I regret to have to report to the House the death of John William MacDougall, the Member for Glenrothes. I am sure that Members in all parts of the House will join me in mourning the loss of a colleague and in extending our sympathy to the hon. Member’s family and friends.

With your permission, Mr. Speaker, I would like to make a statement regarding developments in financial markets to bring the House up to date.

The events in America over the last few weeks and in Europe over the last few days have again demonstrated the global nature and the sheer scale of the problems affecting the global financial system. What started in America last year has now spread to every part of the world and the disruption in global financial markets has intensified, especially over the last few weeks.

People are rightly concerned about what is happening, and I have made it clear that we will do whatever is necessary to maintain stability. Along with Governments across the world, I have a responsibility to support a stable, well functioning banking system. Financial transactions are at the heart of everything we do. They allow people to buy goods, pay for services, buy homes, save for pensions and invest, so it is essential that we take action to support the banking system as a whole, as well as being ready to intervene in particular cases where it is necessary to do so. It is not a case of doing either one or the other. Both general support and individual intervention are necessary.

We need, too, to work with other countries to tackle the causes of those problems, as well as dealing with their consequences. Let me briefly remind the House of what we have done to stabilise the banking system as a whole. Since April, the Bank of England, with support from the Government, has introduced the special liquidity scheme providing funding to the banks. The Government have made available in excess of £100 billion of long-term funding to be lent through the scheme, and the Bank of England has extended it until January. I am willing to make further resources available as necessary and the Governor has made it clear that

“in these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity”.

The Bank of England has also continued to inject substantial funds into markets through its normal operations, and it will continue to do so. Tomorrow, it will put in another £40 billion, taking in a wider range of security, and those operations will continue into November.

We also need to deal with specific problems as they arise, to maintain stability. In February, we took special powers to bring Northern Rock into public ownership—now seen by most people as the right thing to do. I can tell the House that Northern Rock has now paid back more than half the taxpayers’ money that was lent to it and it continues to repay its loan ahead of schedule.

In August, I announced that the Government would swap up to £3 billion of outstanding debt for equity, if required, to strengthen Northern Rock’s capital position. In September, we amended the competition regime to allow the interests of financial stability to be considered in the proposed merger between Lloyds TSB and HBOS. We took that exceptional measure because financial stability had to come before normal competition concerns.

Ten days ago, we had to deal with the problems at Bradford & Bingley. We transferred the savings business, the branches and the related jobs to Abbey Santander, protecting savers, and took the rest of the company into public ownership. We acted decisively to protect savers, and also the interests of taxpayers, ensuring that the financial sector bears its share of the costs.

I have made it clear on many occasions that our priority is to maintain stability and protect the interests of depositors, and safeguard the interests of the taxpayer. I want to set out what we have done so far here at home and also to deal with developments in Europe over the weekend.

The Financial Services Authority has announced a further increase from tomorrow to the compensation limit for retail bank deposits to £50,000 per depositor, which means £100,000 for joint accounts. That measure will ensure that 98 per cent. of accounts are fully covered. The FSA is consulting on whether to increase that limit further to ensure that arrangements here continue to be comparable with international best practice.

I have always been clear that each country needs to do whatever is necessary to deal with its own particular circumstances. However, I also believe that, wherever it is possible to do so, countries should work together and act to maintain stability. This afternoon—in the last hour—all 27 European Union member states have reaffirmed the need to take whatever measures are necessary to maintain the stability of the financial system, whether through liquidity support, action to deal with individual banks or enhanced depositor protection schemes. But in the light of what has happened over the weekend, it is especially important that EU member states work far more closely together. So tomorrow I will meet European Finance Ministers in Luxembourg to discuss further how we bring stability to the system and protect depositors.

This demonstrates that every country in the world—Europe included—is being affected by these problems. In the United States, Congress has now approved measures to support its banking system, which we welcome. Our approach has been different, but what has happened in America emphasises yet again the need for countries to take whatever action they believe is necessary while also working closely together not just to resolve these problems, but to try to prevent them from happening again.

Later this week, I will attend the G7 and International Monetary Fund meetings in Washington. Our aim is to reduce uncertainty and to improve confidence in financial markets by increasing the openness of financial institutions’ exposures. We also want to change and improve the effectiveness of credit rating agencies. These measures are now being implemented, but I believe that we need to move far more quickly.

Here at home, a number of specific steps are necessary. First, the Bank of England will continue to do whatever it takes to make cash available for banks to lend. Secondly, the banking Bill will be introduced tomorrow, building on the special powers we took in February to allow us to intervene quickly and decisively. It will also give the Bank of England a statutory role to maintain financial stability, to complement the role of the FSA.

Thirdly, just as at an international level, lessons need to learned. We need to ensure our regulatory system here is up to the mark. It is not about light touch against heavy-handed regulation; it is about making sure that we have the necessary rules in place and that those rules are enforced effectively. I have asked Adair Turner, the new chairman of the FSA, to make recommendations for reforms. As recent events in the financial markets have shown us, regulation should be about liquidity as well as capital. That is why the FSA is considering changes to the liquidity requirements. It is also looking at remuneration structures in the institutions that it regulates.

Fourthly, we must do everything we can to ensure not only that banks have the confidence to lend to each other, but that lending is maintained to the mortgage market, businesses and individuals. I shall publish Sir James Crosby’s recommendations on options for improving the functioning of the mortgage finance markets shortly.

These are exceptional times, and I am in no doubt as to the size of the task facing us and Governments across the world in bringing order to the financial system. The process of change will necessarily take some time to work through, and because we are dealing with international institutions and international markets, it will require not only action at a national level here, but concerted international action.

It is right that we look at every aspect—liquidity, capital and regulation—with other countries and of course with the financial sector itself, but it would be irresponsible to speculate on the specifics of future responses. Indeed, providing a running commentary could add uncertainty in already febrile market conditions. But I want to make it clear that all practical options must remain open to us. I have made it very clear that the Government are ready, with the resources and the commitment, to do whatever is necessary, and I will keep the House informed.

Our priority, at home and abroad, is to bring stability to the financial system, to ensure that depositors and savers are protected, and to defend the interest of the taxpayer. I commend this statement to the House.

As we see again from today’s markets, these are times of great instability for our economy and of great anxiety for the people we all represent. Families are deeply worried about their savings, their homes and their jobs, and it is up to us to try to work together to get the country through this current crisis. I do not think that the British public would thank us if they saw happening here in this House of Commons what everyone saw happening in the American Congress. That is why we offer to look constructively at any proposals brought forward by the British Government.

For let us be blunt about it: if the banking system fails, it is not just the banks that go bust—businesses fail, families cannot get mortgages, and people lose their jobs, not just in the banks, but across the wider economy. The Prime Minister said that we would never see a return to 15 per cent. interest rates. This week, one of our high street banks has written to many of its small business customers, increasing their interest rate to 15.8 per cent. All of us need to work together to stop Britain sliding from a banking crisis into a deep recession.

Of course, constructive support does not mean that we are suspending our critical faculties. We will return at a later date—[Interruption.] Oh yes. We will return at a later date to ask how on earth Britain found itself, at the end of this age of irresponsibility, with more personal and public borrowing than any other advanced economy in the world. But today I want to ask the Chancellor about the immediate issues facing the banking system: the issues of confidence, liquidity and capital.

The Chancellor mentioned the banking Bill. Will he confirm that it will create the Bank of England resolution regime that we think should have been used to deal with Northern Rock and Bradford & Bingley? As I told him last week when we met, the Bill will have our support. We also welcome the decision to raise the limit of protection on retail deposits to £50,000. We have been proposing that from the Dispatch Box for almost a year, and it is clearly the right thing to do. Even so, events are moving fast, with the broader guarantees issued first by Ireland and Greece and then by Germany, Denmark and others. Will the Chancellor confirm that none of those countries informed the British Government in advance, and does he agree that it is not helpful for European leaders to call for international co-ordination at summits and then, hours later, to act unilaterally? As he implied in his statement, their confusion is adding to market anxiety today. He is going to ECOFIN tomorrow. What reassurance can he give us that we can avoid descending further into a beggar-thy-neighbour approach that will, in the end, help no one?

