by a wolf. [Interruption.] The Chancellor is in the process of being slowly devoured by the British banking system. The banks are not in this position by some unfortunate accident. Their own Institute of—[Interruption.]

The banks are not in this position by accident. The Institute of International Finance, which is the bankers’ group, acknowledged only last week that the banks had engaged in substantial bad practice. British banks have, over the past few years, lent too much, too quickly and too carelessly. The correct course of action, which the markets now anticipate, is that the banks should make a rights issue to their shareholders to raise money to offset the losses that they have to own up to. The problem is that chief executives do not want to go to the markets because they face the sack, so they rattle the begging bowl to the Government and hope that the Government will help them out, which they are doing.

The Government have assured us that they are covering risk as a result of the discounts on the transfer of assets. Can the Chancellor tell us what those discounts are? Only two weeks ago, the International Monetary Fund made an independent estimate that residential property in the UK was 25 to 30 per cent. overvalued. That is the IMF’s estimate; it has no axe to grind. Any asset-backed mortgages that have a discount of less than 30 per cent. represent a transfer of risk to the taxpayer. As I understand it, the Bank of England will provide a discount of up to 30 per cent. but not beyond it. Will the Chancellor explain that discrepancy?

The statement also says—this was confirmed a few moments ago—that the Bank of England will accept credit cards as part of the transfer mechanism. It is said that they will be accepted because they have a AAA rating but after the complete mess that the rating agencies have made over the past six months and the meaninglessness of the AAA rating designations, what possible confidence can we have in that assertion?

My main point is this: if the Government are substantially to relax the conditions under which they make liquidity available to the banking system, surely conditions should be attached to that process. The most important condition should be that the banks accept up front and in writing that they will go to the markets to raise money in the way proposed by the Royal Bank of Scotland. Without that, there is no guarantee that the money raised in this way will not sit in the banks without being advanced to the markets, to small business or to residential borrowers. Without those guarantees, the package promises to be a liability to the taxpayer and to do little to sustain the domestic economy.

I always thought that part of the Liberal Democrats’ problem was that they believed in fairy tales, but I had not understood that the hon. Gentleman did not know the ending of a fairy tale. I hope that when he goes home this evening he will apologise for misleading his grandchildren—inadvertently, of course—about the end of that nursery story.

The hon. Gentleman’s position in relation to the Bank of England’s proposals lacks sense, too. The logic of what he is saying is that the Bank of England should not be providing the support. If these were normal circumstances, that would be a perfectly statable case, but these are highly unusual circumstances. We are in a situation, getting on for nine months after the problems first started, in which the mortgage bank security market is virtually non-existent. That is putting particular strain on banks and making them increasingly reluctant to lend to each other and to customers. That cannot be good for any of us as the problem spreads further into the wider economy. That is why I believe that what the Bank is doing is right. It is similar to what other central banks are doing.

On banks that have got themselves into a position in which they need to recapitalise, I agree with the hon. Gentleman that it is important that they disclose their position as quickly as possible. The sooner the world knows the extent of the exposure, the more confidence there will be in our getting back to trading on a normal basis. Banks are doing that in this country and all over the world. However, the Government cannot say to every institution, willy-nilly, “You ought to have a rights issue,” because that may not be appropriate for some institutions. When the hon. Gentleman thinks through the logic of his position, I think he will see that what he is proposing does not work.

The Bank of England set out the securities that it will accept in the market notice that it published today, as the shadow Chancellor said. As I said in reply to him, it is up to the Bank of England to decide what securities it will accept and, crucially, what margin it requires in order to protect its interests—and, ultimately, the taxpayers’ interests. The measures proposed by the Bank of England are necessary and will be beneficial in helping to get the banking system back into a position in which it functions normally. That will benefit businesses, individuals and mortgage payers in this country.

I think that the principle of moral hazard is very important, but as I have said to my right hon. Friend on a number of occasions, I do not think that we can just stop there. We have a particular problem in relation to the banks. The banking system is crucial to just about every single business and individual, and to all home owners in the country; no Government could simply say, “It really doesn’t matter what will happen to the banking system.” It is crucial to the economy, as we have seen in the United States, as we see in Europe, and as we now see in Asia. There is not a country in the world that is not now being affected by the problem. That is why it is right for the Bank of England to take action, and why it was right to spend the past few weeks developing a proposal that I think will help to begin the process of getting back to normality.

This is further massive financial exposure by the Government. Will it count as Government debt, and if not, why not?

As I said to the shadow Chancellor, the classification of debt is a matter for the independent ONS. On the broader point made by the hon. Member for Gosport (Peter Viggers), as I have said, Treasury bills will be obtained by banks only in return for collateral. Let me make a general point: I know that both in the Treasury Committee and on the Floor of the House the hon. Gentleman has frequently asked perfectly pertinent questions about Northern Rock, as he was concerned about the exposure in that case. The Government did step in to stabilise the position at Northern Rock, but of course money has not been lost; indeed, Northern Rock’s exposure and debt to the Bank of England are being reduced.

The Chancellor referred to low unemployment in his statement. Is he aware that between December last year and February this year employment rose in our country by 152,000? In the last financial year, it rose by 456,000, and 29.51 million of our fellow citizens are now in gainful employment. His theme today is stability. Will not his measures add to the stability of our economy and help our businessmen, citizens and consumers—all of us—overall?

The answer to my hon. Friend’s question is yes, they most certainly will. The shadow Chancellor offered to give us a free lecture on boom and bust, but he might have recalled the difficulties that arise when there are 3 million or 4 million people out of work, and interest rates are at 15 per cent. That is what destabilised the housing market in the early 1990s. The position today is quite different. There are very high levels of people in work, and historically low interest rates. What we have to deal with at the moment is an almost unprecedented shock to the financial system, or certainly one that we have not seen in recent generations. It is important that we, and other banks, and authorities throughout the world, act together to do everything that we can to ensure stability in the banking system.

How much extra cash do banks in the UK now have to deposit or keep for prudential reasons, as a result of the regulator’s change of rules? That will offset the beneficial effects of some of the package. Will the measures be enough to bring mortgage rates down?

In relation to the first point, the right hon. Gentleman is aware that the FSA is responsible for the prudential supervision of the banking system and specifying what arrangements are required, first under Basel I and then under Basel II, which is in the process of coming into force.

In relation to the right hon. Gentleman’s wider point about mortgages, we want to make sure that financial institutions are in good financial health, as I said in reply to the hon. Member for Twickenham (Dr. Cable). That means that some of them will have to restore their capital position. I believe that this is a way of helping to restore the position in relation to financial markets. I have made it very clear that, as most people in this country would expect, in taking action through the Bank of England—either in direct interest rate cuts or through today’s support—the Government are entitled to expect that businesses, individuals and, in particular, mortgage payers will see the benefits of what we are now doing.

The Chancellor needs congratulating if he has got the Bank of England acting with some urgency at long last. However, the House needs to be reassured that we are not, as taxpayers, just bailing out the very same bankers who got us into this problem. I have noticed the financial conditions attached to the loan for the building societies and banks. However, are there other conditions that will force those institutions to pass on rate cuts, extend mortgages and the like—or will the money be used just to mend their balance sheets?

In reply to the latter point, it is not possible for the Government to insist that a cut in the bank rate, for example, should be passed through in every case, whatever happens. There may be reasons why a financial institution is not able to do that—not least because it may need to make sure that its capital position is strong. However, one of the reasons why, in the present position, the rate decreases have not been passed on, and why people have found getting mortgages more difficult or expensive, is that there is less money around because banks are not lending to each other. When we sat down to discuss how we could try to resolve the problem, we asked ourselves what was the root cause of that lack of funding and of the increase in the cost of getting loans, and it is the fact that the mortgage-backed security market is virtually shut. Sorting that problem out will begin the process of freeing up the lending process. That, I believe, will enable us to achieve the situation that we all want, in which people receive the benefits of that. It is not possible to prescribe in a mechanistic way what every single institution in this country must do, but, as I said, if public money is doing its bit, people expect banks to do everything that they can so that the general public can see the benefit.

I welcome the liquidity proposals that the Bank of England has announced today, but I remain concerned about taxpayers’ exposure. Does the Chancellor think that the lessons of recent times will be learned by the banks and building societies, and that those institutions will stop indulging in irresponsible lending? Will the Chancellor and the Government play their part by not adding to the cost of living in this country through stealth taxation?