Let me turn to the issue of liquidity. The increasing reliance of our banks on the overnight money markets is creating a hair-trigger effect which leaves individual institutions more and more exposed to events. That must clearly be undone, so we all support the Bank of England’s decision to extend funding to the banks from tomorrow—it should address the urgent liquidity problem—but let us be clear about what is happening here. The Bank of England is becoming not just a lender of last resort, but the lender of only resort. Does the Chancellor agree that, in the medium and the long term, that is unsustainable? We need to address not just the symptoms of the crisis but the cause, and that brings me to the issue of capital.

The cause of this crisis is that we built an economy on a debt-fuelled bubble. Now the bubble has burst, and the debt is being called in. That leaves banks under-capitalised and their balance sheets weak. There are steps that can be taken now to stop, for example, the mark-to-market accounting rules adding to a downward spiral of falling asset values and restricted lending. The Chancellor’s immediate reaction when we proposed that was to say that it would make “no difference”. Many, many banks disagree with him, and so do many European countries. If he will not accept our argument, will he at least engage with theirs?

That still does not address the central challenge: the need to recapitalise the British banks. Does the Chancellor agree that that must, in the first instance, mean shareholders’ accepting their responsibility? As I said to the Conservative conference, banks that pay out dividends instead of rebuilding balance sheets should be held to account by regulators.

I know the Prime Minister said when he went to New York that he wanted to handle the crisis on a case-by-case basis, but events have moved on. Does the Chancellor accept that the ad hoc approach is running out of road? No one is expecting the Chancellor to stand up here and speculate on every single option available, but he himself confirmed yesterday that big steps were being considered by the Government. Would it not be irresponsible not even at least to consider more dramatic measures to help our banks, including support from creditors and Government injection of capital? Of course there would have to be very strict conditions to protect taxpayers and ensure that they benefited first from any gain, and we could not contemplate taxpayers’ money being used to prop up the kind of salaries and bonuses that we have seen in recent years. We must make sure—[Interruption.] The Chancellor can ask his new City Minister in the House of Lords about that.

We must make sure that in return for any support the banks start lending again, but in the end, for all the risks to taxpayers involved, there is one thing worse than Government action, and that is inaction in the face of this crisis—for then the far greater risk to the taxpayer and the country is a long and lasting recession. Boom has turned to bust; now bust must not become something worse. That is why Conservatives stand ready to help.

I welcome the shadow Chancellor’s offer of co-operation and help, especially as he appears to have changed his tune somewhat about what remedies he now thinks are appropriate. I hope that he will now recognise that it is necessary for Governments to play an active role in trying to resolve the problems that we face, in order to produce greater stability as well as to help depositors.

I disagree with the hon. Gentleman in one respect in particular. Our position is not that one has to choose between generalised measures of support and looking at particular cases case by case. When we were confronted with the problems at Bradford & Bingley 10 days ago, for example, we had to deal with that specific case, because the problems were peculiar to that bank—it was the same for Northern Rock, and different particular issues arose in relation to Lloyds TSB. In addition to dealing on a case-by-case basis, it is necessary to have an overall approach. That is why the special liquidity scheme, which the Bank of England operates, was put in place, and there will be other measures, too.

I am glad that the hon. Gentleman welcomes the Bill, and I hope that we will get support for the measures in it. I very much welcome the fact that he and the hon. Member for Twickenham (Dr. Cable), who speaks for the Liberal Democrats, are anxious to ensure that we try to get the legislation on to the statute book by the middle of February next year, when the provisions we made to take Northern Rock into temporary public ownership will expire. That would be extremely helpful and useful.

So I welcome the support of the hon. Member for Tatton (Mr. Osborne), although I notice that his tendency to lapse into points-scoring and party politics did not take long to reappear. I must make this one point to him in passing: our interest rates are 5 per cent. now, and while people obviously have their views on that, they compare rather favourably with the 15 per cent. interest rates that we had some 15 years ago.

The hon. Gentleman went on to raise some perfectly pertinent points, which I want to deal with. First, in relation to guarantees and what happened over the weekend, as far as I am aware no Government—nor the European Commission—was made aware of what the Irish Government were proposing to do last week. I took up that matter with Brian Lenihan, the Irish Finance Minister, and he explained that they did that because, in their judgment, they needed to take action because of what was happening in Europe. I understand that, but it demonstrates the problems that arise when member states take unilateral action, because, of course, it has a knock-on effect for other member states. Similarly, Germany announced action yesterday. As I understand it, Germany has made a declaration that is not legally binding; it is a political declaration about guarantees.

This emphasises the need for us all to work together, which is why from last night we have been working with the French presidency to get a declaration from all member states—a pledge to work together, to act together. As I said, that statement was finally agreed just an hour ago. I very much hope that when we meet in Luxembourg tomorrow we will agree that, whatever is done, European member states act together. That is very important; otherwise, we will end up with a situation that is confusing not just to depositors, but to institutions themselves.

On the hon. Gentleman’s points about accounting rules, the European Union is looking at that. On Friday, the International Accounting Standards Board said that it would look at the lessons to be drawn from what has been happening in markets, to see whether any changes ought to be made and also to make sure that we do not find that European and American rules start to diverge. However, I say to the hon. Gentleman that it would be a huge mistake to assume that changing the accounting rules would sort out the problem. Especially at this time, markets want to know exactly what is going on, and they do not want to think that the situation has apparently improved simply because the ways in which things are accounted for are different. That issue is not somehow a “get out of jail free” card; it needs to be looked at, but it does not provide the answer that the hon. Gentleman might have been suggesting.

Finally, on capital, I said in my statement that we stand ready to look at the issues of liquidity, capital and regulation. They all need to be looked at, and we are ready to do whatever is necessary. I also went on to say—here, I agree with the hon. Gentleman—that we saw from what happened in the United States that nothing is worse than coming forward with a plan that is not sufficiently developed and about which questions cannot be answered, which resulted in some $1.5 trillion being lost over the 10 days that followed. I am determined that when we take action, we take it quickly, we take it decisively and it works. That is what I am determined we will do.

I thank the Chancellor for his statement. I do not think that any of us envy him for the very considerable weight of responsibility that rests on his shoulders, and we are going to have to work together in the common interest. There will be a time to decide who made mistakes, but the issue now is: have we moved forward?

The Chancellor said that he will do whatever he has to do in the financial crisis. He is right, and I hope that he will, but there are some issues that need clarifying. In the wake of the apparent German decision to give a complete guarantee for all deposits in the German banking system, it seems to us that the British Government will indeed have no alternative but to give a comparable assurance to people in the British retail high street banks. We all know that our bank deposits are safe. Some of my own modest savings are in the Bank of Scotland and some are in the Royal Bank of Scotland, so I am more than usually dependent on both the Chancellor and the Prime Minister and on the First Minister of Scotland not to let me down. However, there are anxieties. People have anxieties about specific questions such as merged banks, large deposits during house sale transactions and small independent businesses, and there needs to be more clarity about the guarantees than the Financial Services Authority has currently given.

Secondly, the Chancellor said in his statement that he is pursuing a case-by-case approach. He is right, and we have no quarrel with what he did in relation to Bradford & Bingley and HBOS-Lloyds—that seemed to be the right approach. However, we are now in a different situation, where banks are being picked off one by one. I set out proposals yesterday, and the Conservative leader said something rather similar this morning—[Interruption]—about the need for recapitalising the banks with a form of partial nationalisation. I hope that the Chancellor will confirm that those specific ideas are under active discussion.

Finally, I would like to say a little bit about interest rates. Of course, the issue is about the availability of credit, but it is also about official interest rates and the implications for mortgage borrowers and small businesses. I have been a very strong advocate of the independence of the Bank of England; I made my maiden speech about it in this House 10 years ago. Does the Chancellor not think it appropriate, in emergency conditions, to make it absolutely clear that the mandate of the Bank of England must include responsibility for averting a meltdown in the financial and economic system? Those members of the Monetary Policy Committee who are going around saying that the problems go no further than the financial system need a line of communication back to planet earth. We do need to be thinking about radical cuts in interest rates.

I know that the Chancellor has said that my comments on this subject are dangerous, and I recognise the dangers. These are very dangerous times, and decisive decisions are going to have to be taken over the next few days and weeks to safeguard millions of jobs and homes. I hope that the Chancellor will give us the leadership that we need on those issues.

I am grateful to the hon. Gentleman and for the fact that on many occasions over the summer he indicated his support for the general approach that the Government are taking. He asked three main questions, one of which related to guarantees. As I said earlier, I think it desirable that European member states act together. If the House looks at the statement that all 27 member states signed up to earlier this afternoon, it will see that there is a commitment there to work together, and it is important that we work together. We have the FSA announcement that it will increase the amount covered to £50,000, and as I said, that covers 98 per cent. of all accounts.

The hon. Gentleman mentioned liquidity and capital. May I emphasise to him that, as I said in my statement, I believe that we must look at three elements? First, we must ensure that there is adequate liquidity in the system. That is absolutely essential, which is why I welcome what the Bank announced this week and the fact that it is looking at providing facilities for far longer than is usual. The problem is not just an immediate one. He rightly says that we need more liquidity, because without it we cannot move to the second phase. I have also said that we need to look at regulation and at issues such as capital, and we will do so; when I have proposals to make, I shall come back to the House to set them out.

Finally, on interest rates, I do not think that I ever said that the hon. Gentleman is dangerous—whatever else he is, that is not quite the right description—but I think that in this case he is just wrong. If one establishes an independent central bank, distant from government, I do not think that one should change its terms of reference just because times are difficult. I should just remind him and the House of what the Bank of England Act 1998 says. The objectives of the Bank of England are

“(a) to maintain price stability, and

(b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”

I do not see any need to change that remit.

There is much concern and anxiety in Halifax about the uncertain future of HBOS, which is the second largest employer in the town. Will the Chancellor guarantee that he will do all he can to safeguard these jobs and give a commitment that Halifax and other HBOS locations will be on a level playing field?

My hon. Friend has already raised with me the question of jobs in her constituency and the surrounding area. I understand that the future of HBOS and the developments at Bradford & Bingley mean that a much wider area is affected. I hope that HBOS and Bradford & Bingley will do everything possible to try to maintain jobs and to help people for whom there will not be jobs in the future to get jobs elsewhere. I have met the regional development agency and the Minister for Yorkshire and the Humber, my right hon. Friend the Member for Doncaster, Central (Ms Winterton). We are determined to do everything we can to help people through what is undoubtedly a very difficult time. I know, from my conversations with them, that HBOS and Lloyds are acutely aware of the impact on employment in my hon. Friend’s constituency. I am sure that she will continue to do everything she can for her constituents, as she has done ever since the announcement.

I know that the Chancellor understands the impact on the wider local economy of what has happened to both HBOS and Bradford & Bingley, and I sincerely appreciate the fact that there will be no compulsory redundancies at Bradford & Bingley for six months—that has been welcomed.

Many employees were also small shareholders in Bradford & Bingley, and many of them loyally supported their company through a recent rights issue in order to try to save the business. I understand that the business had £1.5 billion of equity at the time of nationalisation and that the sale of the savings side raised £400 million. The expected losses on the mortgage book are independently assessed to be about £1 billion. That leaves about £800 million, which, split between 1.6 billion shares, works out at about 50p a share. Does he recognise those figures? Can he give the House some idea of what might happen to those small shareholders?

The hon. Gentleman is understandably concerned about jobs in his constituency. As I said to my hon. Friend the Member for Halifax (Mrs. Riordan), we will work with Yorkshire Forward and the company to see what we can do. I am glad that he also recognises the fact that we were able to provide funding to ensure that people will be employed for six months. That will help, although the situation is clearly difficult. The problem with Bradford & Bingley was that its model just did not work. It tried, as did we, right up until last Saturday to find a commercial solution—or even an approaching commercial solution—but we could not do so.

The hon. Gentleman rightly asks about shareholders. We sold the branches and transferred the deposits to Abbey Santander, and the money from that will go into the pot. However, we also had to transfer and finance some £20 billion of deposits. That amount, which is due to the Government, will be reduced in time as the assets of Bradford & Bingley are realised and mortgages repaid. I cannot say what those assets will realise, or when; it will take years to repay some of them. Some of the buy-to-let mortgages might be worth something in a few years’ time, although they are not worth much just now.

I cannot say at this stage how much, if anything, will be left. I understand the position, because it is exactly the same as that with Northern Rock: people who were not big-time share dealers, but who lived locally, thought that they were doing the right thing in buying shares to support their local company, but then the company failed. We will do what is right, but at this stage it is impossible to say what, if anything, will be left at the end of the day. The bank has a lot of assets that, frankly, are not worth much at all.

I congratulate my right hon. Friend on his steady and careful approach to this catastrophic situation and on trying to avoid it becoming more of a catastrophe. I welcome his commitment to improved regulation of the City, so that people’s homes and jobs are not imperilled by banks that were so stupid in making their complex arrangements that they could not distinguish between liabilities and assets; by firms of auditors that apparently did not spot that anything was wrong; and by ratings agencies that gave AAA ratings to spurious transactions, apparently unaware of the fact that the pieces of paper involved were worse than worthless. I hope that my right hon. Friend will accept my assurance, on behalf of every Labour Member, that we will support improved regulation even if the Tory party—the political wing of the banking industry—opposes it and speaks out against regulation.

I agree with my right hon. Friend that it is necessary to have a regulatory system that is robust. As I said earlier, it is not a question of light touch versus heavy-handed regulation. We will not pursue a knee-jerk reaction, but it is important that we avoid situations such as those experienced in the US—but by no means the US alone—in which banks were able to incur substantial risks, apparently without people at the top of the bank being fully aware of just how exposed they were. Nor do we want a repeat of the situation in which regulators, who were concentrating—for understandable reasons—on solvency, did not pay enough attention to the question of liquidity. Across the world there are lessons to be learned. Changes will be necessary, and I am grateful for my right hon. Friend’s support in that regard.

In the light of the Bank of England’s statement about the special liquidity scheme and the Chancellor’s statement today, is it right to assume that the Government now accept that the Treasury must support the Bank in providing just as much liquidity as is necessary on the widest possible class of assets as security for as long as is necessary, until the money markets start to function again and inter-bank lending is resumed? It is obvious that banks will not resume lending normally to businesses or households until there has been some recapitalisation. As there is open speculation about the Government using taxpayers’ money to take a stake, will the Chancellor accept that he needs to come to a decision rapidly on that issue to bring the speculation and uncertainty to an end and enable us to move towards a more normal banking system?

I agree that speculation can be harmful, which is why everyone has to be careful about what they say and when they say it. It is important that when we have proposals to make—whether on liquidity, regulation or capital—we make them as soon as possible, consistent with having proposals that are fully developed and ready to be implemented. As I said in my statement, it is also important to discuss the matter—as we did the special liquidities scheme—with the financial services industry, where appropriate, so that we ensure that whatever we do achieves what we all want, which is to begin to bring about a situation whereby we can return to sensible lending and where banks will start to lend more freely to individuals and to businesses.

In relation to the right hon. and learned Gentleman’s points about the special liquidities scheme, I have always said that we have never set a cap on the amount that the Government are prepared to make available. Although the scheme will run for three years, we will keep that under review. I am determined to do everything we possibly can to stabilise the present situation and to make improvements so that we can get out of the difficulties that we face. The special liquidities scheme is an essential part of that. The right hon. and learned Gentleman can rest assured that I will do whatever it takes to ensure that it works and that it does so effectively.

Does my right hon. Friend agree that the 100 per cent. deposit guarantees by the taxpayer that appear to be on offer in some major economies—he will need to be careful with his comments on this subject—are harmful and mistaken as policy instruments in this respect? They will encourage a huge moral hazard in the banking industry unless they are backed up with incredibly intensive regulation, which will stifle innovation and growth.

As I said in my statement, it is far better—especially in Europe where so many banks have branches and subsidiaries in many different countries—that any action that is taken is taken together. I have always made it clear that countries need to do whatever they think is appropriate to look after those institutions for which they are directly responsible, but working together is very important. Ironically, the summit called by President Sarkozy in France on Saturday pledged each of the participants to working together. We need to get back to that, because it is the best way to try to resolve the matter.

I am sure that the whole House will realise the very terrible times that we are in. I remember being a lad in Ulster and the soup kitchens, the poverty and the terrible happenings that took place. We must all, in our own way, do what we can to help one another to get some way through this very dark hour for our nation. I know that there are many beliefs in this House; my belief in God is well known and my religious convictions are known. I trust that our whole nation will turn in repentance and cry to God for an intervention so that the calamity will not come on our children and on the babes in their cots.