Banks and building societies should lend responsibly. They should be satisfied that the borrower can afford the loan being taken on, that the asset on which the loan is secured is good and that they will get their money back. I also agree that those responsible for running financial institutions should remember what has happened. What often happens is that the generation involved in one financial or banking crisis has long gone by the time something else happens. I hope that the memories of what has happened in the past few months stick not only with the current generation of managers, but with the rising generation. People need to learn from experiences, particularly bad ones.

I welcome the Chancellor’s statement, although I recognise that it cannot be the place of a Labour Government to bail out a banking sector that has allowed itself to privatise profits and nationalise debt. Will the Chancellor spell out to the House that he intends to bring forward regulations for the banking industry that will, first, make it illegal for banks to conduct the off-balance-sheet transactions that have taken us into our current mess, and, secondly, require the full disclosure of the toxic debt that they are carrying? Is he confident that in the intervention in respect of access to mortgages, he will not be discriminating against the building societies that have remained in mutual ownership and in which people have saved, as opposed to those that converted to banks in order to speculate?

As I said, all institutions that are usually eligible for Bank of England support, including the building societies to which my hon. Friend refers, will be eligible in this regard as well. We are as mindful of their position as we are of that of other banks. I agree with what he says about the need for far greater transparency. There also need to be stricter rules in relation to off-balance-sheet activity, which has enabled some banks to get round their other regulatory responsibilities. That is clearly not a satisfactory position.

In relation to my hon. Friend’s first point, the important thing to remember is that this money, through these facilities, is effectively being lent, not given, to these institutions—they have to repay it. As I said, the collateral—the security—that they have to offer in return will be greater than what they get out of the system. This is helping to put money into the system so that it starts to work again, because if we do not do that there is a risk that the problems that we now see will spread even further and take much longer to recover from. That is why we are taking this action.

Is the rate of interest that the Treasury is charging the Bank of England on these bills less than the rate of interest that the Bank of England is charging the clearing banks, and if so, by how much?

The Bank of England is charging commercial rates, and we are providing funds to the Bank on that basis too.

I congratulate the Chancellor on getting the Bank of England to do now what it should have done last August at far less cost. Will the Bank of England require, in return for these loans, finance to be restored to home buyers? Will it also require the banks not to pay themselves bonuses for getting out of this mess on the same scale and style that they paid bonuses to themselves for getting into it?

Many people look at these bonuses and ask themselves what the individuals did to get them. In relation to Northern Rock, on which my hon. Friend has had quite a lot to say, that is a perfectly pertinent question to ask. This is not something that we can legislate for; at the end of the day, it has to be for companies themselves.

I dealt earlier with the point about passing on the benefits of interest rate reductions to home owners. This action, which comes on top of other action that the Bank has taken independently or with other central banks, of putting money into the system, has helped. I do not think that last summer anyone would have envisaged that what we now see in the financial markets would have gone on for so long and be so deep in so many countries. It is important not only that action is implemented but that it works.

I welcome the statement and thank the Chancellor for advance notice of it. I particularly welcome the international elements of transparency, co-operation and early warning. I give a guarded welcome to the £50 billion of Treasury bills and the changes to the use of credit ratings. The Chancellor spoke about the background against which these new measures have been developed. He spoke about liquidity and rightly pointed out that we have known about this for some nine months. Given that last August the Governor of the Bank of England knew about the difficulties that the credit squeeze was causing, given that on 4 September last year the inter-bank offering rate was higher than the Bank of England emergency rate, and given that on 6 September the European Central Bank pumped £150 billion-worth of liquidity into the system, does the Chancellor now regret allowing the Governor last September not to increase liquidity in the system? Is the real lesson for the future that in a future event such as this, early intervention will always be better than allowing things to drift on for eight, nine, 10 or 11 months?

My guess is that if we had introduced this particular scheme in August last year many people would have said, “Why on earth is this necessary?”, because the extent and the depth of what has happened could not possibly have been foreseen at that time. As I have said before, certainly to the Treasury Committee and, I think, on the Floor of the House, by the time Northern Rock started to get into difficulties it would have been very difficult to help it through a general provision, because by that time it needed so much money that it was almost inevitable that it would come along to the Bank of England. The hon. Gentleman is right that it is always to our advantage to prevent such things from happening in the first place, if that is possible. That is why we will introduce legislation later in this Session, which I hope that he and his party will support, that was partly foreshadowed by the Banking (Special Provisions) Act in connection with Northern Rock.