I think that I agree with the right hon. Gentleman on the need to work together. I am not as well qualified as him to comment on whether divine intervention can help us, but I think that Governments and financial institutions both have a huge role to play. Governments can make a difference and they need to make a difference, precisely to ensure not only that we stabilise the situation but that we get through it.

Will my right hon. Friend rule out a straitjacket on the Bank of England giving long-term help to banks if necessary and if it is decided on over the course of the next few weeks, months and perhaps even years? Will he also remember that when interest rates hit 15 per cent. and above, small businesses were paying 25 per cent., which is why so many of them, sadly, went bust?

My hon. Friend is quite right on that last point. We need to recall from time to time exactly what happened in the past when interest rates went way up—the consequences were devastating. That is all the more reason to ensure that we take the right action, including supporting the Bank of England. I have made it clear, as has the Governor of the Bank, that we will do whatever it takes and whatever is necessary. We will do that because it is essential if we are to ensure that money is available in future not just to individuals, to enable them to buy houses and to invest, but to businesses. British businesses depend to a large extent on their banks, and it is important that we do everything we can to ensure that banks remain in a position to lend to them, because without that lending those businesses would be in difficulty.

I recognise that the Chancellor will have difficulty in answering a number of these questions, but I wonder whether I can return him to Germany’s statement about protection for its depositors. At the Dispatch Box, the Chancellor mentioned, quite rightly, that our protection covers about 98 per cent. of all depositors, but he will also recognise that we have significantly more money on deposit than Germany does. The reality is that that 2 per cent. represents a very significant amount of money. What concerns me right now is that, given the febrile nature of the markets—watching little things and then panicking—if they see any flight of capital, even that 2 per cent., towards Germany, it could cause another stampede and another crisis. I recognise the Chancellor’s problem about indicating what he may or may not do, but does he not recognise that that 2 per cent. alone is perhaps enough to tip over the markets if they saw a flight of that money to, say, Germany or even Ireland?

The right hon. Gentleman makes the point that I was making earlier: difficulties arise if different countries do different things at different times, and we should do our level best to try to avoid that.

I make a plea to the Chancellor that, when he speaks about protecting the taxpayer and depositors, he continues to include customers or borrowers. The whole House understands the importance of helping the banking and finance industry on the grounds of stability, but the sight of the same banks calling in loans to small businesses and making many thousands of good people homeless by making their mortgages unaffordable is totally unacceptable. If we are prepared to have a lifeboat for the finance industry, it should be prepared to participate in a lifeboat for its customers.

My hon. Friend makes a perfectly good point. It is important to remember when we talk about stability and the whole financial system what it actually means to people with houses or people who have businesses who depend on the ability to borrow money. In relation to people who get into difficulty with mortgages, we have been working very closely with the Council of Mortgage Lenders and others to ensure that there is a rigorous code of conduct, so that banks do everything that they possibly can to help any customer who might be getting into difficulty. Exactly the same thing applies to businesses. Of course, one of the other things that we are doing is working with the European Investment Bank to ensure that the substantial sums of money that are made available find their way through our banks into the hands of small businesses.

This is the worst problem that any Chancellor of the Exchequer has faced for a very long time indeed, and I am sure that the whole House wants to be able to support him in whatever proposals he makes to deal with it. He has done a lot on the liquidity front, but he has done relatively little, if anything, on the capital adequacy front. I urge him to address that problem fairly quickly, because such things get worse if they are allowed to drift on. I hope that he will consider the concept of supporting direct injections of capital, as opposed to what the United States did in buying bad assets at a premium in the market, which is a complicated way of doing the same thing. However, I also urge him to take another look at the Dormant Bank and Building Society Accounts Bill, which we will debate this afternoon and which will have the effect of extracting £400 million or £500 million of the banks’ safest and most solid deposits and putting the money into a reclaim fund for good causes. Could we not start by allowing the banks to convert that to some form of capital security? The reclaim fund could still hold the money and distribute it to good causes in due course. That Bill was conceived when the situation was very different from now, and I urge him that that is at least a way to start to make some form of contribution to the capital of banks and that he should propose do to that in Committee.

I understand what the hon. Gentleman is saying. Of course, the proposal on dormant assets in the Bill that we will debate this afternoon is a long-term measure, but I am sure that he will want to return to such measures, perhaps during Second Reading, and my right hon. Friend the Chief Secretary will be happy to respond.

I commend the Chancellor and the Prime Minister for their calm and authoritative leadership, but global political leaders and central bankers seem to be behind the curve, as the financial crisis spreads rapidly into the real economy. Does he agree that it is no longer simply a question of sub-prime versus prime, but about asset quality in infrastructure, businesses, commercial and other property and even car loans and so on? In addition to the special banking powers that he is taking, will he consider legislating to enable reserve powers over infrastructure—rail, vital utilities and similar things—in case they fall into serious problems, as I fear they might, so that we are not behind the curve but ahead of the game, with those powers sitting ready to be taken, perhaps involving stakeholdings, recapitalisation and other matters and procedures that might prove necessary?

I am grateful for my right hon. Friend’s support, and I agree that it is important that all of us—Governments, central banks and regulators alike—keep an eye firmly on problems that might arise in future. I also agree that it is important to ensure that investment, especially in transport infrastructure, continues; I feel very strongly about that, for reasons that he will understand. That is why I am pleased that our Government have been able hugely to increase the amount of money that they are spending on transport infrastructure, and why it is important that, in what will undoubtedly be a difficult time, we ensure that investment does not suffer. Long-term investment in infrastructure is very important.

I agree with the Chancellor that we should consider every aspect of the issue, including liquidity, capital and regulation, and I would add confidence and stability to that list. I very much welcome his saying that “all practical options must remain open to us”. I understand that he will not speculate on his final plan, whether it be enhanced deposit protection, a guarantee of all sterling deposits—that is our favoured option—or an extension of the list of assets against which banks can borrow. May I recommend, as a matter of urgency, that he finalises his plan and makes a firm, detailed, comprehensive statement about the actions that the Government intend to take? Otherwise, as regards confidence and stability, the Government will be seen to be buffeted by events, and to be merely reacting. I am calling for a proactive statement and a detailed plan—a comprehensive set of measures to provide stability and confidence. Will he draw up that plan, and set it out in a single, comprehensive statement?

What I have done this afternoon is set out for the House what we have done so far, in order to provide the House with an opportunity to question me about developments over the summer. However, the hon. Gentleman is right: there are further things that we need to do, and I will come before the House to announce them as soon as I am ready to do so.

Does the Chancellor agree that recapitalisation when property values are falling increases the risk to taxpayers and will prove ineffective, and that we therefore need the Bank of England advisory committee to recommend a significant decrease in interest rates in its recommendations this week? In addition, recapitalisation could start the round of speculation off again, so will he assure the House that he will stand ready with plans for nationalisation of the banks, if necessary?

As my hon. Friend knows, I have nationalised two banks in the past year. Ten years ago, I would never have thought that I would be able to say that to him.

Or 20 years ago!

Not even 20 years ago. On my hon. Friend’s point about interest rates, I do not think that I can add anything to what I said to the hon. Member for Twickenham (Dr. Cable), who speaks for the Liberals.

Some of us on the Liberal Democrat Benches anticipated at least some of the problems, and were concerned about the fact that the regulatory authorities did not clamp down on the excessive unsecured credit that was put into the marketplace; that put pressure on financial services in London and Edinburgh, and it is that pressure that is causing us so much trouble.

Moving on, may I pick up on the point made by my hon. Friend the Member for Twickenham (Dr. Cable)? The Chancellor said that he thought that the remit of the Bank of England required no amendment, but can he really stand by that when inflation, which is the overriding concern, is outside the target? Does he not accept that it would be desirable temporarily to set aside the requirement on the Bank, so that the Government can deal with the crisis today? I campaigned for an independent Bank—he did not—and I believe that independence is right, but the parameters have to be right. Would it not be good to ensure a cut in interest rates, so that we can get the economy going and get banks lending again, and a cut in taxes to help people deal with rising costs?

The right hon. Gentleman may have campaigned for an independent central Bank, but I was part of the Treasury team that legislated to put the measures in place. To be fair, the Liberal Democrats have been consistent on the issue, and did support an independent central Bank. However, if they are to be consistent, they should not, for goodness’ sake, ask for a change of rules when things get difficult.