I welcome the Chancellor’s support for the banking system, but does he agree that it is important to look at what is happening in other sectors in the economy? Last Friday, I visited the Nissan car plant in Sunderland and met some of the 800 new employees who have been taken on to produce the new Qashqai car. That investment was secured because of a stable economy, but also because of a flexible and skilled work force who make the plant the most productive in Europe and one of the most productive in the world.

I agree with my hon. Friend, and the Qashqai has been extraordinarily successful. I know from my time as Secretary of State for Trade and Industry that the situation he describes came about partly because of the support that the Government were able to give Nissan, and because it recognised that we have a strong, stable economy and that the work force in the motor industry in the north-east is extremely highly skilled and motivated. Indeed, the number of cars being produced by the motor industry at the moment is more reminiscent of what happened in the 1970s. The industry has been highly successful.

How is it that the Chancellor can find £50 billion at the drop of a hat, but unfortunately cannot alter his Budget to protect poor people who are losing money through tax rises?

To explain it in simple terms, the Government are effectively lending money through the Bank of England to the banks. In other words, that money has to be repaid, so the position is rather different.

There is money available—tens of billions—to fund the banks because of their own incompetence, and money was available, which will not be repaid, when we had an unplanned war against Iraq, so surely a Labour Government with a brilliant record of stealth socialism in their redistribution of wealth to the lower-paid for the past 10 years can find a mechanism to ensure that those who will lose out because of the abolition of the 10p tax rate will be compensated.

As my hon. Friend acknowledges, the Government have done a great deal for people during the past 10 years, particularly those on low incomes, and as I said yesterday, we will continue to do so. It is essential that we put in place the plan before us today because many people in this country, including those on modest incomes, depend on being able to get access to mortgages, and on mortgage payments being kept as low as possible.

What is the Chancellor’s preferred indicator for assessing liquidity in the banking system, and does he believe that the published London interbank offered rate accurately reflects the scale of the credit crunch?

The British Bankers Association is looking at that at the moment, which is probably quite a good thing for it to do.

The success or otherwise of the measures announced today will be seen in the economy and the banking industry in general, but I wonder whether the Chancellor has any formal process to evaluate the success of the measures during the three-year period for which they could operate.

Success will be demonstrated by the financial markets beginning to return to a stable position, so that banks begin to lend to each other again, which in turn will be reflected in it being easier for them to lend, and for people to borrow, whether we are talking about businesses or mortgages. There has been a substantial jolt to the system that will take time to work its way through, but the step we are about to take is an important one in that process.

The Chancellor is right to address the lack of liquidity in the financial markets. Will he now consider the effect that the lack of liquidity might have on the utilities sector, which bears a collective £28 billion burden of debt? Has he spoken to utility regulators to ask why they continue to rely on rating agencies to fulfil their statutory duty to assess financial stability, despite their track record?

The scheme that we are considering applies to the institutions that can normally get support from the Bank of England. That would not include a utility company. Credit rating agencies should be perceived as a means of reaching a decision, whether that is for a bank, a utility company or anybody else. Their findings are not something definitive, which demands no further questions. The responsibility for running companies and making decisions about debt must lie, first and foremost, with their boards of directors.

Anything that stops us going back to the 15 per cent. interest rates of 1992 must be welcomed in the House. However, what will be the pecking order for the banks in borrowing the £50 billion? Will UK banks come first or can foreign banks also borrow the money?

As I said, the facility is open to the banks that are normally here—British banks and those from abroad with branches here. From the discussions that the Bank of England has held, I do not think that there will be a pecking order problem. The Bank of England is fairly confident that the banks that want to take advantage of the facility can do that.

Banks have been reluctant to take advantage of overnight borrowing facilities from the Bank of England because of the opprobrium that attaches to that public borrowing. What makes the Chancellor so certain that they will be more likely to borrow under the facility that he has just announced rather than under the overnight facility?

As is fairly widely known, a long discussion has taken place between the Bank of England and banks in this country about what the scheme might resemble and whether banks might take advantage of it. I believe that most said that they would. The hon. Gentleman mentioned opprobrium. A feature of the scheme is that the Bank of England will not report on individual banks as and when they may look for facilities. It will report on an aggregate but, for obvious reasons, there is no sense in identifying individuals. My guess is that the scheme will be taken up fairly widely.