Does not my right hon. Friend agree that the Government have acted decisively and with great expediency on the issue, and will continue to do so? On interest rates, will he confirm whether my recollection is correct: is it not right that, although it will rightly be enshrined in statute that it is part of the Bank’s responsibility to maintain financial stability, it is his responsibility as Chancellor to set the interest rate? It is then the Bank’s responsibility to maintain that rate through the appropriate monetary and other policies. If that is the case, as I think it is, it is still for him, as an appropriate and necessary part of his normal functions as Chancellor, to set that rate. Will he bear that in mind in the months ahead, which are bound to be very difficult?

It is my responsibility to set not the interest rate but the inflation target, which is something that is done at the Budget every year. As I said, both in the House today and on previous occasions, I think that targeting inflation is important. Inflation has been a huge problem for this country in the past, and I believe that the Bank’s present remit, both in relation to its inflation target and, subject to that, to its broader objectives, is the right objective.

We have not seen a Northern Rock-type run on the banks—mercifully—but is the Chancellor aware that there is still huge confusion on the high street? There are a lot of people trying to shuffle money, and wondering whether they ought to do so, between institutions, to find some sort of safe haven. Should we not be grateful to building societies such as Skipton and the other five Yorkshire societies that have remained mutual societies? If I may make a suggestion to the Chancellor, perhaps he might talk a little less about systems, and a little more about people, because the anxiety spreads to every level of society, and the one question that they want answered is, “Is my money safe?” The sooner that he can answer that, the quicker we will get calm on the marketplace.

I agree with the right hon. Gentleman that what matters is people, and one reason why the FSA, with our strong support, increased the upper end of the compensation limit to £50,000 for an account holder was precisely to provide additional security, which is very important. He made a point about building societies, especially those that did not demutualise, and I understand why he did so, because I think that I am right in saying that all the building societies that demutualised have either been taken over or, sadly, are no longer with us.

The Chancellor of the Exchequer touched on this briefly, but may I congratulate the Prime Minister on his initiative in Paris at the weekend, in saying that the European Investment Bank should release £12 billion to £14 billion to the small and medium-sized business sector, with a further £12 billion to £14 billion coming later on? Building on the Chancellor’s response to my hon. Friends the Members for Edinburgh, South (Nigel Griffiths) and for Leeds, East (Mr. Mudie), is not this sector the most important sector in the country, and can we say, building on the point made by the shadow Chancellor, that if the banks are not lending to one another, at least they should lend to that sector at reasonable rates?

I strongly agree with my hon. Friend. It is important that small businesses in particular, as well as other businesses, can get access to the money that they need. The initiative to which the Prime Minister referred at the weekend from the EIB is very important. I had discussions with its managing director a couple of weeks earlier in France, and it is important that that money is not only released, which it will be, but that businesses in this country can get it through the banking system. I hope that we will have something to say in the not too distant future that will help with that.

Does the Chancellor agree that guaranteeing all deposits, although it may well prove necessary, is at best a sticking plaster, not a cure for the underlying disease, which is that the value of loans made by banks, and even more of the collateral that they have accepted, has fallen below their obligations and their ability to meet them from reserves? If he is not to have to make that good himself, he must provide incentives for those banks to raise new reserves. Will he consider guaranteeing the proportion of reserves newly raised from this date in the event of any subsequent reconstruction in which the state is involved?

The right hon. Gentleman is right. If we look at the fundamental causes of the problem, we see that banks took on risks that either they did not evaluate or, if they did, they did not take enough steps to ensure that they could withstand any fall in assets. That is something that we need to look at, and it is something that the regulators need to look at.

Will my right hon. Friend accept my congratulations, as the constituency MP for many Halifax Bank of Scotland employees? We were grateful for the work that the Prime Minister and he did in arranging a marriage between HBOS and Lloyds TSB, but on reflection, would it not have been a better option to part-nationalise HBOS to keep its integrity and independence and to keep the jobs, rather than creating a vast monopoly—a third of the market—which will come back to haunt consumers and those of us who represent Yorkshire constituencies? The bank is, after all, the largest private employer in Yorkshire.

I am very aware of the importance of HBOS as an employer in Yorkshire, but if it is possible to reach a commercial solution to problems, that is by far the best route to pursue. A commercial decision was taken by HBOS and Lloyds TSB. Yes, we intervened to waive the competition rules that would otherwise have stopped it, but as I said in relation to Northern Rock a year ago—at that time many people believed that the best option was to try to find a commercial solution, but it did not work at the end of the day—one day even Northern Rock will have to be returned to the private sector. I do not think the Government can run banks particularly effectively, and I do not think that is desirable. If we can get a commercial solution in relation to these matters, that is far better, and it is what is proposed in this particular case.

Has the Chancellor studied the history of the Japanese economic crisis of the 1990s, where the failure of that Government to reduce interest rates in a timely manner led to a prolonged recession, which lasted for a decade?

Yes, I have, and yes, I am aware of that. Thank you.

The Chancellor told me in the summer that he had regular secret meetings with the top bankers. They seem to be coming with a begging bowl, which has been rewarded with massive liquidity. What has he got from them in return—for example, to deal with the fat-cat bonuses and pay-offs that they have had?

I do not think I told my hon. Friend that I had secret meetings with the bankers. If I did, it clearly would not have been a secret any more. It is no secret that I meet people from the banking industry on a fairly regular basis. Indeed, people would be surprised if I did not. On my hon. Friend’s other point, yes, of course there is concern about the way in which employees were paid or incentivised. Many people are concerned that employees were paid bonuses to take on risks which, it turned out, did not just put the individual employer or their bank at risk, but put everybody else at risk at the same time. That must change.

Does the Chancellor agree that without in any way compromising the independence of the Bank of England, he could put into abeyance the inflation target for a period, and therefore allow the bank to take the steps necessary to prevent the present crisis from spilling over into the rest of the economy? Our experience so far has shown that the idea that financial crises could be contained is holed below the waterline, and that the inevitable consequences of not stemming overspill will be detrimental to just about everybody in the country.

I do not agree with the hon. Lady. As I have said before, the remit given to the Monetary Policy Committee is wide. It was designed for the good times as well as the more difficult times. To chop and change it would undermine the idea and principles that underpin the concept of an independent central bank.

How are the Government measuring the danger to the British economy if, when trying to pursue a policy across Europe, we find that we are, for example, the last Government to offer 100 per cent. guarantees to individual savers with deposits in British retail banks? Will he give a guarantee that we will not find ourselves in that position?

We are not in that position. I said earlier that if action is taken, there is much to be said for having a discussion about these matters and acting in a way that avoids the distortions that I referred to. That is one of the things that we will be discussing tomorrow.

The Chancellor may not know, but I can tell him that many small businesses will be disappointed with his statement today. They are facing increasing debt, including massively increased bad debt, and are under tremendous cash-flow pressures. They go to their banks, but their banks are not being helpful; in fact, they are increasing interest rates. Will the Chancellor give the small business sector some confidence today, by saying that he will go to the banks and ensure not only that small businesses get their fair share of the guarantees being given, but that banks will cut interest rates to them?

I think that I have said on a number of occasions this afternoon that there is concern in all parts of the House about the impact that the credit crunch is having on businesses. That is why it is important that banks and Governments act together to try ensure that we help small businesses, whether directly or through the European Investment Bank or other such measures. That is what I want to do.

Does the Chancellor recognise that the markets are in a panic because the authorities are seen to be losing control of events? The right place for the risks of a rescue is not the balance sheets of national Governments, which are there to help the less well-off, not the super rich. Tomorrow he must go to Europe and get a Europe-wide run-off and rebuild facility that can really bear the strain of events and put the authorities across Europe back in control of the situation, not running constantly behind.

I agree with my hon. Friend that it is important for Governments not just to deal with day-to-day events, but to anticipate them and try to restore the calm to which he referred. That said, there are some things that can be achieved on a Europe-wide level, but there are other areas where that might prove more difficult. He may be aware that the Dutch Government came up with a proposal for a pan-European solution that, as far as I can see, has not attracted a great deal of support from the rest of the European Union. However, it is important that if we can take action together, we should do so. If that is not possible, we should redouble our efforts—our Government and other Governments of like mind—to ensure that we do precisely what he suggests: to anticipate and deal with some of the problems that we know are there or which are coming towards us.

As we address such issues in this place, should we not bear in mind that the crisis has been exacerbated because, during the summer, people in high places consistently forgot that there is no situation that is not made worse by panic?

I think I agree with the hon. Gentleman, so I will leave it at that.

Will Members wishing to take their seats please come to the Table?

The following Member made the Affirmation required by law:

John Fingland Mason Esq., for Glasgow, East.

I beg to move, That the Bill be now read a Second time.

I thank my hon. Friend the Member for Burnley (Kitty Ussher), the former Economic Secretary, for all her hard work in developing the Bill and supporting its progress, and welcome to the Treasury Bench my hon. Friend the Member for Dudley, South (Ian Pearson), the new Economic Secretary, who will be taking the Bill through Committee.

The Bill implements the commitment in the Labour party’s 2005 manifesto to channel unclaimed financial assets back into the community. It has already been through the other place, where it received broad cross-party support as well as extensive debate, and I hope that we will see that cross-party support continued here. The purpose of the Bill is to enable what are effectively lost assets to be put to use in supporting the community while ensuring that, should their former owners discover them again, they can still get them back.

We begin our deliberations in this place in a rather different financial climate from that in which we started, and I am sure that the changing circumstances will form part of our deliberations here and in Committee. The hon. Member for Stratford-on-Avon (Mr. Maples) has already raised this matter with the Chancellor today, in the course of the discussions on the statement. It is important to recognise that the Bill is not about tackling today’s market conditions; it is about the future, and about laying the foundations for a scheme that will be in place in mid-2009 at the earliest. The scheme will be voluntary, and it has been brought forward with the full support of the industry.

The point that I was making earlier was that, although the Bill is well conceived—I have no objection to the idea of taking dormant deposits and spending them on good causes—it was, as the Chief Secretary has acknowledged, conceived in a very different banking environment. One of the problems that the Chancellor is trying to deal with is the capital adequacy of the banks, and there will probably be a need for some public sector injection in that regard. Between now and the Committee stage, will the Chief Secretary consider whether it would be sensible to allow this money to be used temporarily for that purpose, so that the reclaim fund would own shares—be they convertible notes or preference shares in the banks—that could buy capital for the banks? In due course, when the banks’ situation has improved, the reclaim fund could then sell the securities or redeem them in order to use the money for good causes. In the meantime, however, I think that the public will find it odd that we are going to take £500 million off the banks to spend on good causes, when it could be used to bolster their balance sheets.

I hear the point that the hon. Gentleman is making. First, the Bill will not come into force until next year and it will obviously take time to set up the reclaim funds, so his proposals would not address the current market conditions that the banks are facing. Secondly, this will be a voluntary scheme, so it will be for the banks and building societies to choose to participate. In the discussions that we have had with the British Bankers Association and the Building Societies Association, they have made clear their continued support for the scheme, and said that they are continuing to encourage their members to participate and believe that they are keen to do so, even in the current market conditions. It is also important to recognise that the assets and liabilities will both be transferred to the reclaim fund, which will obviously have a rather different outcome in regard to the impact on the capital position. As I have already said, however, the changing climate and the credit crunch will obviously be part of our deliberations in Committee in regard to lessons that can be learned to ensure that we get the detailed legislation right.

I would also like to point out that, according to the banking sector, the banks estimate that their dormant assets represent less than 0.07 per cent. of the £535 billion held in retail banking and savings by the UK’s nine largest groups. Although that is a small proportion of their retail banking, that money could make a real difference to projects in the community.

Will the Minister confirm that that figure is £5 billion, which is not chickenfeed? Can she tell us when she was given the advice by the banks that they were happy to proceed with this plan? Was it given in the past 24 hours, or is it two weeks old?

No, it is not £5 billion; that would be 1 per cent. of £535 billion. I was talking about 0.07 per cent., the figure in the banks’ estimates. Also, may I again make it clear that this will be a voluntary scheme?

The banks estimate that they have between £250 million and £350 million in accounts that are lying dormant and have been untouched for more than 15 years, and sometimes much longer. The building societies estimate that they have a further £130 million in the same position. The evidence shows that some people forget about or lose track of often small deposits of money in bank or building society accounts—perhaps because they changed address or lost contact with their banks, or because the account holder has died without anyone being made aware of the money.

The Chief Secretary will be aware that many of these dormant accounts are, in fact, owned by charities, having been left to them through legacy. However, there are very few mechanisms for identifying the accounts and reclaiming the money. Will she bring in some structure that will enable them to do so under the legislation?

The hon. Lady is right that we should do everything possible to reunite the money with the original account holder, whether it be a charity, an individual or whatever. That is an important part of the legislation. Customers always have the right to reclaim their money, but we also think it important to make a concerted effort to reunite account holders with their lost money before the scheme comes into operation. We have encouraged the financial services to do that and we welcome the launch by the British Banking Association, the Building Societies Association and National Savings & Investments of the “mylostaccount” website in January this year. More than 175,000 people have already used this free cross-industry service to reunite themselves with tens of millions of pounds. It is an important part of the scheme.

My right hon. Friend has three times mentioned that the scheme will be voluntary. Is she aware that the National Council for Voluntary Organisations, the Treasury Select Committee and others have been very sceptical about the effectiveness of a voluntary scheme, given that the five or six such schemes already operating around the world are all done on a mandatory basis and they clearly produce a far higher return for good causes than would any voluntary scheme?

I recognise my hon. Friend’s point, but the scheme that we are proposing has strong support from the industry and both banks and building societies have said that they intend to participate in it. That is encouraging, which is why we have set out the Bill in this way, but we will need to review the situation over time, to monitor the scheme’s progress and to look into what further support may be needed.

Three principles have informed the Government’s approach: first, that the preferred outcome should, where possible, be to reunite account holders with their money; secondly, that account holders must have the legal right to reclaim their money at any time; and thirdly, that the scheme should be designed to run effectively and efficiently in order to maximise the money available for reinvestment in the community.

The scheme will allow eligible banks and building societies to transfer money in accounts that have lain untouched for at least 15 years to a so-called reclaim fund. By making the transfer, the liability to repay the account holder will also pass from the bank to the reclaim fund. Any money that the reclaim fund does not need to meet the claims of customers will be passed over for reinvestment in the community via the Big Lottery Fund.

The scheme aims to capture genuinely lost accounts. That is why we have set the dormancy period at 15 years. Some people have argued that it is too long, but we still think that it is appropriate. We will, however, bring forward an amendment to enable this period to be made longer or shorter in future if the evidence shows it to be appropriate, as it is important to ensure proper protection for account holders.

How confident is the Minister in the figures provided by the British Bankers Association and the Building Societies Association, particularly given that The Times was reporting up to the end of 2006 that the amounts involved in dormant accounts could be up to £20 billion? Are the figures given by the Minister for a 15-year dormancy or is there an aged analysis of dormant accounts from a more recent period—perhaps with a three-year dormancy? These will effectively be brought in over time.

We have said that we view 15 years as the appropriate period, so it is not our intention to reduce the dormancy period. The reason for bringing forward an amendment is in order to respond to points made in the other place and as part of the consultation to the effect that there should be greater flexibility and no need to return to primary legislation if certain evidence arises. That will be a matter to discuss in Committee—as I have said, an amendment will be brought forward—but we believe that 15 years is the appropriate period.

The figures that I cited from the banks and building societies are obviously the best that we believe are available. Clearly, they are estimates and different ones will be put forward, but it is right to work on the basis of what we believe to be the best figures available. This will need to develop over time as the reclaim fund is established and it becomes clear what sorts of account can be transferred into the scheme. We will have to look at the evidence as things develop. That is why it is right that there should be some kind of review of the scheme as it progresses.

In the other place, the Bill was also amended to require banks and building societies to consider any customer-initiated activity, such as correspondence, telephone calls, voting at annual general meetings and so on, when determining whether an account is eligible for the scheme. We recognise the intention behind that amendment because, of course, we would expect banks and building societies to do exactly that, but we do not currently believe that it is necessary to legislate on that point.

I must declare an interest as a trustee of a number of charities. In particular, the People’s Dispensary for Sick Animals, of which I am a long-standing trustee, has expressed concern about using the Big Lottery Fund to identify worthy causes, first, because it is an expensive mechanism and, secondly, because its record in choosing good causes is perhaps not as strong as it might be, given that, on occasion, it has been used for purposes that might otherwise have been funded by the Government. Will the Minister reconsider using the Big Lottery Fund?

We think that the Big Lottery Fund is the appropriate organisation. It is important that we use an existing body to do this, rather than create duplicate organisations, which would increase the cost of distributing the money when our priority should be to get the resources to local schemes and, in particular, the young people who could benefit from this proposal.

We think that the Big Lottery Fund has the capacity to distribute resources on a large scale. Obviously, the issue will be discussed further in Committee, but the Big Lottery Fund also has access to an extensive network of third sector and public sector delivery partners, ranging from the large national charities to local community groups. Therefore, we think that it represents the best way to distribute the money and to get the best value for it by using it effectively.

May I complete the point that I was halfway through when I took the intervention? On the issue of the amendments made in the other place, the ultimate safeguard for customers is that they will be able to get their money back at any point from the reclaim fund, via their own bank. We believe that there are also some drafting and legal difficulties with that amendment, which is why we shall seek to overturn it.

I am very supportive of the proposal in the Bill, not least because many of my constituents and organisations in south London see the opportunity for money to come in to help work with young people.

When a group of young people and their organisations came together the other day following the knife crimes that have happened in London, one of the questions that they asked me to ask is whether money can come in and whether it is the Government’s plan not just to create new buildings, but to support existing organisations that could do with expansion or additional resources to do the good work in the community that the community needs them to carry out. If so, can we come to see somebody about that—which Minister is it?—to put the case for existing organisations to be supported, not just for new work to begin?

Treasury Ministers will be happy to meet the hon. Gentleman to discuss his point further. Obviously, some of those issues will be for the Big Lottery Fund to set out as part of its distribution, but it probably is important that during consideration of the Bill we have a good debate on how the resources should be distributed.

The hon. Gentleman would probably agree with me and any other Member of the House who has conducted any kind of local community consultation that one of the key issues on which we can get young and old alike to unite is the need for more facilities for young people and for more for them to do in local areas. That can have benefits not just for those young people, but right across the community. That is why it is so important that we should look to access and use those resources to build a stronger future for young people as well.

It is important not to double count in relation to the possible impact on charities in constituencies such as that of the hon. Member for North Southwark and Bermondsey (Simon Hughes). The figures suggest that the biggest 12 banks and building societies currently give more than £300 million a year in their own charitable donations. Does my right hon. Friend have any indication of the possible impact on that level of giving if banks and building societies lose control of and access to their dormant assets?

I do not believe that the measure will reduce the amount that banks and building societies can contribute to different charitable works. There are two things to consider. First, the Bill allows both assets and liabilities to be transferred. If the banks or building societies continue to hold the assets, they also continue to hold the liabilities on the dormant fund, which could limit what they can do as a result. Secondly, the scheme is voluntary. It is a way of ensuring that building societies and banks do what they think is right in terms of accessing the assets and putting them to good community use.

It is important to remember that the money does, or did, belong to someone and that some of it might have belonged to people who have died and left legacies. A group of charities has asked for a reserve power to be included in the Bill. The charities are worried that they cannot trace the money that they have been left in a legacy because it is too difficult under the current online registration scheme to know when people have changed names or houses. We should bear it in mind that they are asking for something not for today but for the future. If, in three years’ time, Parliament considers that not enough progress has been made in attaching legacies to the relevant charities that would benefit from them, the Government will have to come back to the House with primary legislation. Will the right hon. Lady consider including a reserve power in the Bill so that we do not have to do that?

We have not so far seen the need to include additional support. Obviously, we are happy to consider further issues in Committee. This is a Bill that should command cross-party support. We are happy to continue to look at the issues. As has been said, this is about where possible reuniting the resources—the money and the assets—with those who originally put them in the account or, if they have died, respecting any legacies or wills that they might have set up. Clearly, that is an important part of the approach to the Bill, but equally we have to recognise the existence of dormant assets, which have often sat in accounts for many decades, and put them to good use.

The reclaim fund will receive money from dormant accounts. The Bill does not create a reclaim fund, but it sets out the requirements that a company must meet in order to operate as one and provides for its authorisation and regulation by the Financial Services Authority. The FSA will ensure that the reclaim fund has sufficient money to meet anticipated levels of claims for repayment and will set out a regulatory regime, which will of course be subject to full consultation as well. The Bill requires the fund to meet repayment claims, manage money prudently, and transfer surplus funds to the Big Lottery Fund for distribution. It also allows the fund to cover reasonable running costs.

The Bill was amended in the other place to make a reclaim fund accountable to Parliament. We strongly agree that the fund should function transparently and the Bill requires it to publish key information about its operations, but we do not believe that it is sensible for a private company to become accountable to Parliament in that specific way. Therefore, having considered the issue, we will propose further amendments in Committee to improve the transparency of the arrangements and to respond to some of the concerns raised in the other place.

The National Consumer Council has said that not enough effort is made by banks to reunite dormant accounts with their holders, and a major campaign is required in that respect. Is the right hon. Lady confident that enough is being done by the banks to ensure that that happens?

The banks set up the new “mylostaccount” website in January this year which has helped more than 100,000 people to get their money back. It is always important for us to urge banks and building societies to do more and to do whatever they can. However, the ultimate and hugely important safeguard for people is that they will also be able to get their money back from the reclaim fund.

The Chief Secretary spoke of reversal of the Lords amendment relating to the parliamentary accountability of the reclaim fund, but she forgets that the Treasury has power to give direction to the company that sets up the fund. In view of that, I think it important for there to be some parliamentary accountability.

Clearly the Treasury is always accountable to Parliament for the use of its powers, but I think we should bear in mind the complexities involved in an attempt to establish parliamentary oversight of a private company, as opposed to parliamentary oversight of the Treasury and its decisions. We will propose further amendments to respond to some of the points made in the other place. We do not think that the way in which the Bill currently deals with the issue is satisfactory.

Account holders will experience no practical difference in the way in which they are treated as a result of the scheme. Banks and building societies will act as the reclaim fund’s agents, and on validation of their claims account holders will be repaid in full by their banks. That will include any interest that is due.

The case was made in the other place that the Bill should require a triennial review of the scheme. We feel that we must ensure that the scheme is working simply and fairly, and we think it right to review it once it is up and running; however, we do not think it right to require triennial reviews in perpetuity to be included in the Bill. That issue will also feature in the discussions in Committee.

As I said earlier, we need to ensure that the money raised is distributed fairly throughout the United Kingdom to deliver practical programmes that will bring about real change to neighbourhoods and benefit a diverse range of communities. As we said in the pre-Budget report, the Government intend the resources, in England, to be focused on youth services, financial capability and inclusion. Investment in young people is investment in the future of the whole community, while raising the levels of financial capability and inclusion across the population can help people to make the right financial choices to support themselves and their families. In addition, following consultation, we should like a proportion of the available assets in England to be invested in the long-term sustainability of the third sector, if resources permit such investment.

The spending areas in England are set out in the Bill. Following the model used for the national lottery, the Bill also empowers the Secretary of State to identify particular priorities within the spending areas that must be taken into account in the distribution of assets. We believe that the approach should follow the precedent of the national lottery spending directions, rather than some of the proposals made in the other place. Scotland, Wales and Northern Ireland will determine their own spending areas, which will reflect the needs of communities in each country.

I welcome the boost that the scheme will give youth services, but what many of those services need in particular is an asset base. A straight revenue grant will be of no use, because it will merely postpone some of the problems. Can we be creative in the way in which the lottery is asked to provide funds? Surely providing that asset base is the most appropriate use of the funds.

My hon. Friend is right. We need to ensure that the funds are used to provide sustainable support for young people in particular areas, rather than short-term support that cannot be replicated in the future. Further consultation and discussion will be needed on exactly how that should be done, and I hope that we can take my hon. Friend’s points on board at that stage.

Will my right hon. Friend give way?

I will, for the last time. I want other Members to have a chance to speak.

I am grateful to my right hon. Friend for giving way, and also for her answer to my hon. Friend the Member for Stroud (Mr. Drew), but will she consider again how the help will be focused? Will the Big Lottery Fund be able to operate proactively in geographical terms? For instance, will it be able to target resources on areas where there is great need but little capacity for making bids, and where awareness of the fund may be low?

My hon. Friend makes an important point. We want to ensure that the resources are distributed fairly across the country and that those areas which might have less capacity or expertise to access the funds do not lose out unfairly as a result, so we would certainly be keen to take on board those points in terms of the way the distribution mechanism operates.

Finally, I wish to make the point that we have in the Bill introduced the provision that small financial institutions, particularly building societies, should be able to operate alternative arrangements where they play an important role in their local communities and want to be able to distribute dormant account money to local charities. These alternative arrangements will allow the reclaim fund resources to be returned to the bank or building society for distribution to local charities. We had originally proposed that in order to qualify for this alternative scheme an institution must have total assets of £7 billion or less. Amendment in the other place makes the option available to small banks and all building societies. In fact, the vast majority of building societies were covered by our arrangements. We have listened to the arguments for the inclusion of big building societies, but we do not believe that the expansion of the alternative scheme is desirable. We believe that the larger financial institutions serving wider communities across the country should take part in the main scheme to ensure that resources can be distributed fairly and strategically across the country to meet the priorities discussed in this House. Therefore, we will bring forward amendments in Committee to focus the alternative scheme on the ability of small institutions to support their local communities.

Is not the Chief Secretary being a little disingenuous when she talks about the vast majority of building societies being covered, because some 83 per cent. of the assets of the building society sector are with the big seven, so she is really talking about taking away the independence of those building societies to distribute the funds as they see fit?

I do not think this is remotely about taking away the independence of the building societies. The building societies have the ability to have their own charitable support schemes and programmes operating in their areas and to use their assets accordingly, and many of them do have such schemes. This is about using parliamentary legislation in order to be able to access dormant assets by allowing them to transfer the liability as well as the assets to a reclaim fund. The hon. Gentleman is right that there are a lot of resources in the large building societies, and those building societies should be part of the main scheme. What we are trying to do is help the smaller building societies—of which there are many across the country. Where they are very much embedded in a particular local area or community, that should continue to be supported. However, where the larger building societies can serve much wider communities, we believe they should be part of the wider scheme which involves the banks as well.

This Bill offers an historic opportunity to unleash the potential of the money in the dormant bank accounts in order to deliver social benefits. It does so while maintaining strong support for protection for consumers and for ensuring that they can continue to have their rights respected—and, where possible, for them to be able to get access to their money as well. This is a big opportunity, and a long-term programme to help support improved youth services and other social benefits across the country, and as such I commend it to the House.

It has been six years since the Government first raised the prospect of using money from dormant accounts for good causes. Since the Government published their consultation paper on the Bill, we have had three Economic Secretaries—I am glad to see that the third is in his place—and it has been eight months since the Bill had its First Reading in the Commons, and I suspect that even now it will be at least a year, if not longer, before the money will start to flow. However, in that time, the scheme has changed so that now, rather than charities benefiting directly, the money will be spent at the direction of the Government in line with the priorities they set out in the Bill and, as a number of interventions have indicated, the amounts involved have shrunk. The unclaimed assets register suggested there was about £8 billion split between bank accounts and National Savings & Investments. The current estimate from the Building Societies Association and the British Bankers Association is that there is about £400 million to £500 million from banks and building societies to be used in the scheme. Clearly, the effectiveness of the operations to reunite customers and their accounts will reduce those amounts, so, although the amounts involved are still significant, the scaling down of the estimates does lead, as I shall mention later, to some difficult issues regarding the distribution of the assets.

However, an important prior step to the process set out in the Bill is to ensure that banks and building societies take action to clean up their records, and try as far as possible to reunite customers and their dormant accounts. I am aware from my conversations with the sector that banks and building societies are taking steps to do that. For example, Lloyds TSB announced in June that it is appointing a company to help trace the holders of dormant bank accounts. HBOS has united £18 million sitting in dormant accounts with its customers, with another £29 million left to trace through. According to the BBA, some £50 million has already been reunited with its rightful owners.

In addition to the efforts of individual institutions, there has been a collective effort through the website mylostaccount.org.uk, which provides bank, building society and National Savings & Investments customers with a single point of contact for tracing accounts. Since its launch on 30 January 2008, more than 140,000 people have submitted search forms for money left unclaimed in dormant accounts. That compares with 44,000 claims in 2007 via the separate tracing services for the BBA, the BSA and NS&I. That demonstrates that the focus on reuniting has led to an increase in interest in the matter, and more customers clearly are trying to track down their unclaimed assets.

I want to address the concerns that a number of Members have expressed about charities. Charities represented by the Unclaimed Assets Charity Coalition have set out a very important case—they believe that they would be unable to unlock money sitting in dormant accounts where they are the residuary legatee. They have argued for a central register of accounts that they could use to identify accounts that they believe belong to them, and that a reserve power should be included in the Bill. I can understand their arguments and have some sympathy with them, but such a power goes beyond the voluntary approach that forms the basis of the Bill. However, clause 12 provides them with an important safeguard, as the triennial review explicitly refers to the right of a charity to receive money due to it under the terms of a will. That is an important safeguard, and I hope that that transparency will encourage banks and charities to work closely together on making sure that they have access to those dormant accounts. However, it will be interesting to see how the debate plays itself out in Committee.

It is imperative that, within the constraints of the scheme, there is a robust exercise to reunite customers with their money. If the process is robust, there will be much greater certainty that money transferred across to the reclaim fund relates to genuinely dormant accounts and is therefore less likely to be subject to a reclaim. The Bill before us sets out a legal framework for a voluntary scheme to enable money sitting in dormant accounts to be used for the public good, while ensuring that those who rightly own those assets are able to recover them. The Bill has four essential components: one relates to the question of how we know when an account is dormant, the second extinguishes the liability on the bank’s or building society’s balance sheet when the asset is transferred to the reclaim fund, the third establishes the proper legal framework for the reclaim fund and its functions, and the fourth relates to the allocation of amounts transferred from the reclaim fund to the Big Lottery Fund and to the spending priorities identified in the Bill. However, I want to explore some issues that flow from those steps.

Although there has been a great deal of discussion in recent years about the use to which unclaimed assets in a range of categories can be put, those assets are there to meet liabilities—there is a debt due to a customer, a pension to be paid out or a life assurance policy to mature—so in any scheme it is vital that the record of liability be retained, even if the liability itself is legally removed from the institution’s balance sheet. It is therefore important that, once that liability has been extinguished from the balance sheet, there is a reserve in the reclaim fund to pay out to customers who come forward to reclaim their money.

One of the fund’s priorities is to build up sufficient reserves to cover future claims, yet there is a countervailing pressure to transfer as much money as possible from the reclaim fund to the Big Lottery Fund for distribution. Too few reserves will leave the fund and potential claimants exposed. In the event of a fund’s being unable to meet all its claims, customers will be covered by the financial services compensation scheme, but that is not a green light for the reclaim fund to be imprudent in how it operates. I am also conscious of the fact that if too little money is distributed to the Big Lottery Fund and to the spending priorities, there would be pressure from the potential beneficiaries, and perhaps the Government, for more to be distributed.

I come back to my intervention on the Chief Secretary, because the Bill gives the Treasury the right to give directions to the reclaim fund. I would be grateful if the Economic Secretary’s response could explain how those powers might be used, because a conflict of interest is involved: the Treasury has a role not only with regard to the reclaim fund, but as one of the departmental sponsors of one of the spending priorities—financial inclusion. How does he believe the Treasury will help the fund to strike the right balance between protecting the interests of customers and ensuring that the right moneys flow through to the spending priorities?

Given the important role of the reclaim fund and the need for public confidence in its work, we support the amendments tabled in the Lords to require the accounts of the reclaim fund to be laid before Parliament. I am sorry to hear that Ministers are seeking to remove those provisions in Committee. We will clearly have a debate about that, because it is important to recognise that although the reclaim fund is a private body in terms of its constitution, it is clearly not just a private body. The Bill provides for the Treasury to give direction to it and, as such, one would expect the levels of transparency and accountability to go beyond those applicable to a conventional limited company.

Once proper protection for customers has been established, the next stage is how to use the money. As the Chief Secretary has said, the Bill distinguishes between two sources of these funds: building societies and small banks, and large banks. The money from large banks will go to the Big Lottery Fund, and I shall return to that matter in a moment. The Bill, as drafted, allows for building societies and small banks to allocate the amount from dormant accounts, over and above that needed for the reclaim fund to protect its customers, to be allocated through their own charitable foundations, reflecting the strong links that exist between building societies and the communities that they represent.